For many, stressing about money is a normal part of life. Maybe you're living paycheck-to-paycheck, unsure of how you'll pay for an unexpected car repair. Or perhaps you're knee-deep in consumer debt and feel like you can't get ahead. Maybe it's all the above.|
If this sounds familiar, you're not alone. According to the American Psychological Association, about 62 percent of us worry about money. Moreover, roughly 34 percent of Americans stress about unanticipated expenses, while 25 percent are concerned about paying for basic needs. Needless to say, money has us in the palm of its hand.
But what if you could reduce, or even eliminate, your financial worries? Is it even possible?
When you have financial freedom, the answer is "yes!" Personal financial freedom helps you live your life without feeling hindered by money. Most importantly, it frees you from the clutches of money, once and for all.
What is Financial Freedom?
Now, financial freedom isn't about being free to do what you want with your money. It's about freeing yourself from money so you can do what you want.
"[Financial freedom is] being able to meet your financial obligations, not having debt and pursuing things that make you happy without having money as a stress factor," says Bola Sokunbi, a certified financial education instructor, author and founder of Clever Girl Finance. "It means you have the financial means to support the life you want to live."
Financial freedom, sometimes called financial independence or security, also looks different for everyone. For some, it might mean paying cash for a car or taking a vacation without using a credit card. To others, it could look like retiring a few years early or being able to cover unexpected expenses.
While financial freedom isn't a one-size-fits-all achievement, there are certain things everyone needs to get there. So whether you're just starting your journey or giving it another go, consider these 11 essential things for becoming financially free.
How to Become Financially Independent
1. Learn How to Budget
Regardless of your income, financial freedom isn't possible without budgeting. That's because a budget gives every dollar a purpose before it hits your bank account. After all, how can you control your money if you don't know where it's going?
If you're intimidated by budgeting, Sokunbi recommends giving your budget a fun name. Make it inspirational, personal and creative. She also suggests trying different budgeting methods until you find what works for you. Furthermore, avoid chasing perfection. "So many people give up on budgeting because they fall short of following their budget perfectly, and then they think they are bad with money," says Sokunbi. Try looking at your slip-ups as redirection in disguise, instead. By giving yourself space to revise and reframe, you'll heighten the chances of reaching your goals.
2. Build an Emergency Fund
Life happens—it's unpredictable, random and messy. And while we can't control what happens to us, we can control how we prepare. By establishing an emergency fund, you can buffer the expenses for things like car problems and home repairs. In turn, you'll reduce the need to cash out your savings or swipe your credit card.
To build an emergency fund, add it as a category in your monthly budget to ensure that you put money toward the fund each month. Even if your stash doesn't fully cover an emergency, it will lessen the blow of surprise expenses.
3. Reduce or Eliminate Debt
According to Sokunbi, reducing or getting rid of debt is also essential for financial freedom. Not only does it help you save the money you would've paid in interest, but it lowers your monthly expenses, too.
"[When you eliminate debt,] you're not tied to the interest that's compounding daily, weekly or monthly, which is what keeps a lot of people in debt," says Sokunbi. "But if you only make your minimum payments, the interest you're paying will start to exceed your principal balance. That's what keeps a lot of people stuck."
Essentially, the longer you hold on to debt, the longer a part of your paycheck will go straight to someone else.
To combat debt, Sokunbi recommends prioritizing your debts by highest to lowest interest rate. If the debts have similar rates, you can rank them from highest to lowest balance. From there, focus on aggressively paying the highest debt first before moving on to the next one.
4. Obtain Adequate Insurance
Having the right insurance will help cover the expenses of various emergencies. For instance, a broken leg can cost about $7,500, according to HealthCare.gov. Without insurance, you'll likely have to pay out of pocket, making it difficult to save money.
Insurance is crucial, even if you have an emergency fund, and while some argue that insurance may not always cover the full cost, the point here is to be prepared. Paying some money today could protect all your money tomorrow.
