You may have heard the term financial freedom and thought, “That doesn’t apply to me.” But financial freedom doesn’t mean getting rich and never having to work again. It simply means taking control of your finances.
Here’s what we mean: Rather than living paycheck to paycheck, you have savings for emergencies, your debt is under control, and you have money left to save toward your goals.
This kind of financial freedom is possible—with the right steps.
Define Financial Freedom
We’ve defined financial freedom in generic terms, but you’ll need to determine what it means for you. Ask yourself what you are trying to achieve and set goals.
As JC Murray, First Interstate Program Manager, puts it: “What does this money mean to you?” That may mean a comfortable retirement, a new house, a recreational vehicle, or enough money in the bank to take a year off from work.
If you have a partner, discuss your goals and make sure you’re on the same page—literally. Put your goals down on paper.
Give Yourself Time
Time is your ally. The earlier you can start saving toward your goals, the better—especially if it’s a big expense such as retirement, college savings, or even a vacation.
“The sooner we plan, the longer we have before we’re trying to achieve our goal, the money works for us,” he said. “It’s much harder to achieve with shorter time frames.”
Save for Emergencies
Before you can start working toward your bigger goals, you’ll need a solid foundation underneath you. That includes building up a savings account that can cover three to six months of living expenses.
“You have to have that foundation underneath you, making sure you have that savings account,” JC said. “That’s a pretty big deal, because it keeps you from taking bigger steps back when unexpected expenses arise.”
Pay Down Debt
Managing debt is also key to building a solid financial foundation. It’s important to distinguish between consumer debt and capital debt. A mortgage on a home that’s within your means is good debt—the house is an asset you can hopefully sell for more money that you paid.
Consumer debt—loans for lifestyle purchases such as boats, campers, ATVs—can distract people from longer-term goals if they spend too much money.
Because credit cards have higher interest rates, pay down this debt first. But don’t toss your cards, a well-managed credit card can improve your credit over time. Just be sure to pay off the balance in full each month.
“If you have a savings account, but you’re running up money on a credit card, you’re not really achieving what you think you’re achieving,” JC said.
Seek Financial Advice
JC suggests working with a financial advisor. Your advisor will help you align your goals to your financial resources. That might mean putting more money toward your 401k, funding an IRA, starting a separate long-term investment, or simply saving for a big purchase such as a boat or vacation.
“If they don’t match, you have a few options. You can change your goals, increase resources, or modify the risk you’re willing to take to achieve your goals,” JC said. “It might be some of all of those.”
A financial advisor can also keep you on track when emotion gets in in the way. For example, if the stock market drops, an investor might feel the need to get out quickly.
“Clients who have a thoughtful course in place, being able to ride it out is a very productive strategy that’s proven itself time and time again,” JC said. “But emotions will challenge you.”
Check in Yearly
Financial freedom isn’t a “one and done activity,” JC said. Reassess your plan each year and make adjustments as needed.
“Is that still what you want? Is the timing still correct? Has there been an increase or decrease in resources,” JC said.
Financial Freedom is Possible
Financial freedom doesn’t happen overnight. It takes being thoughtful about your goals, and giving them the time and energy they deserve. But it’s doable.
“Most people are very capable of being financially free, being able to take care of themselves in the manner of living they hope for, that they aspire to, but takes planning,” JC said. “It takes conscious effort to make sure we’re making the most of the resources we have along the way.”