How to Achieve Financial Freedom in 5 Proven Steps

Sometimes thinking about financial freedom can be overwhelming and hard to truly picture the end result. So, as with anything, it is easier to break down into steps that are achievable. This will help you to be focused without feeling too overwhelmed.

According to statistics, 78% of U.S. workers live paycheck to paycheck, 3 in 4 say they are in debt, and almost half of U.S households have staggering credit card debt.

Is that sounding familiar? If so, it’s time to break out of the cycle and start creating a life of freedom.

What is Financial Freedom?

Financial freedom is the ability to live comfortably on your income without having to actively work for it, trading in hours for money.

It means you have other assets that generate income to cover all of your expenses and costs of living for the rest of your life.

These assets are passive income streams that have systems in place so that you are making your money work for you, and not the other way around.  

Financial freedom is defined differently for every individual so figuring out what it looks like for you would be the first step. Lifestyle and places of living are different for everyone so taking into account the expenses that go along with that is important.

Some feel they can officially consider themselves financially free when they reach the one-million-dollar mark while others have a different number in mind.

Why Do You Want to Achieve it?

There are many reasons why people want to achieve freedom. Think of the reasons that are important to you and write them out so you can truly visualize them.

Do you want to travel all over the world?

Finally buy the house you’ve always dreamed of for your whole family?

To have the ability to help others in ways you never imagined possible before?

Even if it is to just have less stress about your finances and to be able to enjoy life more, every person has a reason why they want to achieve financial freedom.

It is a life made up of your own choices. You decide what you want to do every day! It is the ability to follow your passion without worrying about money or take a spontaneous trip to another country whenever you want.

How bad do you want it?

There’s a reason why many people don’t ever achieve financial freedom. The thing is even if you’re starting with very little to your name, if you want it bad enough, you will achieve it. It takes hard work and persistence to achieve, but it is possible.

Many people are stuck in the same mindset they grew up with that they have to go to college, get a degree, a job and work until they can finally retire.

Your job may be your dream job and you might even be making six figures, but if you’re spending most of what you make then you are relying on your employer for every paycheck. What happens if one day those paychecks abruptly stop due to any variety of reasons? Many don’t look for something more.

It is great if you love your career and that is exactly what you want to do in your life but for those that want a different path, the freedom of living with your own set of rules, a whole world opens up into opportunities that are there, if you are looking for them.

Some come across those opportunities and think of some these as a get rich quick scheme. They try and fail, and then give up thinking that no such thing exists. The secret to success is trying over and over again until you finally get it right. Whether that is learning how to start a business or investing, you just have to want it bad enough.

So, what are the steps that will get you to financial freedom?

To make financial freedom as simple as possible, we’ve broken it down into just five proven and achievable steps.

Step 1. Calculate Your Finances/Budget and Set Goals

Sitting down and writing everything out is the first step. Write down where you picture yourself living, what you will be doing, and of course, then calculate the cost you think you will need to fund all of those expenses. While some might find these numbers to be unpredictable, there is a way to get a very good estimate.

To start, calculate all of your expenses of the lifestyle you live at the moment. This is because most likely when you achieve financial freedom, that is the lifestyle you will be comfortable living. Be reasonable with the number that you think you can actually live with. Make sure to include any additional things that you think you might be doing if you were financially free such as traveling more.

Once you have your approximate number that you want to have monthly, use that number to calculate the yearly expenses and then multiply that number by 25. This is known as the 4% rule.

Let’s say you estimate that to live comfortably, you will need $5,000 per month. Multiply $5,000 by 12 to get the annual spending number of $60,000. Multiply $60,000 by 25 which gives you a total of $1,500,000. This number is the starting point of how much you will need to achieve financial freedom and have the ability to retire without ever working another day.

So, what is the 4% rule?

It is based on a study called the Trinity Study, that analyzed a hypothetical retirement of 30 years, with 50% stocks and 50% US government bonds, between different years allowing for variability. The 4% was the worst-case scenario withdrawal rate in the 65-year period while still having a growing surplus.

Mr. Money Mustache, someone who retired in his 30’s himself, introduces and explains the 4% rule well, for those interested in learning more.

Once you know where you want to be with your finances to be able to achieve financial freedom, its time to figure out where you currently are. Your net worth is the calculation of all your assets minus liabilities. In other words, everything you own minus everything you owe.

What are assets?

