What is the Step-by-Step Guide to Financial Freedom?
Today we are going to do a high-level overview of the ten steps needed to reach financial freedom.
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10 Steps to Financial Freedom
Save one month of living expenses
We assume you are cash flow positive, meaning you are earning more than you are spending. You will have to go through your spending to figure out how much you spend a month. Once you figure out that amount, you begin to save this money in your checking account.
Pay off high interest debt
Anything that is over 10% we consider high interest. You want to pay off the highest interest debt first (while making minimum payments on any other debt).
Build up an emergency fund
This is money that will be used for sudden and severe events. One side is an increase in expenses, medical, home, or car costs that were unexpected. The other side is loss of income. This could be job loss or decrease in hours. Having 3-12 months living expenses is a target to achieve. If you have a stable income (consistent pay, without fear of job loss) you can save less. If you have an unstable income (inconsistent pay, chance of layoff), you need to save more. The money saved can go into a high-yield savings account or money market mutual fund.
Save up to your employer match in the company retirement plan
You may not have this benefit at work. If so, you can go to step 5. For those that have a match available, you want to contribute the amount required to get the benefit. Typically, this is 5% of your paycheck but varies from business to business.
Fund short term goals
Saving up for a new car, downpayment on a home, or a vacation are examples of short-term goals. This is something that you expect to happen within the next five years that is outside your regular monthly spending.
Use HSAs and IRAs to fund your retirement
Health Savings Accounts (HSA) are a great tool to build wealth due to all the tax benefits. You have to have this offered with your health insurance, so there is a chance that you may not have this available.
Individual Retirement Accounts (IRA) are a great tool as well, but with slightly less benefits than the HSA. Paying less taxes means more money in your pocket. If your income is too high, there will be additional restrictions for you.
Max out your employer retirement plan
If you have this available to you, this is another huge tax break that is available to you. You can save about $25,000 a year in this account and even more if you are over 50.
Save for long term goals
Step 4, 6, and 7 have been about building your nest egg for retirement. If you are not on track for getting your retirement goal in time, you can save additional money in a brokerage account. Other long terms goals could be saving for college or starting a nest egg for your children. You may also have other debts that you want to get paid off (low interest car loan, student loan, etc.).
Pay off all your remaining debts
At this point, you should have enough money to fund everything you want now and in the future. Paying off debts reduces the amount of withdrawals you will have to take from your portfolio in the future. You also gain peace of mind for not having to worry about missing payments.
Give back
Find ways to help others. Donate money to people or causes you care about. There are tax efficient ways to donate so more of your money can go to these people and causes.