Everybody wants to be financially free. But what does it mean for you exactly? It’s common to hear: “I’m going to be financially free so I can spend all day doing whatever I want”. No matter how hard you’re working to achieve your financial goals, there are two important questions you must ask yourself: When do you want to be financially free and what steps are you taking towards being completely financially independent?
Create an emergency fund.
One of the most important things to do when you’re trying to achieve financial freedom is to create an emergency fund. This is a separate account that’s only used for emergencies, and it should have at least three months’ worth of expenses in it.
What happens if you lose your job? What happens if your car breaks down? What happens if there’s a natural disaster or terrorist attack? An emergency fund is there as a safeguard in case of any unexpected event that may happen out of your control.
You don’t want to use this money for anything else other than emergencies, so consider using a high-interest money market account to keep your money safe until you need it.
Get out of debt.
The first step to achieving financial freedom is to get out of debt. If you owe money, you are a slave to that money — and the people who hold it.
Debt is when you borrow money from someone else in order to pay for something. The borrower is indebted to the lender until the loan is repaid with interest.
To get out of debt, you must focus on paying off your highest interest debt first. Once that debt is paid off, you can then focus on paying off your next largest debt and so on until all debts are paid off.
Create a spending plan.
A spending plan will help you identify how much money you’re spending on your daily expenses. You can use an app like 22Seven or your banking app to track your spending, or just write down your expenditures in a notebook.
Once you know where all your money is going, it’s time to make some changes. If you want to get out of debt and achieve financial freedom, then you need to come up with a plan for how much money you’ll need to save each month in order to do so.
You may be thinking that this seems like an impossible task, but it doesn’t have to be hard at all. You just need to take small steps toward achieving your goal every month and eventually those steps will add up into something substantial.
Save for retirement.
If you’re not saving for retirement, you should be.
It’s a simple fact that most people need to save for retirement. And if you’re one of those people, here are some tips on how to do it.
How much should you save? It depends on your income, your expenses and your goals, but a good rule of thumb is that you should aim to save at least 10% to 15% of your income. If you have debt or other financial obligations, you may want to pay those off first.
The easiest way to make sure you’re saving enough is to automate it so that money goes from your salary into an emergency fund before it goes anywhere else. Once that’s done, look at how much money you can set aside for retirement through your tax-free savings account (TFSA) and your company retirement fund or retirement annuity (RA).
If your employer offers matching contributions for retirement funds, take full advantage of them. Not only will this allow your employer to contribute money toward your retirement goals — which is likely a tax perk — but it will also increase the amount you’re saving on a monthly basis by as much as 50%.
Invest in your children’s education and your own education.
I’m not a parent, but I know that there’s no better investment than investing in the future of your children.
If you can’t afford to send your kids to private school, make sure they get the best public education possible. The good news is that this doesn’t mean moving to an expensive neighbourhood or sending them to one of those R200,000-a-year private schools. Just find an excellent public school nearby and make sure your kids get into it — even if they must wait for a spot when they’re younger.
As for yourself, make sure you continue getting a good education throughout life. Investing in yourself seems like an obvious thing to do, but the truth is that most people stop learning after high school or college graduation — and this can lead to financial problems later in life.
Written by Warren Ingram
CFP®, Wealth Manager, public speaker and author. Host of the HonestMoney podcast. FPI South Africa Financial Planner of the Year 2011.