Financial freedom can sound like a vague and unachievable goal but there are actually some very real and concrete steps to Financial Freedom. This practical approach can help you save enough to never work for a pay-check again.
There are plenty of people that have achieved financial independence, some have even become millionaires in the process and all they did was follow a very logical and straightforward formula to financial freedom: spend less than they earn and invest the difference.
By deconstructing their success and by my saving and investing so far, I’ve come to understand that there are some very straightforward ways that you and I can achieve financial freedom.
What Is Financial Freedom?
Financial freedom is a journey where you move from being financially unstable, to financial stability but dependent (e.g. a salary) to financial independence through passive income. It’s a process of understanding your finances, saving money and investing the difference to create the lifestyle you want.
As you move along the spectrum from financial dependence towards financial independence, you will find that your financial freedom grows with the more positive steps you take. Options and lifestyle choices become more apparent, and you feel more in control as your FU money grows.
You can stand up for yourself in the workplace, relocate to a new city or take a career break by taking unpaid leave. By the time you are completely financially free, work becomes optional as your expenses are paid for by passive income.
What Are The 11 Life-Changing Steps To Financial Freedom
The 11 steps I outline below, move from the fundamental to more advances but they are all necessary for financial freedom. You start by getting your house in order, and develop better money habits and then move into the area of exponential wealth growth.
- Understand your current situation
- Look at money in a positive way
- Define your financial goals
- Decide how much you want to save
- Track your spending (and saving)
- Pay yourself first
- Increase the gap between your saving and spending
- Only buy happiness
- Create a side hustle
- Invest for your future
- Rinse and repeat these steps periodically
#1 Understand Your Financial Situation
This might be a tough first step, especially if you have debts and you feel miles away from where you need to be. Even for people who earn a reasonable income and don’t have debts, financial freedom feels like a pipe dream.
I remember having conversations with friends and talking about saving and investing £200-£400 a month and them looking at me like I was saying something extremely radical.This is because the first step with any financial planning is to break down your finances as they stand. Ignorance can be bliss and sweeping everything under the carpet is the action many people opt for.
Even on a small level, people don’t do things like set a budget or track their spending, because at first, it seems like self-criticism and behaviour that will make them unhappy. I’m not immune from this myself, sometimes we just ignore uncomfortable things, or put that to-do list to the back of our minds.However, uncomfortable it might be, we need to write down:
Income: Salary, Side Hustles etc.
Savings: Current Account, Savings Accounts, Stocks, Retirement Plans.
Debts: (excluding student debt in the UK), credit card debts, loans.
Monthly expenses (estimated): rent, bills, going out, classes/hobbies.
Then calculate your net worth using my net worth tracker. I use this to write down each of my balances every month and total them up. I also use it to calculate my savings rate, month on month and year on year savings growth.
#2 Generate A Positive Money Psychology
There are many negative connotations people have with money that influence how people think and behave with money. For example some people feel guilty about spending money. This can be influenced by how you are raised with money and the cultural influences around us.
Many people feel guilty about having money or spending money. Trying to ascertain wealth can be seen as greedy or shallow, and trying to be frugal is often dismissed as cheap.
It’s important to remember that the end goal is not money itself, the end goal is financial liberation from the corporate world and full autonomy of your time. Money is simply a tool to help you achieve your dreams, fuel your energy and live a stress-free life.
This is why it’s important to associate money with financial freedom, because if you view money negatively, you may subconsciously sabotage your chances of making it and keeping it. There is a whole social psychology of money that we can break down.
#3 Define Your Financial Goals
Depending on if you are more towards the thinking or feeling spectrum, you might want to approach this in two different ways. I fall between the two polls, so I just do both. You might want to tie your financial goals to emotions goals, you might want to imagine that sense of freedom, paying off your debts, owning your own home, or leaving your job for the last time.
When you have financial goals, you will eventually get excited when you see the numbers go up, by contrast, you will be motivated to find more effective or efficient ways of saving if your savings rate drops.
