There’s nothing heavier than the weight of debt on your back. For many families, it may seem like no matter how much you save or how diligently you chip away at your outstanding balances, the massive mountain of debt doesn’t move an inch.
And that type of consistency doesn’t account for the many curveballs life throws your way: the interest on your adjustable rate mortgage spikes; the basement renovation goes way over budget; a pandemic sweeps the world and sends millions out of work… you can’t predict these things, but you get the picture.
Before resigning your fate to tarot cards that can reflect your future finances, first make sure that you’re following the right steps toward financial freedom. A lot has changed in the world of money management, so if you’re still stashing savings in your sock drawer, you have a lot to learn.
How can you tell if you’re on the right path? Follow these five steps to achieve a life filled with abundance, free of financial strain.
- Define What “Freedom” Means to You
For some people, financial freedom is traveling the world without concern over the cost of air fare or five-star lodging. For others, it means watching the sun set over their property while enjoying a cup of relaxing tea.
There’s no universal marker of success; it all depends on your desired lifestyle and personal goals, which may be more difficult to reach than others. For example, if you want to retire in Malibu, you might consider a California reverse mortgage to finance your golden years while living in the (expensive) Golden State. Or, if you want to spend your days on road trips to National Parks across the country, then saving up to purchase an Airstream might suffice for your success.
Ultimately, before you can figure out how to achieve the life of your dreams, you’ll need to determine how much money it’ll require to accomplish.
- Evaluate Your Current Position
Now that you have the big picture in mind, it’s time to assess your current standing. Calculate your net worth by tallying up all your assets and subtracting your outstanding debt, then compare your income versus spending to forecast your financial future.
Are you on the right path? The money mavens of Generation X display better savings habits early on in life compared to their seniors who often fail to put enough aside throughout their careers. But don’t compare your wealth to your neighbors’; compare it to your personal measure of success.
- Adjust According to Your Goals
If your debt-to-income ratio isn’t looking so great, take it as a sign that recalibration is in order. It might feel like a bit of a wakeup call, but it’s the kick in the butt you need to take budgeting more seriously on your steps toward financial freedom.
Remember that interest works both ways; it can rack up quickly on accumulated debt, but it can also compound significantly on the money you put away. That’s why it’s important to take a temperature check sooner rather than later, so you can minimize what you owe and maximize what you earn.
- Make Immediate Changes
Identify areas of opportunity that can improve your financial position. Where can you reign in spending? Perhaps you’ve been eating out too much or shopping online a little too frequently. Is there anywhere you can cut costs? You might consider trading in your luxury Mercedes for a modest sedan and instead direct those car payments to a high-yield investment account.
Frugal budgeting is rarely fun, as it requires you to defer enjoyment in the present for fulfillment in the future—but the work you put in now can pay off tenfold down the road, so buckle up your budget as tightly as possible.
- Increase Your Wealth
Finally, in order to execute your long-term plan, you’ll need to increase cash flow and eliminate bad debt. One strategy is to sell off non-essential assets, such as a depreciating boat, so you can take care of high-interest loans. If your income isn’t cutting it, try taking up a side hustle to earn more money, or find an employer with a better benefits package who might match your 401k contributions.
If accumulating wealth was easy, we’d all be rolling around in piles of cash. It’ll take time and determination, but with the right plan in place, financial freedom can be completely attainable.