The Benefits of Financial Freedom

Financial freedom means having enough cash and savings on hand to live the lifestyle you want. People who are financially free can retire with ease or pursue a new career without worrying about how they’ll pay their bills. Most people want financial freedom but aren’t quite sure how to get there. Today, let's talk about the benefits of financial freedom and how you can start taking steps to achieve this goal.

The Benefits of Financial Freedom

Achieving financial freedom is the goal of any good financial plan. Here are some of the biggest benefits of financial freedom:

• More options: Financial freedom gives you options—you won’t be stuck working a job you dislike because you need the money. You could quit working altogether if you choose, or you’ll have more negotiating power if you decide to move on to another job. You can also start your own business or invest your time in a passion project.

• Lower stress: Research shows that financial worries are a top stressor for most people. Money problems not only take a toll on your mental health, but they can actually cause physical problems like back pain and stomachaches. This stress can take a bigger toll on your finances, causing you to overspend and underperform at work.

• Better retirement planning: Financial freedom allows you to create a retirement plan that matches your goals and values. It can make it easier for you to travel or get involved with your community. And you may have the option to retire early if that’s your desire.

Why Is Financial Freedom So Hard to Achieve?

Many people have a goal of reaching financial freedom, but unfortunately, most fall short of achieving it. One survey found that only 11% of Americans are living out their definition of financial freedom.

Many people don’t achieve financial freedom because they don’t have a plan for how to get there. Because they don’t have a plan, they don’t prioritize budgeting, saving, or investing. They don’t know how much they’re spending each month and fall into the trap of living beyond their means.

Some people are also limited by their lack of knowledge. They may not understand the importance of compound interest and investing as early as possible. If they are investing, they may not be diversifying their assets or taking advantage of low-cost index funds.

And they may not be taking advantage of tax breaks that can reduce their taxable income. Fortunately, a knowledge gap is the easiest one to make up since there are tons of financial resources available online.

How to Achieve Financial Freedom

Reaching financial freedom is possible, regardless of any mistakes you’ve made in the past. Implementing the following five steps will get you on the path toward financial independence.

#1 Come Up with a Plan

The first step is to understand what financial freedom means to you and come up with a plan for how you’ll get there. Just saying you want to reach financial freedom is too vague—you need to put a number and timeline behind that goal.

Start by looking at your lifestyle and identifying how much money you need each month to live comfortably and how much you need to save to make that happen. From there, you can come up with a timeline for how you’ll reach your goal.

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#2 Budgeting

Many people fall into the trap of lifestyle creep—as their income increases, their spending goes up as well. If you feel out of control when it comes to your finances and feel like you don’t know where your money is going, you’re probably dealing with lifestyle creep.

Budgeting and reviewing your spending is the best way to break free of this pattern. Start by listing any income you receive from your job or side gig. Next, you’ll list your monthly expenses, starting with the essentials like your mortgage payment, food, and utilities.

From there, you can add in any non-essential expenses, like eating out or a Netflix subscription. And make sure to save a minimum of 10% of your income (though the more you can save, the faster you’ll reach your financial goals).

Once you subtract your income from your expenses, you shouldn’t have any money left—this is what’s known as a zero-based budget. Make sure to track your transactions throughout the month to ensure you stay on track with your budget.

#3 Paying Down Debt

If you have any outstanding debt, like credit cards or a car payment, you’ll want to pay this off as soon as possible. Credit card debt, in particular, comes with extremely high interest rates, making it harder for you to save money and reach your goals.

You can pay off your debt by using either the debt snowball method or the debt avalanche method. With the debt snowball method, you start by paying off the smallest balance first and work your way up to the largest debt. With the debt avalanche method, you pay off the debt with the highest interest rate first. There are pros and cons to each method, so just pick the one you think will work best.

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#4 Save an Emergency Fund

Financial emergencies will always arise, which is why it’s important to save six months of your income in an emergency fund. That way, if you suddenly lose your job or receive a large medical bill, you won’t have to rely on credit cards or take money from your retirement savings.

Start by making a list of your essential expenses, like housing, utility payments, or insurance payments. Once you have your monthly expenses, multiply this number by six—this is how much money you need in your emergency fund. Open a high-yield savings account designated specifically for your emergency fund. This account should be easy to access if a financial emergency does occur.

#5 Investing

Finally, you should begin investing your money to take advantage of compound interest. Many people are nervous about investing, but it’s the best way to grow your money and build long-term wealth.

If you have access to an employer-sponsored 401(k), you should max out this account first. Ask your employer if they match your contributions since this is free money you can take advantage of to continue building wealth. If you don’t have an employer-sponsored 401(k), you can open an online brokerage account. Low-cost index funds, mutual funds, and ETFs are the best and easiest way to get started.

The White Coat Investor is filled with posts like this, whether it’s increasing your financial literacy, showing you the best strategies on your path to financial success, or discussing the topic of mental wellness. To discover just how much The White Coat Investor can help you in your financial journey, start here to read some of our most popular posts and to see everything else WCI has to offer. And make sure to sign up for our newsletters to keep up with our newest content.