How to Achieve Financial Freedom?
August 16, 2022
How to Achieve Financial Freedom?
We dream of it, work for it, and sometimes we even plan for it — but can the average person with an average job ever get to true financial independence? The answer is a resounding “Yes,” and I can prove it.
What is Financial Freedom?
Financial freedom is the ability to pay for your lifestyle through the rest of your life without relying on a regular salary or wage. It is often spoken of as “retirement savings” and is usually achieved through saving, contributing to a 401(k), and investing. It is also characterized by a lack of debt.
Begin by understanding your personal net worth. Your personal net worth is a combination of:
- What you earn
- The assets you own
- The liabilities you owe
Assets include what you own, like a house, investments, or cash in the bank. Liabilities are what you owe — rent, mortgage, credit card debt, or student loans.
6 Steps to Financial Freedom
As with all financial planning, it’s best to start early in your career and avoid debt. After that, follow these six steps to establish a firm financial by the end of your career.
Step 1: Set Your Initial 401(k) Contribution (percentage of income)
When you join a new organization, you’ll have the option of joining their 401(k) or 403(b) (for nonprofits or public teaching organizations) plan. Some companies will automatically opt you in with a default contribution percentage. Take command of this moment with a predetermined percentage of contribution.
If your employer does not offer a 401(k) or IRA (Individual Retirement Plan), contact an outside investment advisor, create a retirement account, and have your bank make automatic deposits into that account every month.
If you’re working with a 401(k) through your company, the key is to take advantage of employer match, when available. A typical amount is 100% of the first 6% you invest.
That means for every dollar you contribute to your 401(k), the employer matches you. Some deviate from this and will match, say, 50% of your first 6%. Your priority should be to get to the top of the match.
My suggestion is to begin with a 6% contribution. Be aggressive in what you allocate and learn to live with long-term funding at this level. You’ll see why in a moment.
Step 2: Set Your Goal 401(k) Contribution
You should allocate 12-15% of your salary for your 401(k). You likely won’t be able to contribute that much if you’re just starting out in your career but aim to increase your contribution one percentage point a year until you reach that milestone. I suggest doing this without counting on your employer.
Step 3: Hold Your Lifestyle Flat for The First Number of Years
As you receive raises in your career — especially early on — consider taking those modest raises (say, 2-3% per year) and pushing them entirely to your 401(k). You’ll find yourself at your goal percentage faster than anticipated. Once you’ve reached your goal, allocate 15% of all future raises toward long-term financial security and savings.
Step 4: Be Committed
You stand in front of the mirror, raise your right hand and pledge to yourself, “I will never divert long term assets (your 401(k) or retirement savings) to near term expenses (like buying a car or paying off credit cards).
Many people spend 401(k) funds when they leave an employer. The problem with this is the government will hit you with a hefty penalty and you will regret it over the long term.
To combat this, make a pledge to yourself to never divert long-term assets (401(k) contributions or retirement savings) to near-term expenses (like buying a car or paying your credit card).
Step 5: Build an Emergency Fund
Start this habit when you set up your initial 401(k) contribution as soon as you read this. To do this, allocate a percentage of your paycheck and have it sent automatically to an emergency savings account at the start of each month.
Your benchmark should be to have at least three to six months of expenses (not compensation) in this account. That way, if your transmission goes out, you have an unexpected healthcare expense, or you lose your job, you have a financial cushion to fall back on.
Step 6: Navigate to a Debt-Free Life
We live in a high-consumption world financed by debt. Avoid it. Be smart and protect your long-term goals by using cash to pay for depreciable expenses like automobiles or clothes. Avoid debt at all cost and you’ll thank yourself in the next 20 years.
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