The path to financial freedom is simple with the right plan. You can boost your savings rate, collect a bigger paycheck, and invest your growing nest egg. Although, it’s not a one-size-fits-all approach. You can do really well with any one of these pieces to become financially free at a faster rate.
Everyone is starting out at a different point on the road to financial freedom. Do you have $100,000 in debt and are trying to climb out of the hole? Or are you already debt-free with some cash saved up? Maybe you’re nearing retirement with over $1 million in the bank?
Personal Story: I’m 28 (updated April 2020) and luckily debt-free. I’m hoping to be financially independent by age 35. It’s a steep goal but if I shoot for the stars and fall a little short, I’m still closer to the stars 🙂
Whatever point you’re at, the three steps below can help improve your financial well-being. And the first step is by far the most important. It helps you build and maintain your wealth…
Step 1: Boost Your Savings Rate
To reach financial freedom, your savings rate is more important than your paycheck. It’s also more important than the rate of return on your investments. Saving money is what holds most people back from becoming and staying wealthy.
You might think that you just need a raise. Sure that can help, but most people raise their expenses with their income. Financial planners call this lifestyle inflation. From every tax bracket, workers in the U.S. live paycheck to paycheck. According to a Nielsen survey, close to 25% of families earning $150,000 a year or more are living paycheck-to-paycheck.
Many people see each payday – after debt payments – as their spending limit. They spend it all and don’t prioritize their future. This also happens to many people that inherit or win large sums of money. Almost one-third of lottery winners end up declaring bankruptcy.
This trend also happens with many top athletes. Roughly 80% of NFL players go broke in the first three years after leaving the league. There are many reasons why this happens… but they all boil down to not planning ahead.
Now on the other hand, wealth builders have learned how to save for their future. They avoid impulse buying and cut out unneeded expenses. Here are four top ideas to help you save more of your hard-earned dollars…
Set up a Budget: You should keep a close eye on both your income and expenses. When you know where your money is going, you can pinpoint areas to cut back. Companies also love recurring expenses because people forget to cancel them. So setting up a budget can help you find ways to save. This puts you on a faster path to financial freedom.
Save in Tax Expenses: Uncle Sam rewards you when saving for retirement. You can save a few extra thousand dollars a year by contributing to an IRA and 401k. It’s delayed gratification at its finest. It’s not fun now but it will improve your life down the road. I set up a Roth IRA when I was in a lower tax bracket and then switched to a traditional IRA as my income and effective tax rate climbed.
Get Cash Back: Credit card companies and other businesses offer cash back. If you’re already spending the money, take advantage. Although, don’t start a cash back program if you wouldn’t have spent the money in the first place. This is how they get you.
Automate Your Finances: Thanks to 21st century technology, you can automate how you save money. Many employers or banks can automatically transfer a portion of your paycheck into your savings. Try to set this up and then forget about it. Your savings will pile up over the years.
To see more money-saving ideas, here are 30 cost-cutting ideas anyone can start with… Frugal Living Tips to Build a Fortune.
Step 2: Collect a Bigger Paycheck
Once you know how to prioritize saving for your future, earning a bigger paycheck will go much further. And to increase your income there are plenty of paths – some better than others.
The first important rule is that you shouldn’t follow your passion when it comes to work. That usually leads to two outcomes 1) major financial setbacks and 2) a loss of your passion. This is a powerful lesson and it comes from an unlikely source: Why Following Your Passion is Terrible Advice.
Instead, it’s good to start by looking for work that’s in high demand (and sustainable). That usually leads to a bigger paycheck. You can then start specializing in that field and with the right mindset, it might become your new passion. Your happiness has little to do with the type of work you do.
Now if you’re already set in a career, don’t fret. There are still plenty of ways to increase your income. To start, you can ask your manager or mentors for more work. You can also look for areas where you can make your boss’s job easier. This is a great way to add value, and with it you can negotiate higher pay. If your employer doesn’t offer new pay opportunities, you might want to move on or pick up some side gigs.
