Many of us dream of a time when we can live off the assets we've accumulated without having to spend our days toiling away at work. If your goal is to achieve financial freedom, we're here to help.
What is financial freedom? In a nutshell, it's the ability to live your life the way you want it, without having the pressure to earn money hold you back. And while it might seem like a far-off dream, attaining financial freedom, or independence, is doable even if you're an average earner with no immediate wealth to boast of. Here, we'll outline a path to financial freedom and show you what steps to take to reach your goals.
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Step 1: Establish a solid emergency fund
The whole point of achieving financial independence is to not be reliant on an incoming paycheck to cover the bills. It therefore stands to reason that you'll need a pretty solid savings cushion to reach that point. And that's where your emergency fund comes in.
The purpose of an emergency fund is to serve as a backup source of income when the unexpected arises. Most folks are advised to amass enough savings to cover three to six months' worth of living expenses. If you're seeking financial freedom, however, you'll want to stash away even more to ensure that you're covered when unanticipated expenses rear their ugly head.
How much should you aim to save? At a minimum, start with a year's worth of expenses and adjust that figure accordingly as your circumstances change. For example, if you're diagnosed with a health condition down the line, you may want to pad that account to allow for a temporary string of higher medical bills.
Step 2: Get out of debt
Financial freedom should also include freedom from debt -- especially the high-interest credit card variety. If you're intent on securing financial independence, work on tackling your costliest debts first and work your way downward until you've paid off your balances in first.
But it's not just credit card debt you'll want to eliminate. Ideally, you'll want to shed all forms of debt, from student loans to car payments. Oh, and that mortgage of yours? You'll want to pay that off, too. Even though mortgage debt is the good kind to have, especially since you can deduct the interest you pay on your taxes, part of attaining financial freedom is ridding yourself of as many predictable expenses as possible -- including your housing payments.
Step 3: Invest for the long haul
Even if you're willing to take frugality to a reality show-worthy extreme, you'll still need some income to maintain your status as a functional human being. And that's where your investments can make a world of a difference.
Your goal in investing for the long haul should be twofold -- to grow your money with compounding and to secure an ongoing, reliable income stream. You can accomplish the latter with both dividend stocks and bonds, both of which can serve as a steady source of income provided you choose the right companies or issuers. (Ideally, you'll want to favor stocks over bonds, as they've historically delivered much higher returns.)
For the former, the key is to start investing as much as you can, as early as you can, and let the magic of compounding turn a series of smaller contributions into a significantly larger sum. The following table shows how much your portfolio might grow to based on your investment window:
|
If You Invest $500 Per Month for This Many Years... |
Here's What Your Account Value Will Grow To*... |
|---|---|
|
5 |
$35,000 |
|
10 |
$87,000 |
|
15 |
$163,000 |
|
20 |
$274,000 |
TABLE AND CALCULATIONS BY AUTHOR. *ASSUMES AN AVERAGE ANNUAL 8% RETURN, WHICH IS JUST BELOW THE STOCK MARKET'S AVERAGE.
As you can see, the longer you give your investments to grow, the more impressive a sum you'll accumulate -- and that's money that can buy you continued freedom. Remember, once you've amassed whatever sum your investment strategy allows for, that money is yours to withdraw or reinvest. And that, in additional to your emergency fund, interest payments, and dividend payments, is how you secure enough income to kiss the workforce goodbye at an age when most folks are still plugging away.
Achieving financial freedom is really a matter of setting goals and making them your utmost priority. The path to financial independence may be a long and winding one, but if you keep working at it, you'll get there eventually.
