Posted by Abundant Wealth Planning LLC

The 8 Step Plan to Achieving Financial Freedom

The 8 Step Plan to Achieving Financial Freedom

The late Jim Rohn, who spent several years as a sales specialist and motivational speaker, spoke about financial freedom in his podcasts. With his distinct voice, he emphasized the need to learn to work more on oneself than on a job. He called it "easy" to make money in America. Of course, Jim's definition of "easy" was "something I could do," which meant it took a lot of hard work.

Rohn also said it's easy for people not to take these steps. Unfortunately, most Americans seem to choose this "easy" version. The United States has the 11th highest gross domestic product (GDP) per capita globally, at $62,641 per year. Despite this, approximately only 40% of Americans can cover an unexpected expense of $1,000. As a result, several people find it hard to imagine their financial freedom when they have to go into debt to repair their cars or replace a used device. You can change these circumstances by committing and taking the time to learn how to pay off debt, save, and invest.


Eight steps to financial freedom

Obtaining financial freedom will not happen by accident. It will take discipline and commitment, a series of specific steps to make this goal a reality. These processes will make financial independence a real goal and help you avoid monetary mistakes. They will also help you find ways to make early retirement a reality.


Define financial freedom for yourself

Most of those you ask will tell you that they want "financial freedom." But what does that mean? Coming back to Jim Rohn, he defines it as the ability to live off personal income. It also leaves a lot of inaccuracies, as financial freedom can mean different things to different people. Does it mean a modest or luxurious lifestyle? Do you live in a high-cost area or a low-cost area? Will you have mortgage or rent repayments, or will you live in a house that has already been paid? What other debts, if any, do you have to pay? All of these decisions will affect your definition of financial freedom.


Make a Budget

One way to make sure you reach your financial goals is to budget. Budgeting takes every dollar of income and gives it a purpose. Of course, it can be difficult at first to budget for that milk or a vacation. But once you get used to living within your means, your budget can be consolidated.

Income includes all of the money that goes into your home. Every dollar of income needs a designated purpose: an expense. Charitable taxes and donations are considered expenses, as are irregular payments, such as a car insurance policy that expires every six months, and non-essential expenses, such as meals out on the town. All expenses go to the budget. It is, therefore, necessary to distribute expenses between needs and desires.

One approach to allocating your money is to put 50% on needs, 30% on wants, and 20% on savings. This balanced monetary formula emphasizes long-term financial sustainability. 

If your expenses exceed your income, you will need to find ways to meet your needs with less or find additional sources of income to make your budget work. But once you break down your income and expenses, you'll at least know what you need to do to take control of your finances and reduce your financial mistakes.


Open the appropriate accounts.

Families need more checking accounts and savings to gain financial freedom. Certain types of additional accounts have become critical to success, in large part because they increase your money tax-free. Pension funds, for example, belong to a 401(k) account or an individual pension account. Are you saving for your child's college? This will require a separate account for your 529 plan.

Emergency funds and even non-retirement savings may also require a separate place to store the funds.


Create a plan to pay off the unpaid debt.

The United Nations identifies a global problem called "debt slavery." Some may choose different words, but whatever your perspective, debt is the antithesis of financial freedom. Therefore, an integral part of freedom is to pay off debt or avoid it altogether.

Paying off debt requires an effective strategy. Research shows that families often use equilibrium matching heuristics. This means paying all debts equally, which can cause consumers to pay more interest and write off their debts more slowly if they do.

Some have recommended the "avalanche method." This involves devoting all debt payments to the minimum debt with the highest interest rate, thereby reducing the amount of interest paid. Other experts argue for the "snowball method," which devotes all funds above the monthly minimum to the lowest debt to motivate borrowers when debt disappears.

Whether the avalanche or snowball or whatever method is best for you, tackling debt one at a time seems to be the most effective strategy.


Build an emergency fund

Create an emergency fund of $1,000 regardless of debt level. After paying off all non-mortgage debt, fully fund the account to cover expenses for three to six months. Why? You don't know what's going to happen. The emergency fund can help prepare you financially for these surprise events.

Also, use a separate account for this emergency fund. Keep the money that is enough to pay a doctor or mechanic quickly, but not so that you might be tempted to spend it in vain.


Increase your financial literacy and financial education

Unfortunately, most people finish formal education without taking a personal finance course. This limitation can be the biggest obstacle to financial success. Succeeding financially is extremely difficult without some knowledge of how to save, plan, avoid and pay off debt, take advantage of tax-deferred accounts, and invest. Educational resources such as seminars, official articles, and podcasts can teach you strategies that will bring you financial freedom faster.


Investments

Warren Buffett once said that if you don't learn how to make money while you sleep, you will work until you die. Investing is a way to make money while you sleep.

You can follow different investment strategies depending on the types of accounts you have. Your retirement account may require diversified mutual funds and exchange-traded funds consisting of bonds or a stable basket of large-cap stocks or other assets. With the extra cash and an appetite for risk, you can budget a small amount for riskier but potentially more profitable investments. However, opt for diversified and low-risk investments for the majority of your wealth, and do not hesitate to seek credible advice from a financial professional who can help you assess your risk tolerance and assess your potential investments.


Look for other ways to achieve financial freedom.

Any business that generates money can help you gain financial freedom. Not all of these paths involve saving and investing. Let's take a step forward, for example.

Secondary activities range from running social media sites or driving an Uber or Lyft, or creating YouTube videos and using them to sell advertisements, products, or services. You can also go into "house hacking." It is about buying real estate to rent part of it to cover all or part of the expenses.

Of course, time and talent must play a part in this decision, but thinking outside the box can help you build wealth.


Get help on the road to financial freedom.

As mentioned above, financial education only reaches those who want to learn. Even so, issues such as taxes or investment strategies may require professional advice. You may also need to take an honest and analytical look at your finances to gain more control. Whatever your needs, feel free to use some of the resources available to help you achieve financial freedom.


Find a financial advisor.

Having a good financial advisor can go a long way towards achieving financial freedom. These experts can not only help you save money but also provide you with investment advice. But consultants come in many forms. Beware of those who promise "get-rich-quick" strategies. Consider hiring a consultant who receives financial compensation to help you out instead of selling a specific product.

Many turn to certified financial planners. The CFP must meet the standards of competence and ethics in order to obtain this designation. Another option is a consultant appointed by the National Association of Personal Financial Consultants. NAPFA consultants work for a fee-only, ensuring they are acting in the best interests of the client.


Conclusion

Learning and achieving financial freedom are two different things. Individuals who want to learn can benefit from various resources, ranging from books and lessons to a wide variety of online tools. However, at the end of the day, success depends on you and your determination.

You need to commit to making healthy financial habits part of your routine. Follow this long-term plan, and not only will you have less debt and more savings, but you will also be carrying out these steps with the money you earn while you sleep.


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