7 Steps to Financial Freedom
The best way to get control of your finances and experience the freedom of being debt-free is to be intentional and have a plan.
There are many benefits of being financially debt-free including more life-style options, greater appreciation of non-financial moments and relationships, and a reduction of stress.
The first step to financial freedom is to stop spending money unnecessarily on items that are not in line with your long term goals. Don’t spend money on impromptu, instantly-gratifying, or non-essential things like convenience store snacks, latte's, bank service charges or "it was a good deal" sale item that you don't really need. Do not incur additional debt.
Tips to reduce unnecessary spending:
Investing a few dollars in a milk frother can save you hundreds of dollars on latte's and cappuccinos from the local coffee shop. Plus it's quick and fun to use!
Know the terms of your checking and savings accounts, including minimum balances and how many debit transactions are needed to avoid service charges.
Ask yourself every time you spend over $20 - do I need this or do I want to be debt free?
Wait at least 24 hours before spending anything over $250
Business Note: These same tips can be used on business purchases also. In business, you want to either increase revenues, or decrease expenses in order to improve profits.
The second step to financial freedom is to create a budget and use it. A budget is a plan for how you are going to save and spend your money. In order to create a budget, it is helpful to track every penny of your spending for at least a month. Then, create a spreadsheet or use a program like Quicken, Mint, Simple Home Budget or GnuCash. Businesses can use QuickBooks online or desktop, or a number of other accounting programs such as FreshBooks.
Tips for setting up a budget and tracking expenditures:
No matter how small the expenditure - track it. Those $5.00, $1.50 and $7.80 purchases all add up.
Be realistic, but be willing to cut expenses in order to gain financial freedom. Small sacrifices can reap long term rewards and sometimes even surprising side benefits. For example, If you go to the movies frequently, consider having a weekly or monthly movie night with friends and family - have each person take turns bringing the movie and snacks. You'll engage with people, have fun, and still watch movies.
Be sure to count often forgotten items in your budget such as nylons and makeup (women) and golf outings or hunting (men). Gift giving is also frequently forgotten in setting up a budget.
Business Note: One of the best budget tools available for any business is LivePlan, It is extremely easy to use and provides valuable information for seeing where you are and where you need to be.
The third step to financial freedom is to pay yourself first. You should set aside money each month in savings, then pay bills and expenditures from the remaining amount.
The amount you save each month is determined by your goals, your current debt, your current savings, and other factors. Start with at least 10% of what you take home. This money is used for income taxes, retirement accounts, emergency funds and college funds.
If you think you can't afford to do this - do it anyway. Save $200 a month for six months. You will find a way to live on the rest - whether it's cutting bills or finding a way to earn additional income.
For businesses, I recommend they take 20% of all revenues deposited and put it in a business savings account to be used for paying income taxes, insurance and capital purchases.
Fourth, give to others. I personally tithe (give 10%) on my gross revenues. If I can help change one person's life, the investment would have been worth it. Decide what you'll give to others (usually to a 401k organization to take advantage of the deduction) each month and set that portion aside before paying off bills.
Businesses - your charitable contributions are listed as an itemized deduction on Schedule A of your tax return and can only be deducted if you itemize your deductions. Remember to acquire and retain an acknowledgement letter from the nonprofit for your donation. Your cancelled check is not enough documentation and the IRS may disallow the deduction if you cannot provide this document. It must be obtained before filing your tax return. You cannot request it later during an IRS audit.
For additional information: https://www.irs.gov/Charities-&-Non-Profits/Charitable-Organizations/Charitable-Contribution-Deductions
The fifth step to financial freedom is to pay off the debts that have the highest finance charges first. Make a list of all your debts. Include how much you owe, the percentage rate you pay, and your monthly payment.
Paying off debt with the highest rates first is called the Debt Avalanche approach. Some financial advisors promote using the Debt Snowball method which is paying off the lowest balance first. I disagree with this method since it does not make financial sense - you will pay more using the snowball strategy.
The Vertex42 Debt Reduction Calculator allows you to choose both methods. I strongly encourage you to download this easy to use excel template and pay attention to how much money you are paying in financial charges each year.
Your goal of course is to be debt free. It can be done. My husband and I have been completely debt free (no mortgage, no car payments, no loans, etc.) for over 5 years.
Businesses - you should review your Balance Sheet each month. You should have more assets than liabilities.
After credit cards are paid off, pay off the new balances each month. This is the sixth step towards, and maintaining, financial freedom.
I use my credit card for most of my daily purchases such as gas, groceries, and sundries. It is more secure than using a debit card (a thief can't wipe out your bank account with a credit card), plus I earn points that gives me hundreds of dollars' worth of rewards each year. Credit scores can improve with paying your credit cards on time as well.
Credit cards are necessary for traveling and more convenient than cash. The key to using credits cards effectively is to record all purchases immediately, tracking them against your budget, and then to pay off the balance each month. Do not incur finance charges or pay annual fees on credit cards.
The last step, number seven, on your path to financial freedom is to pay your bills twice a month. I created a spreadsheet of all my bills and their due dates. Based on paying them one week before their due date, I put them into either my 1st bucket or my 15th bucket. My first bucket I pay on the first day of each month. My 15th bucket on the 15th day of each month.
This method reduces the stress of paying bills, allows you to see how much money you need for each "bucket", eliminates late fees and helps you feel in control of your finances.
If you're serious about traveling the road to financial freedom, implement each of these steps one at a time and you'll soon be heading towards your debt free destination.