10 Tips to Achieving Financial Freedom: Part 1
I think it’s safe to say that we all aspire to be free from financial shackles that often hold us back from achieving our goals in life. I mean money isn’t everything, but it sure can be a huge pain in the you know what. The thing about it is, it doesn’t have to be! Financial freedom is certainly subjective, but attainable for all. For me, financial freedom is the ability to live comfortably throughout all the unknown phases of life to occur with no financial concerns. To do so, I have put together 10 Tips on Achieving Financial Freedom that I follow diligently. We understand that this information may be overwhelming, so we’ve broken it into 2 digestible parts for you. Check out the first 5 tips below and the next 5 tips after 3PM on 1/9/2022.
1. Budgeting
The first is budgeting. To create a financially secure future you must plan for a realistic outcome. At least once a year I create a spreadsheet that takes into consideration my take home pay, mortgage, expenses, and goals. After the spreadsheet is complete, I also use budgeting platforms such as mint.com to keep track of my spending and inform me of areas where I can improve. As the year continues and my spending habits change or I experience major events that impact my budget (i.e., promotion, raise, etc.), I reference my budgeting spreadsheet and update accordingly. I have found that when I do a combination of the previously mentioned tasks, I experience fewer financial surprises and I feel accomplished at the end of the year when my financial goals have been met.
For example, let’s say you collect a monthly check of $3,348. From that monthly check you have a series of essential (i.e., rent, electricity, gas, etc.) and nonessential (i.e., subscriptions, eating out, savings for vacations, etc.) expenses you need to save up for. If you create a realistic budget (like the one below) for yourself and remain disciplined, you may be able to achieve financial security throughout the year whilst exceeding your own expectations. Notice how in the below exhibit, this person can save for a vacation and investing all while enjoying the luxuries of eating out, shopping, and tending to the essential expenses that they have. This person was able to do so all while still having an additional $480 left over each month from their take home pay.
Feel free to create your own monthly budget using our Monthly Budget Template located here.
2. Separate Accounts
I also highly recommend creating a separate checking account for personal/other expenses vs non-personal/essential expenses. When you do so, you would pay for all your essential expenses from one account and pay for all other expenses from the other account.
Additionally, one should have separate savings accounts for each of their saving goals. In the scenario above, this person should have four separate savings accounts. One for their vacation fund, one for their investment savings, one for their personal savings, and one for their emergency fund. By doing so, you clearly see how close you are to reaching your financial goals and where improvements can be made, if necessary.
3. Automatic Payments/Transfers
In addition to having separate accounts to pay for your monthly expenditures, I highly recommend paying for all expenses via autopay, as well as auto transferring your paycheck into the appropriate accounts. For example, if we piggyback off the budget exhibit above, I recommend that this person auto transfer $1,500 of their monthly paycheck into an account that they pay their essential bills from and that they deposit the remaining paycheck into an account that they pay for nonessential bills from. I would also recommend that they sign up for autopayments for all essential and nonessential expenses (where applicable). If items such as rent, cable/internet, cellular service, car insurance, subscriptions, etc. are being automatically paid for, then you will lessen the likelihood of missing a payment and being charged a late fee. Not to mention, most establishments offer a discount for accounts that are set up through autopay!
I would also recommend automatically transferring the amounts you wish to save into their appropriate accounts. This prevents the opportunity for you to forget to transfer the money into its desired account. And let’s face it, no one likes seeing their paycheck get smaller and smaller as the month goes by. If you must manually transfer your hard-earned money and pay for bills constantly throughout the month, that may just ruin your mood and freak you out. Following my strategy is more like closing your eyes, trusting that you have overprepared for the task at hand, and enjoying your month in peace.
4. Emergency Funds
As we discussed in Emergency Fund 101, life is a cycle of pleasant and unpleasant surprises. One of the most unpleasant surprises to experience is a financial crisis and without an emergency fund, this kind of surprise can be a significant financial setback. An emergency fund should only be used for financial emergencies that have a severe catastrophic impact on your life if an immediate action is not sought. An adequate emergency fund is a savings of three to six months’ worth of essential expenses. In the scenario provided above, I would recommend that that individual have an emergency fund of $4,350 to $8,700 in a separate savings account, preferably high yielding.
5. High Yield Savings Accounts
High yield savings accounts are a wonderful place to store money you don’t need right away but want to have easy access to, as well as money that you want to work just a little bit for you on your behalf. What I mean by that is a regular savings account may offer you an annual interest rate of 0.01%, whereas a high-yielding savings account may offer you an annual interest rate of 4.00%. This means that if you put a $1,000 into a regular savings account one day and never add anything to it for a year, you would have a balance of $1,000.10 (in other words, you would have been rewarded $0.10 for not touching your money). On the contrary, if your money were in a high-yielding savings account, you would have a balance of $1,040.74 (in other words, you would be rewarded $40.74 for not touching your money). Now imagine what your reward would be in a high yielding savings account if you contributed monthly to that account? For this reason, I highly recommend high-yield savings accounts over regular savings account.
Keep in mind there is often a tradeoff for the high interest rate. While opening a high-yield savings account is free, you often get the highest interest rates at online banks. This means that there may be no physical location for you to go to for depositing and withdrawing money, you may not even have a debit card to use at ATMs. However, you will be able to transfer the money to a checking account of your choice for withdrawal. Additionally, you may be required to keep a minimum account balance to avoid being charged a fee. Other than that, high yield savings accounts are remarkably like regular savings accounts, just better!
Check out NerdWallet.com for a list of recommended High-Yielding Savings Accounts for January 2022.
Disclaimer: The information in this blog is based on my opinion and experience, it should not be considered professional financial investment advice. The ideas and strategies should not be used without assessing your own personal and financial situation, or without consulting a financial professional.
