Financial freedom explained: Key concepts and significance
Many people may not fully understand financial freedom. While some think it’s all about eliminating debt, that’s only one part of it. What financial freedom is, at its core, is having options.
But progress is only sustainable when you have a clear definition of what financial freedom means to you. This guide will help you define what financial freedom is to you and provide actionable steps to get your personal finances on the right track.
What is financial freedom?
The answer to this question is unique to you. Here are some examples of what’s considered financial freedom:
- Living without the stress of surviving paycheck to paycheck
- Having the financial stability to quit your job and take one you’ll love for less pay
- Having six to 12 months of expenses in emergency funds
- Having zero debt
- Paying for your children’s college in cash
- Paying off your mortgage
- Living off investment income
- Building your family’s financial legacy
- Taking early retirement to travel
- Living panic-free when bills arrive
How to achieve financial freedom
You may question how you even start down the path toward financial freedom. Don’t worry—we have your back. The process can be much less overwhelming if you follow these simple steps:
1. Set goals
The process begins with understanding your version of financial independence. Ask these five questions to gain some clarity on what financial freedom is to you:
- What one major financial goal do you want to accomplish in a year?
- What steps will you take this month to get closer to that goal?
- How much financial help will you give your child or family member, and why?
- Which major life purchase makes you smile and feel excited?
- Imagine the day you claim your financial freedom. Where are you, what are you doing, and who are you with?
Consider writing out your answers in a journal. Research in neuroscience shows a physiological response to writing your goals. The act of writing helps you encode them in your brain and transform those thoughts into reality.
Also, keep in mind your definition of financial freedom may shift over time. Writing things down will give you more clarity so you can enjoy the journey as you progress toward your financial freedom.
2. Make a budget
Budgeting is an important step on the path to financial freedom. Without knowing where your money is going, it’s easy to overspend on things that aren’t bringing you closer to your goals.
Think of your budget as the GPS for your financial journey. With that in mind, you’ll need to figure out your starting point first. Here’s how (check out our budgeting guide for more tips):
- Carefully total the income you have coming in every month. Next, do the same with expenses. Work through these steps thoughtfully and double-check your bank statements to make sure you’re not leaving anything out.
- Once you have a clear total for each, subtract the expense total from your income and see what you get. If the number is negative, we have some work to do. You may need to pick up a second job or cut expenses wherever possible.
- If the number is positive, you’re starting off strong. There still may be some areas where you can cut costs or increase income, but extra money means you may be able to start looking at investments or other more advanced personal finance tactics.
3. Pay off debt
Any current debts are chipping away at the foundation of your financial freedom, especially consumer debt. Consumer credit cards typically have some of the highest interest rates—often as high as 20% or more.
Once your budget is set and you eliminate unnecessary expenses, you’ll have some extra money to use every month. You might consider putting some or all this money toward your smallest debt first. After you pay off that debt, move to the next smallest, and so on. This is sometimes called the debt snowball method.
4. Start saving for emergencies
It pays to have an emergency fund in place before paying down your debt. A goal of $1,000 is a good place to start, but aim to grow your emergency fund over time. A reasonable savings goal is three to six months of expenses, but you might gradually expand to 12 months for extra cushioning.
You never know what might happen. If you own a car or home, it’s only a matter of time before you have to visit the mechanic or replace a broken appliance. An emergency fund gives you peace of mind.
5. Plan for retirement
While your emergency fund covers short-term savings, you should also consider longer-term savings goals. More specifically, this is how you’ll start your retirement planning.
A sound first step is opting into any tax-advantaged investment vehicles your job offers. Many employers offer 401(k) plans that you can contribute automatically. This is a good practice to get into because you’ll be investing in your future without even thinking about it.
How much should you invest? A good rule of thumb is 15% of your paycheck. Some employers will also match a percentage of what you contribute. Aim to contribute at least enough money to take full advantage of an employer match. It’s essentially free money to further your future goals.
A financial advisor can talk to you about additional retirement options. They may suggest adding a Roth IRA or life insurance as an additional retirement vehicle. There isn’t a one-size-fits-all strategy, so consider seeking out a professional who can help you tailor your goals to you.
6. Increase your income
Many people embarking on the journey to financial freedom begin by cutting expenses. Another tactic to help realign your balance sheet is to grow your income.
There are several ways to do this. Maybe you can pick up a part-time job or freelance work. Or perhaps you can score a position serving tables or working in retail.
Career growth can be another path to increasing your income. Instead of a part-time job, you could pursue a new certification or learn a new skill that advances your career at your primary job. Sharing your goals and ideas with supervisors or management at your company is a good place to start. You never know what learning opportunities or compensation is available until you ask.
7. Live below your means
Developing a frugal mindset and learning to live below your means is essential to reaching your own version of financial freedom. As you begin to save, grow your income, cut expenses, and pay off debt, you’ll start to see more money in your account every month. It’s important to use that money responsibly and live off a fraction of what’s coming in to see that amount grow over time.
Living below your means and not spending this excess money just because you have it takes thoughtful planning and discipline. Within your budget, you should have a spending limit for short-term fun. This means things like date nights, eating out, and movies for the kids.
Other things like vacations are long-term fun and should be viewed as savings goals you reach sometime in the future. Adopting this mindset allows you to live below your means and consistently grow your financial stability.
8. Increase your financial literacy
The more you know, the more confident you’ll feel. Dive into online financial literacy resources and learn more about how money works, how to save for your kids’ college, and more. This type of financial literacy is vital to your financial freedom journey and helps ensure you don’t slip back into any bad habits.
9. Meet with a financial advisor
Regardless of what financial freedom is to you, it’s always helpful to have a mentor. Consider meeting with a financial professional early in your financial freedom journey. They can ask questions to help you clarify your goals. They can also provide extra resources and guidance on how to align your behaviors with those goals.
What it means to be financially free
Gaining control over your money doesn’t have to be overwhelming, and it doesn’t have to be challenging. Start by asking yourself, “What is financial freedom to me?” Once you have that definition, it’s easier to seek out actions and opportunities to bring you closer to your goals and ignore the ones that don’t serve you.
Additionally, Intuit’s resources on job readiness can help you prepare to get the job and income you want, as well as how to advance in your current career. Consider us your partner in powering your own prosperity.
Sure, the journey may be daunting. But, like all journeys, it starts with a single step, and Intuit is here to help you with that first step and every step thereafter.