Assets are everything that has value that you own. It can include any cash you have, money you are owed, inventory, property and equipment.

What are liabilities?

Liabilities are any debts you have. These can include mortgages, loans and credit card balances.

Calculate your net worth to see where you stand and then start making a plan on how you’re going to achieve financial freedom. Taking your financial situation into your hands is the beginning of the road to financial freedom.

Step 2. Tackle Your Debt

Debt is almost never a good thing unless you use it to your advantage, which we’ll talk about later on. Having debt can destroy your financial dreams, making it feel impossible to get ahead. That’s why the first step in your financial plan should be paying off all of your debt.

If you have any kind of loan, more often than not, there are huge interest rates hanging over that loan. These interest rates eat away at so much money that could be going into your savings and investments instead.

Paying off debt requires determination but it is possible. Read a few stories of how people have paid off thousands in debt in just a few years to get inspired to pay off your own debt too.

No matter what kind of debt you’re facing there are a few great strategies to help you pay off debt faster.

  • Tackle debt with the highest interest rates first
  • Pay off the smallest amounts of debt first to create a snowball effect, then being able to use the freed-up money towards the next debt
  • Create a budget to cut costs and allocate as much as you can for debt payments
  • Earn more income to throw at your debt

Once you have paid off every last bit of your debt, you now have so much more money to put towards saving and investing.

While some believe there is no such thing as good debt, hear us out. Sure, having no debt is better than having debt, but there are ways you can leverage debt. A prime example is investing in real estate. When you invest in real estate, assuming you purchase a rental property with a loan, you’re leveraging debt. Not only is someone else paying you to increase your net worth but you are getting cash flow if you do it right.

Step 3. Live Under Your Means

While building up financial freedom for yourself it’s important to live frugally. It’s not always easy to completely cut back on all spending, but think about it this way. Cutting out just a few expenses every year and investing instead, can actually add on several years to early retirement.

It doesn’t mean that you need to cut out all of the fun out of our life, but there are certainly things you can do to reduce your spending.

  • Change your phone plan to a less expensive one
  • Make your favorite coffee drink at home over getting one every day
  • Make some budget friendly meals during the week instead of eating out
  • Invite your friends over for game night instead of going out

After starting to save more money, be sure not to start spending more. Remember you goal and what you’re working towards. Those little changes will create bigger, lasting effects years to come.

Step 4. Make Additional Income

In reality, most likely you will need to make some extra income to reach your goal. The more money you make to put towards your goal, the faster you can reach it.

So, if you don’t know how to pay off all the debt with your income at the moment, and don’t have much money left over to save after paying all the bills, it’s time to look into additional sources of income.

Decide whether you already have a skill you can use, or if you need to learn a new skill to increase your income. Udemy is a great source for learning new skills without the huge price tag.

There are endless opportunities to make money and these are just some side hustles you can start that have the potential of high income:

Digital Marketing: With so many people and businesses online, the need for digital marketing has never been higher. Making Facebook Ads for businesses is one of the ways to make a great income for just a few hours of work each week

Delivering food: There are so many food delivery companies that are available like UberEats, Postmates, Grubhub, and DoorDash.

Tutoring: Are you an expert on a certain topic? Consider tutoring or teaching online for extra income

There are so many side hustles out there you just need to figure out which one is best for you.

Step 5. Invest and Create Passive Income Streams

Your debt is paid off and you’re making a nice side hustle income, what next? Time to start investing and putting your passive income streams in place.

There are so many ways to create passive income streams but they do require either time or money up front.

A tried and true method is investing in real estate over the long run. In fact, 90% of the world’s millionaires have been created by investing in real estate. While to get started, you do need a substantial amount of money, but there are ways to get started without using your own money. As said before, this is one of the best ways to increase your net worth and build financial freedom.

If you’re not ready to start investing in real estate yourself, consider crowdfunded real estate where you can invest money into real estate without doing any of the other work. Fundrise and Rich Uncles are two great platforms to start investing

There are other options for investing as well such as investing in the stock market. It’s important to learn which investing options are the best for you by delving into books, blogs, and podcasts.

Another form of passive income is creating things that will bring you money down the line with just a bit of upkeep. This can be writing books, creating courses, selling printables or a number of other ways. The more passive income streams you build the better your finances will look.

It’s important to keep learning about financial freedom as much as possible. The more you learn, the more you will see opportunities all around you.