Most of us depend on a job to make a living. Many families depend on two incomes nowadays. To gain more freedom, means less dependence on your job. If you do it right, you will not need your job altogether!
There are some very successful stories out there of people who made millions in just a few years, and who subsequently retired in their early thirties. Although these success stories are great, for most of us they don’t offer a very realistic example. The road to financial freedom realistically will take quite some years. Nonetheless, it is still very doable!
Like the Japanese Kaizen (改善) philosophy, the idea is to take small steps. Small improvements in your everyday financial situation, will have a low impact individually. No sudden drastic changes are required. Over the long run all the small (continuous) changes will have a huge benefit.
And the good thing is, even setting up a plan, and seeing what the possibilities are, is liberating and gives you ease of mind from the start!
These are the five basic steps towards financial freedom:
- Getting insight in your income and expenses
- Getting out of debts
- Pay off your mortgage
- Let your money work for you
1. Insight in your income and expenses
The first thing to do is getting a detailed insight in your income and expenses. Income is normally not that hard to analyse, the expenses are more work. You can categorize expenses by downloading the transaction statements of your bank. Remember to include everything (all bank accounts of your family together). Take income and expenses for one year. This might be a painful exercise… specifically if your income is good, you also might be spending a lot! The good news however: there is a lot of room for improvement! Because one of the most important elements in reaching financial freedom is reducing expenses (read more about this in the two basic concepts). This will help you in the next steps.
2. Getting out of debts
The first thing to do is getting rid of consumption loans as fast as you can! This can be anything from a student loan, car loan or credit card debt. Credit card debts charge a huge amount of interest, so they should be dealt with quickly. Also stop using your credit card to buy stuff. In the US this might be a challenge (where you actually need to buy on credit, to build up a credit rating e.g. to get a home loan). In the Netherlands it’s the opposite, if you don’t have additional debt, this is positive for your home loan application.
Student and car loans may take some more time to pay off, but if you have them, make it a priority to pay them of.
3. Pay off your mortgage
A mortgage will normally will run for thirty years. Nowadays it is normal to have a mortgage for at least 30 years, even into official retirement age.If you are capable of saving a good percentage of your income, the mortgage can be paid off quicker than you might think. With my current savings rate I expect to have my mortgage paid off in about 7 or 8 years (instead of the 20+ years the bank likes me to pay them). Should you pay your mortgage or invest? Read how paying your mortgage will increase your freedom.
4. Let your money work for you
If you paid off your mortgage you have already reached financial freedom to some degree: you can now live without having to pay a mortgage or rent, which means your monthly expenses have probably gone down substantially. This is good news, because your savings rate will go up further! You are still working for your money, you can now use your savings and invest them, so your money will start working for you instead of the other way around!
When the ‘save withdrawal rate’ of you investments can cover your spending, you no longer need your job and you are financially free! Time to do what you always wanted to do! How much years you need to reach financial freedom will depend on your personal situation, read ‘The 2 concepts to calculate what your financial freedom age will be’.
Photo by Estée Janssens on Unsplash