While the broad concept of financial freedom generates a lot of ink, it can mean something different to each one of us. For some, it means you don’t need to live on ramen noodles and hold your breath until your next paycheck. For others, it’s enough money in the bank to walk away from the daily grind and pursue your passion, whether that means travel, philanthropy, creative pursuits, or something else altogether.
Once you arrive at your own definition of financial freedom, you can create a plan—and stock a tool kit—to help you achieve it. Here are five tips to guide your path toward financial freedom:
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Get comfortable with the idea of a budget
If you’re serious about achieving financial freedom, you’ll need to face up to the b-word: budget. For more than half of American adults, the prospect of setting up a budget is a hazy concept at best; for some, budget is a cold, unpleasant word that implies hardship and no fun.
But without some form of a budget for reference, there’s no way to know exactly where your money goes each month. The good news for the resisters among us is that it’s never been easier to create a budget. If old-fashioned pen and paper don’t appeal, a quick online search will deliver a host of easy-to-use budgeting and personal finance tools to consider, many of them available at no charge.
In your quest for financial freedom, a budget is your ally, not the enemy. And keep in mind, a good budget is not set in stone. As you get more comfortable using it, you’ll know how to make reasonable adjustments and still stay on track.
Understand your expenses — and your spending habits
Part of your budgeting exercise involves identifying categories for various expenses. Some expenses are fixed, such as your rent or mortgage payment, or a car payment. Others are discretionary, like what you spend on clothing, entertainment, and dining out.
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. Would you consider living in a less-expensive home or apartment if it helped you build a financial cushion? Can you get by for another year or two without that new car? The answer may be yes or no, but it’s important to be clear about your options.
For categories where you have greater control, it can be helpful to review your spending habits for a better idea of where you can save. How much do you spend on dining out or ordering in? The average American spends approximately $3,000 on restaurant meals and takeout every year.1 This works out to $250/month or just about $8/day.
And what about the gym? Are you using it enough to justify the cost of membership? Ditto for various subscriptions and streaming services.
You get the point: The goal is to identify which expenses might be preventing you from reaching your financial goals. Consider writing down every dollar of income and expense from the past few months. You may be surprised at what you find when you take an honest look at the numbers.
Then set some parameters to shave what you’re spending, even if it’s just a small reduction. The first milestone on the road to financial freedom is to spend less than you earn.
Look at your debt with a clear eye, then make a plan to pay it off
Individual debt for Americans amounts to an average of $92,727, according to a 2021 CNBC report.2 Especially if some of that debt comes with high-interest rates—credit card debt is a major factor here—paying it down can feel like climbing a tall mountain with no summit in sight.
With financial freedom in mind, the ideal approach is to pay off your debt as quickly as possible. When you lay out each debt and the interest rate you’re paying, your repayment priorities will become clear.
A personal loan could be part of the solution. With a fixed interest rate and term, a personal loan to consolidate debt could simplify the repayment process and possibly reduce your interest rate, saving you money today and in the long term. In fact, 90% of surveyed debt consolidators said they saved money or time by taking out a Discover personal loan.
And those extra resources can go a long way toward relieving the stress of paying down debt:
“I am so happy that I took a Discover Personal Loan and am on my way to being debt free for good,” said a customer in Florida in early 2022. “I was having a tough time keeping up with all the minimum payments on my various cards and never making much progress. Now I see light at the end of the tunnel. I am so glad I did this. Also, there are no origination fees and significantly lower interest fees so I already saved money just in a month.”
Pay yourself first
You’ve probably heard the expression “pay yourself first,” but you may not know exactly what it means. Regardless of how you earn your money, this strategy can revolutionize your approach to both spending and saving.
In short, paying yourself first means exactly that: With every paycheck, prioritize putting money into your savings and retirement accounts. The idea is to treat these accounts like regular bills you pay each month, rather than as an optional expense category you fund with “leftover” money. Setting up direct deposits so that some of your paycheck automatically goes into a savings account, or scheduling automatic debits from your checking into your savings account, makes reaching your savings goals even easier.
And if you can, take advantage of any employer-sponsored retirement savings plans, such as a 401(k). Your 401(k) plan deducts pretax dollars from your paycheck, a big win. Plus, many employers will match your savings up to a certain amount, a double win. In addition to accelerating your savings, the best part is that this is a set-it-and-forget-it approach—this money never hits your bank account so you won’t be tempted to spend it.
Plan for bigger expenses, and set aside an emergency fund
Sooner or later, big or unexpected expenses can arise. The key to handling them is anticipating the cost and creating a proactive strategy to tackle it.
You may want to remodel your home to accommodate a growing family, or maybe you have a medical procedure coming up that involves significant out-of-pocket expenses. Start by understanding how much you’ll be paying. Then you can explore responsible ways to pay for it.
A personal loan, for example, might help you get that much-awaited remodel underway. And a health savings account, funded with pretax dollars, can offset medical bills.
Don’t forget to plan for unexpected financial hits, too. An expensive car repair, damage to your home, or a dental emergency can be stressful. But when you put a variety of safety nets in place, these events are less likely to become financial catastrophes. This is yet another reason to automate your savings. And to protect you from serious financial hardship, a periodic review of your insurance coverage is essential.
Equip yourself to pursue financial freedom
Financial freedom is a long game. And no matter what your personal definition of financial freedom looks like, getting there starts with a proactive mindset and the right tools. A personal loan might be a sensible way to pay for big-ticket expenses, planned or not—or help you kick higher-interest credit card debt to the curb.
Considering consolidating higher-interest debt? See what you could save in interest with a personal loan from Discover.Estimate Your Savings