This is because there will be a greater divide between your and your financial/emotional goals. Ultimately setting these goals will keep you motivated to save and turn down unhealthy life options. For example:
I want enough passive income, to allow me to pursue my passion projects without needing a pay-check.
I want to travel the world forever on a passive income.
I want to spend as much time with my family and friends without having to be limited by an annual leave allowance approval.
For The Vulcan Among Us
Those of you who rely on logic, might want to set monthly, yearly and future financial commitments that you will keep to. All the while understanding how much passive income you could generate from your savings and investments. Some people just get excited about the numbers and maintain an excel spreadsheet.
Make $1,000 a month from display ads on my blog.
Save £9,000 for a house deposit.
Develop a stock portfolio that will return on average £1,200 a month in passive income (e.g. portfolio value of £365,000).
> Can You Make It To Financial Independence? 7 Actions To Keep You On Track
#4 Decide How Much You Realistically Want To Save
This takes us nicely onto our next step, understanding how much we want and need to save each month to achieve our goals. We need to set a psychological pre-commitment to these goals that we can take every month.
Calculate how much you need to save each month to accomplish your desired lifestyle or financial goals. My financial freedom calculator can help with this.You can use it calculate your portfolio value at say 7% return from the stock market for 20 years.
Once you now how much you need to invest, you can deduct your estimated expenses from your income. Then you can to see if you can realistically accomplish this goal. The reason I do it this way is because I know that setting a challenging goal and saving target enforces a strong saving mentality. Essentially I apply Parkinson’s Law. My expenses have to shrink to fit the savings goal.
#5 Pay Yourself First
Psychological commitment is important because rather than making a vague attempt to see what’s left to save at the end of each month. You will take action with each pay-check you receive each month.
Setting an intention and building the financial structures to habitually save money every month is one of the most important aspects of money management. Without it, you simply won’t save money.
You should read my article “How To Save Money Each Month: What To Do Every Pay Day” to understand more on this point.
#7 Track Your Spending And Saving
One of the most important steps to financial freedom is tracking your spending. Tools such as Snoop and Cleo are fantatic apps to use because they automate all of this. Far from the tedious approach of manually sorting through your transactions and reviewing, you just have to log onto the app.There are some nice visualisations too, that keep things interesting and help you identify patterns.
Revolut | One app, all things money.
Revolut is another great option as it’s a banking tool with detailed analytics features. Revolut analytics is a unique feature that allows you see all your expenses from different accounts in one place. It aggregates your spending and committed spending (scheduled payments and bills) from all your Revolut.With the Analytics feature you will be able to:
- See an overview of your finances and track current spending breakdown on a daily, weekly, monthly or yearly level.
- Set budgets and keep track of your spending.
- Compare your monthly, weekly or yearly spending to previous periods.
- Understand exactly which categories you’re spending in, the amount you spend with specific merchants and the places you spend in at a given period.
- Create a custom category and assign specific transactions to it.
- Add transactions to specific categories.
Simply having an awareness will do wonders for your finances as you’ll realise you didn’t even notice what and how you were spending your money before. Once you are happy with your level of spending and saving rates you can switch to a net worth tracker to keep an eye on your progress and saving consistency.
Automating your finances is one of the 12 Actions In Your 20s That Will Give You Better Money Habits For Life.
#7 Increase The Gap Between Your Saving And Spending
Once you categorise your spending you can specifically target patterns of spending you realise don’t add to your happiness and wellbeing. When you feel that you are spending too much on something that is delaying your financial freedom, you will want to question if that spending habit is really worth your while.
When you feel that it’s just an empty habit you weren’t even aware of, you will want to sacrifice it to speed up or maintain the arrival at your financial destination. For example, when living in Melbourne I could easily buy a coffee every day, I really love it.
However, if I bought the coffee everyday, I would likely habituate to the reward sensation and the sense of pleasure I get from drinking coffee would dull over time. At $4 a coffee would then be spending $1456 per year.
Maximise Your Enjoyment
Whilst it’s a good thing to treat yourself to things you enjoy, it’s also important to ensure we get the maximum enjoyment out of them and this ties into money habits too. Work through recurring expenses and eliminate the unnecessary and/or forgotten, and cut the big expenses.
