This month we are celebrating independence and freedom. There are so many ways to gain independence and freedom. One of the areas that have been a challenge for me over the years is the area of financial freedom. As you all might know, you don’t just wake up one day being financially free. How many people were raised in a home where parents had varying views on how to manage money? How many people grew up in a home where there was an abundance/lack of money? Despite how you were raised you must understand your relationship with money. You must also acquire the skills and the mindset needed to be a good steward over your finances before truly obtaining financial freedom. Without the mindset change we will never really be able to maintain freedom over our finances and be a good steward over our money.
Here are several steps to help you gain financial freedom.
Step #1: Set financial goals If you don’t know why you’re doing this — why you’re making sacrifices, why you’re working so hard — it’s too easy to fail. If you set goals, they can help guide you even when things get tough. When you have to make a decision your goals can help you stay focused on what’s important.
For your goals to be effective they have to be personal; they must have value and meaning to you.
Be prepared for setbacks and curves in the plan. Life happens but you can always revisit your goals.
You’re not going to meet your goals without mistakes; Stuff happens. The best way to deal with problems is to have a plan before they occur.
Step #2: Track every penny you spend The authors of Your Money or Your Life urge readers to “keep track of every cent that comes into or goes out of your life.”
[This is] the best way to become conscious of how money actually comes and goes in your life as opposed to how you think it comes and goes…This is the step that somehow makes the biggest impact.
It doesn’t matter how you track your spending — the most important thing is to do it. Find a method that works for you. There are tons of apps and or programs that will help you track.
Whichever method you choose, stick with it. Make it a habit. Don’t fudge the numbers. Record your transactions as soon as possible. Most important of all, don’t judge yourself. Tracking your spending is an exercise in data collection; it’s not the appropriate time to change your habits.
Step #3: Develop a budget After you’ve tracked your spending for a few weeks (or months), use the data you’ve collected to develop a budget. According to The Millionaire Next door, budgeting is one thing that sets the wealthy apart from the rest of us — 55% of millionaires keep a budget.
Many people — myself included — fail to budget for a variety of reasons: it’s boring; we don’t think we need it, or we don’t know how. But this simple act can provide a roadmap for your money.
There are a variety of budgeting methods you can choose, again, just make sure you select a tool that works for you and that you are consistent with the budget.
Tip! Spend less than you earn. This is the fundamental money skill. It’s common sense, yet many people never learn to do it. Only by spending less than you earn can you hope to build wealth. This is easier to do if you track your spending and develop a budget, but those steps aren’t completely necessary. Even if you do nothing else in this list, spending less than you earn can put you ahead of your peers.
Step #4: Review your bills (and ask for discounts) At least once each year, you should review the contracts and agreements you have with various banks and service providers. This is also a great time to review your financial accounts to be sure everything still matches your needs.
Read your credit-card agreements and make sure you understand everything. (If you don’t, then ask questions.) When I read my own agreements, I just dial the customer service line and ask for clarification.
Check your service levels. We have a tendency to keep paying for the same service we’ve always had, whether it’s with our phone, our electricity, or our gym membership. Now’s a good time to make a quick check to be sure you’re only paying for what you need.
Ask for lower rates.
If you rent, review your lease or rental agreement to be sure you’re clear on all of the policies. While you’re at it, consider asking for a rent reduction. Sound crazy? If you’re a good tenant and regularly pay on time, it’s not so far-fetched.
Review your insurance. Are you carrying policies with three different companies? Consolidate them at one place. Check the deductibles on your auto and homeowners insurance. Are they too low? Could you afford to raise them and “self-insure” the first $1,000 of damage? And is your liability coverage high enough?
Go over your investment accounts. Check your balances and asset allocation. Are you too heavy in stocks for your risk tolerance? Should you own more stocks? If so, shift things around to get to your target allocation.
This task may be boring, but it’s important. Terms change all the time just like your own financial situation changes. Spending one afternoon a year to review your agreements (and ask for discounts) can keep you from getting trapped in contracts you don’t want and save you money in the process.
Remember: You always have the right to ask for a discount, but it’s not your right to receive one. It never hurts to ask, but if the answer is “no”, don’t be a jerk. Thank the person who helped you and move on.
Step #5: Optimize your accounts
Open an online high-yield savings account. Interest rates are about as low as they can go, and should increase in the months and years ahead.
Choose a rewards checking account. Believe it or not, it’s possible to find checking accounts that pay interest. The best online checking accounts are paying about 1% right now, depending on your balance. But you can usually find an even better deal through your local bank or credit union.
Use a rewards credit card. If you have trouble with credit, it’s best to avoid plastic altogether. If you can use credit responsibly, be sure to choose a credit card that pays you. Avoid cards that carry an annual fee. Find a rewards program that matches your lifestyle. But don’t choose a card just because it offers a signup bonus or because it gives you a discount at your favorite store. Remember: your goal is to find a useful tool. Look for a long-term relationship you can live with.
It’s important to choose accounts and systems that work for you. I signed up for a rewards checking account at a local credit union, but the nearest branch is fifteen minutes out of my way. I never used it, so the credit union closed the account. I compromised by opening on online checking account instead. I earn a lower rate, but it’s an account I’ll actually use.
Tip! When optimizing your banks and credit cards, consider using multiple accounts at each institution. For example, I have ING Direct subaccounts that allow me to target my savings. I save for vacation in one account, for a car in another, and I use a third account for emergency savings.
Step #6: Start an emergency fund- It is important to put money away for a rainy day. Most financial analysts suggest that you have 3-6 months of saving just in case an emergency arises. But my suggestion is that you start where you can so that you will have something saved in case your car breaks down or if you have emergency home maintenance to take care.