Reaching financial freedom can mean different things to different people. You may picture someone basking on the beach instead of battling rush hour traffic. That dream of early retirement, also known as achieving financial independence, is a concept often tied to the highly publicized FIRE movement (financial independence, retire early). For others, financial freedom is simply having financial resources to comfortably cover all basic living expenses, plus enough money for a vacation or two.
What is financial freedom?
Generally speaking, financial freedom is the ability to afford your desired lifestyle without financial stress. The concept of financial freedom means different things to different people, and it’s less clearly defined than financial independence, which typically involves living entirely on passive income. That said, financial freedom generally means you aren’t encumbered by debt, work doesn’t get in the way of pursuing your desires, and you have the means to invest in yourself—whether that’s completing a passion project or going full Eat, Pray, Love.
How to achieve financial freedom
- Set short- and long-term financial goals
- Evaluate your finances
- Set up a monthly budget
- Eliminate debt
- Obtain and monitor your credit score
- Create an emergency fund
- Invest early and wisely
With some strategic steps and careful planning, you can get on the path to your version of financial freedom:
1. Set short- and long-term financial goals
What would your version of financial freedom look like? It could be retirement, paying off your home, stepping away from the day-to-day operation of your business, or achieving sufficient property investment to live off rental income. Set goals for the short term that can help you reach your long-term goals, like getting out of credit card debt or attaining a promotion.
Narrow down your goals to your biggest priorities so you can calculate how much money you need to (and realistically can) save monthly to achieve your goals.
2. Evaluate your finances
Information is a powerful tool on the path to financial freedom. Before making any money moves, take time to thoroughly assess your financial health. Gather your bank statements, credit card statements, utility bills, and other regular expenses to track your average monthly spending—or use a budgeting app. Then, list your average take-home pay, including side gigs. You can use these two numbers to determine your net income. Review your assets (like a car, home, or first edition copy of The Great Gatsby), savings, debts, and investments.
This full picture will help you identify pitfalls that could stand in the way of your financial goals. How much money do you need to live comfortably? Where are you overspending?
3. Set up a monthly budget
If financial freedom is your goal, prioritize saving and sticking to a budget. Living below your means, especially by reducing housing costs, can make a big difference. Consider having roommates or renting out a bedroom. You might automate savings by setting up recurring transfers to savings or retirement accounts, so it’s consistent and effortless.
With this mindset, build a monthly budget or spending plan. Use a spreadsheet or app to categorize your expenses into housing, transportation, groceries, entertainment, and so on. Allocate money to each area to focus on reducing debt and increasing savings. Don’t forget to account for miscellaneous and unexpected expenses that can add up quickly.
One popular budgeting method is the 50/30/20 rule, which sets after-tax income into three separate categories: 50% for needs, 30% for wants, and 20% for savings. To increase your progress toward financial freedom, shift some of that “wants” spending over to savings.
4. Eliminate debt
Credit card spending can spiral into significant debt, especially since many cards have interest rates over 20%. If you have debts, start by listing them from highest to lowest interest rate. Calculate monthly payment options for both short- and long-term payoff timelines, and compare the amounts to what’s available in your budget, aiming to pay them off as soon as possible.
If you can’t pay more than the minimum, look for areas to cut back or find ways to increase income. One strategy for approaching credit card debt is the avalanche method, which focuses on paying off the highest-interest debt first. Once that’s cleared, move to the next highest, and so on. This approach can minimize interest costs while accelerating payoff.
A debt consolidation loan may help you pay off your credit cards and get on a single payment plan at a lower interest rate.
5. Obtain and monitor your credit score
Credit scores are part of a system that lenders use to determine your creditworthiness, or ability to repay debt. They’re based on a report that details your credit history, including account balances, debt load, payment histories, and more. A high score can lead to good terms on home, auto, and business loans. A low score can lead to high interest payments or outright denial, continuing a cycle of debt. If your score is low, create a plan to improve it by paying off debt and staying current on accounts.
Negative marks on a credit report can be a major block to financial freedom, since they prevent you from obtaining loans at favorable interest rates. This may not affect you immediately, but it can significantly increase the cost of a large purchase like a house or car.
The three main credit bureaus in the United States are Equifax, Experian, and TransUnion, each offering one free credit report per year. It can be worth obtaining a report from all three, as they may report different information, including old debts, errors, and signs of identity theft. Review everything listed and flag inaccuracies to dispute, if necessary. If your credit score needs improvement, it can take several months to years to steadily improve it, so factor that into your goals.
6. Create an emergency fund
If you were to lose all of your income today, how long would you be able to rely on your safety net to maintain your current lifestyle? It’s a good rule of thumb to have enough savings to cover three to six months of expenses should you unexpectedly lose your income. Keep this money in a separate savings account, preferably a high-yield savings account that earns a higher annual percentage yield (APY) than a traditional savings account.
7. Invest early and wisely
Invest early because money grows over time thanks to compound interest. Invest wisely because the investment options you choose now will shape your return down the road. The options can be overwhelming, so it’s wise to consult a financial adviser to guide you. To progress toward financial freedom, look back at the dollar amount that will allow you to reach your goals. Your adviser can then help you plan out your investments with that number and timeline in mind.
A typical beginning investment strategy involves contributing to a company retirement plan, such as a 401(k). Some companies even match monthly contributions, doubling your investment. If you’re a business owner, you might instead choose a solo 401(k), an individual retirement account (IRA), a SEP IRA (designed specifically for small business owners), or a SIMPLE IRA (similar to a SEP but allows for employee contributions).
Assuming you’re in good financial shape, you have an emergency fund, and all debts have been paid, maxing out a 401(k) can be a strategic way to begin building long-term wealth. From there, you may consider other areas for additional investments on the way to financial freedom—again, with the guidance of a financial advisor.
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What is financial freedom FAQ
What does financial freedom mean?
Financial freedom is the ability to comfortably pay for living expenses. Financial freedom also means having enough money for emergencies, vacations, or philanthropic efforts.
What are the steps to attain financial freedom?
Financial freedom takes a good amount of time and planning, but some of the steps include assessing your financial situation, monitoring your credit score, determining goals, budgeting monthly, eliminating debt, creating emergency savings, and investing properly.
Is financial freedom the same as being rich?
Although the terms are subjective, it’s generally safe to say you can attain financial freedom without being rich (although being rich certainly helps). Depending on how you define it, financial freedom may simply involve living debt-free without having to work full time—a status that can be attained via modest passive income or a profitable side hustle. It all depends on your lifestyle and financial goals.