Growing the gap between your saving and spending will ultimately give you that little more leeway to spend on things you enjoy, and will also motivate you when you plum in some new numbers to your financial calculators. You can improve the amount you save by building up your knowledge of things like the Supermarket Tricks Costing You Money.
#8 Strategically Buy Happiness
When you force yourself into trying to accomplish certain financial goals, you will realise that you can’t continue to buy everything. Whilst you can now afford many things, you will need to ration out the ‘enjoyment related allowance’. This pushes you to get the best value for money on your purchases.
With this in mind, you may want to consider the top 3 things you really enjoy. For example, experiences often return a greater level of satisfaction and are less likely to elicit feelings of guilt, such as buyers remorse.
What Products & Experiences Make You Happy?
Ultimately, it’s our experiences that are the defining features of our life. So you have to ask the question of whether the products you own or intend to buy will make you happier over the long-term, do they make your life easier? Do they bring you and your friends and/or family together?
Let me also ask you this, what’s one of your happiest memories? What were you doing and who were you with? How does all of this compare against and expensive product you bought? Life is made up of moments and not products and I’m sure this is the conclusion that you will have come too. There is Positive Psychology Of How You Can Buy Happiness that you can take advantage of.
#9 Create A Side Hustle
There are many people who have ended up creating a full-time income from their side hustles. Countless others have managed to level up their income by one or more smaller incomes on the side. Personally, I’m still working on this, but at the moment my predicted earnings are around $365 a year for this blog, but that figure is growing all the time.
There are two main reasons you need to seriously consider a side hustle:
- You want to reduce the time to complete your financial and/or life ambitions (e.g. financial freedom).
- You can supplement your future passive income with a more active income.
Taking the first step on your side hustle is the first but biggest step. However, you can easily have your own blog and you can Start A Blog In Under 20 Minutes,
Side Hustle Websites
If you are short on time but want to sneak in a few extra hours here and there, you can use these sites to get started:
- Become a freelance writer finding jobs on ProBlogger
- Help a business owner with jobs on Upwork
- Cambly – Teach English Online
- Get side gigs on SideKicker (AU)
- Write articles for Medium, who will pay you per the amount of visitors to your articles.
- Find other paid writing opportunities
You can also invest in your entrepreneurial side by:
- Selling things on Ebay or Etsy by creating or re-selling products
- Start an Amazon fulfilled / Drop-shipping business with Shopify for example.
- Start a blog or podcast and use affiliate marketing or selling book courses.
#10 Invest For Your Future
This is the most important step when it comes to exponentially grow your wealth. You can implement all of the other steps to financial freedom but if you simply leave your money in a cash account, you will lose money against inflation.
For example, if you manage to save £100,000 and inflation tracks at 3% for 18 years, then the real purchasing power of that money is just £50,000. You will have lost over half of that money in real terms because you failed to take action.
Therefore it’s important to see that there is a risk of not investing, as much as there is a risk to investing. Many people perceive a false dichotomy, where cash is a safe option and the stock market is risky. As we can see, this is entirely false.
Further to this point, when we review the stock market from a logical perspective, we see that the average return of the stock market is 7% in real terms. Therefore, to create wealth, we can’t merely save, we have to consistently invest for the long term.
Calculate Your Path To Financial Freedom
Investing consistently is one of the most fundamental steps to financial freedom. With this in mind, I’ve created a calculator which will give you the exact amount you need to invest each month to reach financial independence.
#11 Rinse And Repeat These Steps To Financial Freedom
Once you take these steps to financial freedom and get your finances on the right trajectory, it can be easy to sit back. However, it’s important not to get complacent, so we need to re-evaluate our financial goals, plans and motivations every now and then.
It’s important to not rest on our laurels but to consider if we can save more, or even earn more by landing a new job or negotiating the salary. As importantly, what can we sell, or create rather than consume to increase our saving and income.
From there we need to look at a responsible way we can multiply our savings and generate a sustainable passive income so that one day we can achieve financial freedom through financial independence and passive income.
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