5. Improve Your Credit Score
Your credit score impacts your biggest transactions, including home mortgages and car loans. But if your credit score is on the lower end, you'll have higher interest rates. This will only dampen your journey to financial freedom.
"When you have poor credit, it costs you more to do certain things," explains Sokunbi. "[That's because] you present a higher liability to the creditor or lender." It can even affect your ability to do things like rent an apartment or receive utility services.
If your credit score needs a boost, Sokunbi recommends paying your bills on time and avoiding applying for credit that you don't actually need. Reducing or eliminating debt will help, too. "Over time, you'll see your credit score improve as you [continue] managing your money," says Sokunbi.
6. Invest for Retirement
For the average American, retirement lasts about 20 years. Yet, less than 50 percent of us have determined how much money we need during that time. The Department of Labor also shares that, in 2016, about 30 percent of workers who had access to a retirement plan didn't contribute.
If your employer offers a plan, contribute as much as possible. And if they don't? Open a traditional or Roth Individual Retirement Account (IRA). A financial adviser can offer personalized guidance based on your situation and goals. From the tax advantages to the automatic transfers, retirement plans make it easy to create financial security for your future self. It's also one of the most financially-wise things you can do, no matter how old you are.
7. Learn to Negotiate
The idea of negotiation doesn't sit well with most people. It's natural to be afraid of judgement, rejection or feel as though you're coming off as pushy. Nevertheless, in some cases, negotiating can transform your financial security.
At work, simply asking for more money could be what stands between you and a pay raise. According to research by Jobvite, a recruiting software company, though, only 29 percent of workers bother trying. Of those people, though, an impressive 84 percent received a higher pay.
Negotiation can also lower your utility bills, thus increasing how much you save. For example, if you've been with your internet provider for a long time, see if they can offer a discount. Or, you can try reducing your phone bill by removing certain features from your phone plan. Sometimes, it's as simple as asking, "What can we do to lower this rate?" You never know what one question can do.
8. Automate Your Savings
Another tool for achieving financial freedom is automation. "[Many] people don't save or invest because they see the money in their bank account," says Sokunbi. "They need to manually make the transaction, but often, they end up spending the money before they get a chance to transfer it."
There's also the issue of self-debate, where you wonder if you should make the transfer next week, next month or even at all. By automating the transfers, you won't have a chance to think twice.
9. Prioritize Your Health
Financial security also means investing in your physical health by treating your body well. When you live a lifestyle that supports your health, you can improve your quality of life while lowering your healthcare costs.
One example is avoiding expensive, unhealthy habits like smoking or drinking too much alcohol. Staying physically active improves your balance, which could help prevent future falls and injury. Or, if you have a chronic condition like hypertension, lifestyle modifications can reduce your need for medication.
Additionally, with health insurance, you'll have access to annual check-ups and routine screenings for free or a small co-pay. By staying up-to-date with these appointments, you can prevent chronic diseases (or catch them early) before they take a toll on your health and wallet.
10. Handle Your Things with Care
Similarly, taking care of your belongings sets you up for financial success. Proper maintenance, after all, is often cheaper than replacements. This includes everything from clothes and air conditioners to cars and lawn mowers. Handling things with care extends their life and function, and also stretches your dollars by preventing extra expenses. Consequently, you can protect your savings as you work toward financial security.
11. Live Within Your Means
If there's only one thing you do, make it this: Live within or below your means. If you spend more than you earn, it will be nearly impossible to build wealth.
Does this mean you need to ditch the mattress and sleep on the floor? Not at all. It means making financial decisions based on what you need versus what you want. Plus, when you live below your means, you can reduce how much money you need to begin with.
At first glance, this list might seem like a set of limitations. Yet, when you consider the intended outcome, you'll find that it's quite the contrary. These accomplishments can remove the restraints and stress that often come with money issues. Without money holding you back, you'll have more room to live life to its fullest.