6 Steps To Financial Freedom

Everyone dreams of living a financially secure life. Unfortunately, that goal is at odds with the world we live in. Even if you start working right after college, or even before it, by the time you reach your late 30s, there’s a good chance your net worth will be negative. If not negative, chances are it won’t be very high either.

Most people believe financial security means saving as much as possible. In reality, that’s not entirely true. Financial security is a combination of saving and investing.

If you just save, there’s a good chance you will have to work till your last day. But when you invest, your money grows by itself! And when you add regular investments to your savings, you can take control of your life and plan it ahead. 

Here are a few ideas for you to get started:

Step 1. Cut all the unnecessary expenses

The three biggies are Subscriptions, Club memberships, and eating out. That sums to a lot of money. If you manage to cut those out, it will be possible for you to save a considerable part of your salary.

According to Business Insider, an American spends in average about $3,000 a year on eating outside. I bet that is by far more than you expected. If you would put that money apart, it would easily add up to significant numbers over time. You can see here the statistics I am talking about:

https://www.businessinsider.com/what-people-spend-on-dining-out-2019-8

Now let’s come to subscriptions. We all love to watch fiction movies, documentary series, play games online, use a cool fitness app, or store our photos in the cloud. But people often barely have time for all that things, so they end up by engaging in lots of paid services which they do not really use.

There is an interesting report by ZDNet, which says people are spending in average about $273 per month on subscription services:

https://www.zdnet.com/article/average-consumer-spending-273-per-month-on-subscription-services-report/

I will not talk about Club memberships, since you got the idea. The main takeaway from step 1 is to identify your bad spending habbits and track the leaks out of your pocket.

Step 2. Pay off all those high-interest rate debts

If you have credit card debt from shopping during sales or a personal loan from a bank at an interest rate of 10%, or even a car loan, the best thing to do is to pay it off asap. You can also consider refinancing your house for a cheaper mortgage if you have one.

You can think about paying your 10% interest debt as of an 10% yielding investment. In the end, it’s about the money which exists in your pocket, regardless if it stayed there or came as investment return. It can be more profitable to keep a debt with low interest rate if you can get a higher return by investing the money, but that is another story.

Coming again to statistics, according to a CNBC report in 2021, the average American has $90,460 in debt… And they still manage to spend $3,000 per year on eating out?!  That is incredible!

In the mentioned CNBC report, you can also see the debt level by age group:

https://www.cnbc.com/select/average-american-debt-by-age/

Step 3. Build an emergency fund

Not building an emergency fund is one mistake that can haunt you for years. From medical emergencies or sudden need of cash, building an emergency fund is the best way to be prepared for any unexpected life events. Experts recommend to keep three months of your salary in your savings account in case any incident happens.

Now be honest, how much do you have? Feel free to share that in the comments section. We can build our own statistics based on your feedback, but according to CNBC, half of Americans have less than those 3 months. If you don’t believe me, read this article, written in July 2021:

https://www.cnbc.com/2021/07/28/51percent-of-americans-have-less-than-3-months-worth-of-emergency-savings.html

I personnaly do not have a saving account holding my 3 months salary, but this is just because I invested very aggressively during last 2 years. 

And here is where we come to our next step: 

Step 4. Start investing

Once you have saved some money, it’s time to start investing. Investing allows your money to grow by itself in the long term. If you keep investing and reinvesting your gains, soon you’ll have more than enough money for your retirement as well as other goals (buying a house or car). From stocks to real estate, there are hundreds of options for you to choose from.

This is the best way to put the money you worked for to work now for you instead. There are plenty of publications about that which you can easily find over the internet by yourself, so there is no need that I cite some sites for you.

I would rather recommend you a life changing book, called “The Richest Man in Babylon”, by George Samuel ClasonThe-Richest-Man-In-Babylon-George-Clason.png

https://en.wikipedia.org/wiki/The_Richest_Man_in_Babylon

It is a very nice reading which you will for sure enjoy and at the same time it will change your view on your financial culture, from savings to investing.

Very important, stay away from scammers and “get rich quick” schemes. There is no trustful method to get rich over night. It is much easier to get poor over night. Most of the people seaking for this kind of fortunes end up losing everything.

Step 5. Diversify your investment

Investing is not that easy as it may seem. The first thing which might come to your mind when you hear the word “investing”, is the word “risk”. And that is perfectly right, it does come with a certain risk. For example, a drop in the stock market can affect your investments for a couple of years. 

The key to successful investing is diversification. You should spread your money across various asset classes such as stocks, real estate, gold, and cash. This way you may lose on some investments but at the same time, you might gain from the others.

I will give you the example of the well known “Housing Bubble” of 2008. 

The chart below shows the Vanguard Real Estate ETF (VNQ), the S&P500 and the old good Gold.

It is not hard to see that during the period from 2007 until 2009 both S&P500 and VNQ had a dramatic nose dive, while on the other hand, Gold has significantly overperform.

This is not an investment guide and I am not advising you to invest in Gold. The scope is to simply show how diversification can help you face the red years of the stock market.

You can read more about S&P500 here:

https://www.investopedia.com/terms/s/sp500.asp

More information about VNQ on their website: 

https://investor.vanguard.com/etf/profile/VNQ

I have build the above chart using https://www.tradingview.com/

Step 6. Be consistent

This is where most people fail. Building wealth is not a one-time thing. You will have to save and invest every month in order to reach your goal. 

You are not going to make a profit out of your investments every time. This journey may show you a lot of ups and downs. But it’s important to stay focused and keep going.

Compounding is the best concept coming together with consistency when speaking about investments.

There is an impressive quote:

“Compound interest is the eighth wonder of the world.

He who understands it, earns it … he who doesn’t … pays it”

By Albert Einstein

I can recommend you to watch the following youtube video about compounding, to understand why it is so important and how you can get benefit of that:

Final thoughts:

What is your number one priority now? If you keep focusing on your goal and working towards it, there’s a good chance you will succeed! It’s never too late to start. 

If you follow these tips outlined above, it is very likely that in just a few years, you will be closer to financial freedom than ever before!

Thank you for reading and I hope it was useful for you.

Happy journey to freedom.

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