Apr 23, 2024
Financial freedom can mean something different for each of us.
For some, it might simply mean being debt-free. For others, it might entail a comfortable lifestyle. Or perhaps it means having enough money to pursue your passion, whether it’s travel, writing, painting, volunteering, or something else altogether.
Whatever your definition of financial freedom is, getting rid of worries about money requires a long-term plan and the discipline to follow it. Here are some tips to help you define and pursue your own financial freedom.
Financial freedom generally means having enough savings, investments, and cash to live life as you wish without worrying about money. Your personal definition of this freedom, or financial independence, will depend on your current financial situation, desired lifestyle, and future goals.
The journey to financial freedom starts by clearly defining your long-term goals. Ask yourself if you want to first eliminate your existing higher-interest debt, if there are big purchases you hope to make, or if you have a dream retirement scenario that you aim to achieve.
Keep in mind that long-term financial freedom is separate from more-immediate financial stability. A strong financial position is something you’ll want to achieve as soon as possible. But your financial freedom goes well beyond addressing the here and now.
By answering what’s most important, you can determine exactly what financial freedom means to you and establish clear goals. A realistic budget could be the next vital step along your journey.
A budget is a spending plan that accounts for your income, expenses, and goals. It’s designed to serve as a roadmap to help you reach your financial destination. As such, it’s important you create a budget that works for you. You could get started with these first steps:
Start by getting a firm grasp of your spending habits. Some expenses are fixed, such as your mortgage, rent, or car payment. Other expenses might be optional, like what you spend on entertainment, travel, fitness, or dining out.
Compare your monthly income to how much you spend each month. This will allow you to establish a baseline understanding of your current financial situation.
Once you know your income and expenses, you should be ready to choose a budgeting strategy that works best for you. One example is the 50/30/20 rule, which suggests allocating your after-tax income across three broad categories: 50% to needs, 30% to wants, and 20% to savings and debt repayment.
Reducing your fixed expenses could take time and involve major changes to your lifestyle, but it might be worth doing in your quest for financial freedom. For other expenses where you have greater control, it can be helpful to review your spending habits for a better idea of where you can save.
Remember that a budget is not set in stone. You can adjust it as needed and still stay on track to achieve your goals.
A key step on the path to financial freedom is creating a plan to pay down your debts quickly since the amount of debt you carry can be a barrier to reaching your goals.
This might be especially true if you’ve accrued higher-interest rate debt or fees, such as payday loans or some credit cards.
To help pay down debt fast, you should first know what you owe and how much you’re paying in interest and fees. When you lay out each debt and the interest rate you’re paying, your repayment priorities will become clear. Then, there are a number of actions you might consider, such as trimming your expenses, paying more than the minimum on all of your balances, and avoiding adding any new debt.
A personal loan for debt consolidation could be part of your solution. With a fixed interest rate and repayment term, consolidating debt could help you save money on interest today and in the long term. In fact, 93% of surveyed debt consolidators said they saved money or time by taking out a Discover® personal loan .*
“I was impressed with how easy it was to complete the loan process. They did all the work! Paid my creditors in time and allowed me to save tons in interest with one, reasonable percentage rate for the life of my loan. Great terms! 😊,” said one Discover personal loan customer in February 2024.
Saving and investing are crucial aspects of the path to achieving financial freedom. With every paycheck, prioritize putting money into your savings and retirement accounts. This might be part of following the 50/30/20 rule.
It helps to be intentional about saving. Try to regard these accounts as you do regular monthly bills. In other words, don’t treat saving as an optional expense category that you only fund with leftover money.
To help make saving easier, consider setting up direct deposit from your paycheck so a part of it automatically goes into a savings account. Or you can schedule automatic debits directly from your checking into your savings account.
If available, it’s also wise to take advantage of any retirement savings plans offered by your employer, such as a 401(k), which deducts pretax dollars from your paycheck. Many employers also match your investment amount up to a certain percentage. In addition to accelerating your savings, the best part is that this is another set-it-and-forget-it approach—this money never hits your bank account, so you won’t be tempted to spend it. If you do not have a 401(k) available, there are a variety of individual retirement accounts (IRAs) that you might want to consider.
For detailed advice and insights about savings and investment strategies, including your 401(k) and IRA, you may want to speak with a financial advisor.
Maintaining a healthy credit score is another key to successfully achieving financial freedom. A strong score may help you get approved for loans such as mortgages, car loans, and credit cards with favorable interest rates.
It’s wise to regularly check your credit score. If you’re unhappy with where your score stands, there are ways to improve it over time. These might include lowering your credit utilization ratio, building your credit history, and paying your bills on time.
An emergency fund is a cash reserve separate from your primary savings. These are funds that you’ve specifically set aside for unplanned expenses or financial emergencies. These might include car repairs, sudden damage to your home, or unexpected medical bills.
Surprise costs have the potential to derail your plan for achieving financial freedom. By establishing an emergency fund, you may be prepared for the unexpected and stay on track with your goals.
The amount of money you need in your emergency fund depends on your personal situation. But, if possible, you should aim to have three to six months’ worth of living expenses in reserve.
Financial freedom is all about being in control of your finances instead of being controlled by them. No matter what your personal definition of financial freedom is, achieving it requires long-term discipline and dedication.
The path begins with a proactive mindset and a comprehensive plan. When creating your plan, be mindful of the steps involved. Remember, no matter your age or financial situation, there are always ways to help ensure your long-term financial health.
Ready to begin your journey? See what benefits a personal loan for debt consolidation might provide you on your way to achieving financial freedom.
Articles may contain information from third parties. The inclusion of such information does not imply an affiliation with the bank or bank sponsorship, endorsement, or verification regarding the third party or information.
The information provided herein is for informational purposes only and is not intended to be construed as professional advice. Nothing contained in this article shall give rise to, or be construed to give rise to, any obligation or liability whatsoever on the part of Discover Bank or its affiliates.
Discover Bank does not sell non-deposit investment products (“NDIP”) or provide recommendations regarding NDIP. NDIP are NOT FDIC insured .
*ABOUT SURVEY
All figures are from an online customer survey conducted September 14 to October 3, 2023. A total of 1,191 Discover® Personal Loan customers were interviewed about their most recent Discover personal loan with 550 of them using the funds to consolidate debt. All results @ a 95% confidence level. Respondents opened their personal loan between January and July 2023 for the purpose of consolidating debt. Agree includes respondents who ‘Somewhat Agree’ and ‘Strongly Agree.’
