How to Define and Plan for Financial Freedom
We go to work to earn a paycheck. We use that paycheck to pay our bills, feed our families and hopefully have enough left over to set aside something for the future. We often get caught in this cycle of working and paying bills without ever really stopping to ask ourselves why we do what we do every day.
Why do we earn money? There are various reasons, but for a lot of us, the answer is to find freedom. Once you’ve covered your necessities, you can start to look further down the road toward financial independence, which leads to actual freedom—the ability to do what you want to do when you want to do it.
In this week’s episode of the rich & REGULAR podcast, we discuss the purpose of income. Check it out and then continue reading for tips to help you reach financial independence.
Know your why.
Conventional financial advice tells us to earn more money and increase our net worth, and the internet is full of tips to help you get a promotion or start a side hustle. These are essential steps to take, but it’s also necessary to consider where you’re headed and why you want to get there. Once you have your reason identified, it is easier to determine the steps you need to take to reach your goal.
Everyone’s reason is different, but ultimately, we want the freedom to discover and prioritize what is important to us. For you, financial freedom might mean never having to go into an office or work setting again. It could also mean that you can take care of whatever problems come your way—despite the loss of a job or other income streams, you can continue to put food on the table and a roof over your head.
Using a journal or piece of paper, write down what a day in your life looks like after you’ve reached your goal. Do you get up early and make a full breakfast every day instead of rushing out the door? Maybe you workout at 10 a.m. and spend the afternoons with your family.
This should be stream-of-consciousness writing, without judgement. Just put everything you see in your mind’s eye on paper so that you can refer to it later. From there, apply concrete steps that will help you achieve your goals.
Calculate your number.
Once you’ve determined your reason for working and earning money, think about and articulate the total dollar amount that will help you accomplish your big why. Many personal finance experts will tell you to take your current monthly expenses, add 4% to the overall number for inflation, and then multiply that by 25 or 30 in order to reach your financial independence goal.
That can be a useful exercise, but it still leaves us with an abstract number we can’t apply to our actual lives. Using the visualization technique gives you a feel of what you’re working toward, instead of an amount pulled from someone else’s experience or your own vague notion of financial independence should look like.
Set concrete goals and apply the numbers.
Once you know where you’re going, it’s time to determine the concrete steps that will help you get there. Looking back at your day in the life image, think about the city or state you were living in, the type of house you had and what having enough felt like. From there, do some research on cost of living and housing prices to apply numbers to those ideas.
Once you have a target number in mind (be sure to add a cushion for unexpected expenses and then add 4-6% for inflation), you can start to fine-tune your vision and budgets. Look at things like health care, groceries, utilities, and insurance. Your current budget is a great place to start and build on.
Use large, medium and small goals.
After you have your financial independence number in front of you, start thinking about the large milestones you need to hit in order to reach your goal. Think about things like:
- Your desired retirement date
- Buying a house and/or paying off your mortgage as quickly as possible
- Paying off your student loans
- Increasing your net worth
Once you have these large milestones, break those up into the medium goals you need to reach in order to meet these big goals.
Those might look like:
- Maxing out your retirement accounts every year
- Determining the extra amount you can add to your mortgage every month
- Researching new investment opportunities to help you build wealth
From there, break your medium goals into small steps that you can apply every day. These are the little actions that lead to success.
Those can be:
- Sticking to your weekly budget and not indulging in too many treats
- Spending your lunch hour researching investment allocation so that you can ensure you’re making the most of your retirement contributions
- Having a weekly appointment with yourself to review your budget and make sure everything is moving forward
Knowing what you want the future to look like and then creating a road map to get there can make the journey to financial independence a lot easier. Creating goals based on other people’s idea of freedom will ultimately delay your progress and scatter your energy. Doing these exercises isn’t a guarantee that you will reach your target, but it’s a lot easier to hit a goal once you’ve defined it and created a road map to get there. Use these techniques to create the life that you want to live, full of success and freedom.
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