Here’s one last tip on collecting a bigger paycheck. As you’ve heard before, work smarter, not harder. But let’s put this idea in perspective with a quote from one of the world’s richest people…
I choose a lazy person to do a hard job. Because a lazy person will find an easy way to do it. – Bill Gates
The quote doesn’t mean lazy people that cut corners, it’s directed at people who improve and automate processes. Those people can then go on to accomplish bigger tasks with their newfound time.
So for people on the path to financial freedom the saying should be work smarter and harder.
Step 3: Invest Your Nest Egg
As you build up your income and savings, don’t stuff it under your mattress or hide it around the house. Many of our grandparents took that approach with the Great Depression in their recent memories. Although, those savings lost purchasing power over the years thanks to inflation.
Inflation Example: One dollar in 1950 has the same buying power as $10.92 today. So a dollar from 1950 has lost about 90% of its value. Inflation is a hidden tax that chips away at your savings each year.
Instead, you can put your money to work for you. And if you might need the money in the short-term, stick to a savings account that collects a little interest. I personally try to keep six months’ worth of living expenses in a savings account. Any amount above that, I put into higher returning assets.
For one step up in risk – and return – you can buy US government debt. It’s one of the safest assets around. But in return for the safety, it barely keeps up with inflation. For another bump up in risk – and return – investors put their money into corporate debt, commodities, real estate, derivatives, and many other securities.
Each asset class has a place in a portfolio, along with a different risk-to-reward profile. And it’s important to note that the risks and rewards change with the holding period. In the short-term, any one asset class could outperform the others. But in the long-term, it’s a different story. Stocks take the cake.
In the short run, the market is a voting machine but in the long run it is a weighing machine. – Ben Graham
Since I have a few decades before tapping into my nest egg, I stick to stocks. They’re volatile in the short-term but have outperformed in the long-term. With history as a guide, the stock market averages about 7% to 10% annually.
Rule of 72: Here’s a shortcut to estimate roughly how long an investment will take to double. Take 72 divided by the annual return. So at a rate of 7%, your investment will take about 10 years to double in size. And at 10%, it takes about 7 years to double.
The stock market is one of the best wealth creators in the world. And thanks to new technology, anyone can get a piece of the action. You can now buy stocks for free and become a partial owner in some of the world’s best businesses.
If you buy shares of Microsoft, you’re now a partial owner with Bill Gates. Or if you buy shares of Amazon, you’re a partial owner with Jeff Bezos. And you’ll see the same percentage returns as the other shareholders. Some might have a few million shares more than you… but if they’re up 7% for the year, you’re up 7% too.
Investing doesn’t have to be hard and it’s vital to start sooner than later. I have a lot of brilliant friends – doctors, nuclear engineers, lawyers – but when it comes to investing, many of them shy away. Some of them end up going to financial planners that charge an arm and a leg. But you can do better by investing yourself.
There are only a few simple rules that you need to do well. To get you started, here are 16 financial concepts to make better money decisions. Also, you’ll be able to find new investing ideas by returning to my blog. I show you exactly where I’m putting my money and why I’m doing it. This is where I’m different from many other bloggers. I put my money where my mouth is.
The Path to Financial Freedom is a Balancing Act
Having money affords you more freedom, but spending too much can limit your future financial freedom. So it’s important to find balance between your saving and spending habits. This is where the distinction between frugal and cheap lends a hand…
Frugal living doesn’t mean skimping on what’s valuable. Instead, it’s a way to maximize value in your life. This is the big difference with being cheap…
Cheapskates try to find the lowest price tag on everything. As a result, they often buy goods that don’t last long. Their sole focus on price can end up costing more in time and money. A cheap mindset can also ruin relationships. That’s why it’s vital to focus on both the price and value.
With the right mindset, you can find a healthy balance. One that helps you and those around you live a wealthier life, in both the present and the future.
Conclusion and My Last Piece of Advice
Many people have paved a path to financial freedom. According to Spectrem Group, there are over 10 million millionaire households in the U.S. And that’s not including primary home values. So follow in many of their footsteps with the tips I’ve given you above.
It’s not rocket science and a few simple steps today make a huge difference. If you have any questions or personal stories to share, please leave a comment below. I really appreciate any feedback and love to hear when the information I share has an impact.