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6 Easy Steps to Financial Freedom – The Motley Fool

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These six steps can help you become financially independent.


Key points

  • Financial freedom is having the money to do what you want without worry.
  • Even the best financial plans can be easily derailed through common mistakes.
  • Here are some ways to help meet your financial goals and become financially free, from budgeting to avoiding emotional investing.

Financial freedom means different things to different people. For many of us, being financially free means having the money to do what we want without worrying about our bank account — having financial stability and peace of mind when it comes to money.

Regardless of your definition, following these steps will help you on the path toward meeting your financial goals.

1. Understand where your money is going

Starting a budget or cash-flow plan is essential to controlling your spending and saving. The end goal is to assign each dollar of income to an expense or to savings. It is much better to tell your money where to go rather than ask where your money is going. Fortunately, there are many budgeting apps that can help you track your spending.

2. Avoid lifestyle inflation

People tend to spend more as they earn more. To ensure that saving keeps up with income, consider switching dollar amounts to percentages. For example, if you commit to saving 8% of your income rather than a specific amount, your savings will rise with your income. Every time you receive a raise, increase the dollar amount automatically transferred to your savings and investment accounts. After all, if you don’t see the extra money in your checking account, you’re less likely to spend it.

3. Don’t follow the herd

Studies have shown that investors tend to buy high and sell low. The average investor from 2001 to 2020 saw returns of only 2.9%, where the S&P 500 averaged 7.5% over the same period. To overcome emotional investing, use a technique called “dollar-cost averaging.” This is an investment strategy in which you invest a certain amount weekly, monthly, or quarterly. This reduces the likelihood that hot trends, unexpected market events, or bad news will drive your investment decisions.

4. Be proactive with your retirement

Getting a complete picture of your retirement plan can be a challenge. If possible, maximize your retirement account contributions. Research investment products to make sure they are right for you — don’t just set and forget. Revisit your financial plan regularly to make sure you are on-track.

5. Expect the unexpected

Have an emergency fund with three to six months of living expenses in the event of an emergency or job interruption. Otherwise, you may have to fall back on credit cards, or suffer the tax consequences of raiding retirement accounts. You don’t want to sell long-term assets to meet short-term needs. How many months of expenses you set aside should be based on your employment longevity, job security, and other sources of income.

6. Don’t let past mistakes paralyze you

It can be difficult to take another stab at shaping up your finances if there were false starts and stumbles in the past. Don’t dwell on past mistakes or worry about what you should have done. Instead, learn from them — plan your future based on where you are now and where you want to go. The best time to make smart financial decisions may have been in the past, but the second-best time is now. Develop a plan you feel comfortable with, and continuously measure your progress.

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