3 Steps to Financial Freedom


As Mark Twain best said, “The secret to getting ahead, is getting started.”  People talk about financial freedom, but many, given their current financial situation, don’t have a plan or understand how to get ahead.  But in order to get anywhere, you have to get started and have a disciplined plan to stay focused to achieve your goals.  It won’t just happen on its own.  Therefore, I thought I’d share 3 steps that might help anyone get started towards achieving financial freedom.


Invest in Your Future

Why invest in your future?  Because no one else is going to do it for you.  You have to do it.  The best way I’ve found to make this happen is setting up a 20/30/50 budget and sticking to it.  The 20 stands for taking 20% of your take home salary and paying yourself first.  Most people pay all their bills and then see what’s left over to invest in themselves for the future.  This is the wrong way to think about it.  You need to pay yourself first, then the rest of your monthly expenses with the remaining 80%.  It will take some discipline, but you’ll be surprised how you can get to 20% that invests in yourself once you sit down and understand where all your money is going.  Do you need that $150/month cable bill?  Is $4/day at Starbucks or $100+/month really necessary?  Do you really need that new car at $500/month + Insurance, registration, etc.?  Look to see where you can eliminate expenses to get to your 20% goal.  Once you understand your spending and can pay yourself 20% first, make sure you build up your emergency fund (3 months of living expenses in your savings).  Only 39% of Americans have a ‘rainy day’ fund to support an unexpected bill, a job loss, etc.  Even if money is tight, there are still ways to save more of what you earn.


Know Your Financial Vitals

Just like your health vitals, such as blood pressure, body temperature, and heart rate, you should also understand your Financial Vitals if you are going to continue to improve your financial fitness towards financial freedom.  You don’t have to be a financial wizard, hold a Ph.D, or a financial planner to do this.  Anyone can do this and should know their financial vitals.  There are 3 that I believe are important to always understand about your financial health:

  1. Credit Score.   Your credit score is one of the most basic ways that others determine your creditworthiness.  How likely are you to uphold your financial responsibilities?  Therefore, it’s always important to ensure you are constantly improving your credit score.  Even if your credit score is low (below 620), there are ways you can improve it, but it’s important to understand what it is and how to improve it.
  2. Debt-to-Income Ratio.  Making a nice steady income is great, but not enough if your debt is too high.  Debt-to-income ratio is a simple calculation that determines how much of your monthly pay goes to service your existing debt (e.g., mortgage payment, insurance, car loans, student loans, credit card payments, etc.). This calculation is your total monthly debt payments divided by your total monthly household income. The general rule of thumb from mortgage lenders is to keep this below 45%.  I personally like to encourage people to keep it below 36% because you don’t want to be ‘house poor’. 
  3. Net Worth.  Your net worth is simply your assets minus your liabilities.  Each year, is your net worth increasing or decreasing?  Are you accumulating more assets (checking/savings account, mutual funds, real estate, stocks, etc) or more liabilities (credit card debt, car loans, etc.).  There are great online tools and resources to help you track this important financial measure over time.  The one I like and use is Personal Capital as it links all your assets and liabilities and sends you weekly updates on how much you spent the past week vs. the previous week, etc.


Never Stop Learning

The world never stops changing.  Therefore, you cannot stop learning.   Otherwise, your skills and knowledge become out-dated, rusty, antiques, whatever you want to call it.  The best way to enjoy learning is finding where your passion crosses your financial freedom trail.  

For me, I’ve always enjoyed real estate investing, from our first home in 1994 to now and into the foreseeable future.  For you, that could be starting your own business doing something you love, or learning about stocks, or commodities, or possibly real estate.  I hear many people tell me that they don’t have time.  But you have to make time in your spare time to achieve financial freedom.  Most of us work 40+ hours per week, but what do you do the other 120+ hours in a week?  Can you find an extra hour per day or week spending your spare time in an area that will improve your financial fitness and ability to make better decisions in the future?  I recently wrote an article called ‘Your Success Depends on One Skill’.   As Albert Einstein said, “Education is what remains after one has forgotten what one has learned in school”.   Even though we might not be in school, every day is an opportunity to continue our learning.

Less than 40% of Americans can cover an unexpected emergency bill between $500-1000.  Financial Freedom will not come to you, you have to fight for it or and go get it.  The first step is getting started by investing in your future, understanding your financial vitals, and never never never stop learning!

Would love to understand and hear about your plans to achieving financial freedom.