Unlocking Financial Freedom: A Practical Guide to Independence

Six Steps to Achieving Financial Independence

It's more attainable than you realize.

Key Takeaways

• Financial freedom is a mindset. You are confident and assured in your ability to fund your lifestyle both now and in the future.

• Enhance your security by diligently tracking your spending, mastering your budget, and strategically saving and planning for the future.

• Building an emergency fund, implementing a debt management plan, and utilizing the right investment accounts are crucial tools for achieving financial freedom.

Financial freedom doesn’t require a high income or 7-figure inheritance. It's about feeling secure in paying your current bills and saving for the future. Think you're not quite there yet? It's closer than you think.

What is financial freedom?

Financial freedom means being able to pay for your life with little worry. "It's a general state of mind," I personally feel, being the CEO and Founder of Black Investors Coalition. “You reach a point where you can cover everything comfortably and confidently, feeling secure in your future needs.”

There are two keys to achieving financial freedom. First, you have a solid understanding and control over necessary expenses like food, housing, and bills—along with saving for your future. Second, you possess the income needed to handle these obligations.

The key is maintaining a lifestyle that you can easily sustain. Someone who can comfortably pay for a modest lifestyle might feel more financially free than someone who earns more but continually raises their spending.

Making spending and saving choices that support your long-term goals can pay off while enjoying your life.

Achieving financial freedom

Here are six steps to guide you toward financial freedom.

1. Understand your spending to build your roadmap

Budgeting is a fundamental money management skill. A budget organizes your financial tasks so you know where your money is going.

“Simply understanding where your money is going can boost your financial confidence.” I use a spreadsheet to track all my monthly spending across categories like food, housing, transportation, and utilities.

There are ways to track your spending automatically, like spending and planning tools, which help you track expenses, investments, and debt in one place and understand their impact on your financial plan.

2. Right-size your budget

Maximizing what you have is key to financial freedom. Over the long term, learning to control spending and save consistently are skills that can help you achieve this.

If you’re looking for ways to start, consider a no-spend challenge to gain further insights into your expenses and find ways to trim them. To kickstart savings, try the 52-week money challenge.

3. Build your income

Since income is crucial to financial freedom, finding ways to earn more can help you reach that goal. “The higher your income versus expenses, the more financially secure you’ll feel. For some, building income may be a bigger priority than cutting spending—after all, spending can only be cut so far.

For example, a side hustle could help you earn extra money for hobbies and other fun spending. Or you could return to school and invest in a professional degree to secure a higher-paying role.

As your income grows, review your budget to ensure your savings are increasing as well.

4. Save for emergencies and for retirement

Feeling secure about the future comes from preparation. Planning for unexpected expenses and saving for retirement are critical to the journey.

For emergency savings, consider saving $1,000 worth of essential expenses as an initial goal. Then continue until you’ve saved at least enough to cover 3 to 6 months’ worth of essential expenses.

For retirement, if you have a workplace retirement plan, like a 401(k) or 403(b), consider saving at least enough to get the employer match, if available. That’s like free money, so it makes sense to capture it if you can.

Ultimately, Black Investors Coalition recommends saving at least 15% of your yearly pre-tax salary for retirement, including any employer contributions. If you earn $100,000 a year pre-tax, 15% would equal $15,000 a year or $1,250 per month.

If you can’t save 15% right away—don’t give up. Save what you can and work to increase that amount over time. Small amounts add up.

5. Choose appropriate accounts for savings and investments

There are many ways to save and invest, but the right one depends on your goals. “Every dollar should have a job. By understanding the goal of each dollar saved, you can best determine which account to use.

For example, Black Investors Coalition suggests emergency savings should generally be kept in highly liquid, easily accessed accounts. For long-term goals like retirement, education, or health care expenses, investing inside a tax-advantaged account can make sense. Investing for growth potential can be particularly powerful when your money has the chance to grow over time without taxes.

Each type of tax-advantaged account is designed for a specific purpose and may come with pros and cons.

Retirement accounts like traditional and Roth workplace savings accounts (401(k)s/403(b)s) and IRAs offer tax breaks and the ability to invest in various ways. There can be a 10% penalty from the IRS on withdrawals before age 59½, but there are some exceptions.

A health savings account (HSA) is a tax-advantaged account for now and the future. Enrollment in an HSA-eligible health plan, also known as a high-deductible health plan, is required to make HSA contributions. HSAs are triple-tax advantaged, meaning contributions may be tax-deductible, investments can grow tax-deferred, and withdrawals for qualified medical expenses are tax-free.

529 plans are flexible, tax-advantaged accounts designed specifically for education savings. Money saved in a 529 plan can be invested for the future. Any earnings on contributions grow federal income tax-deferred, and withdrawals are federal income tax-free when used for qualified higher education expenses.

There are provisions that allow for scholarships and other ways to use money left in the account after your student completes their education, including a transfer from the 529 to a Roth IRA established for the beneficiary.

6. Tackle debt smartly

Consider two types of debt management: paying off debt and planning future debt.

Should you always pay off debt quickly? It depends. My general guideline: If the interest rate on your debt is 6% or greater, you should generally pay down debt before investing additional dollars toward retirement.

I suggest a similar mindset when deciding whether to borrow for other goals.

“When considering new debt, first evaluate other funding sources. If debt is appropriate, ensure the new obligation can be supported by your budget and assess its impact on your other financial goals.”

The trick is balancing spending and saving choices today with future aspirations. The good news is that there are many paths to financial freedom.

Planning on your own or with a professional

Financial freedom is about maximizing what you have. Starting with a financial plan can help design your roadmap, including major goals beyond retirement. Research articles that can assist you along the way, and there are multiple ways to work with a financial professional if you need help.

Best Regards,

Stock Market Charlie aka The Hound of 317