July tends to be a significant month for all Americans, as it marks the annual celebration of our nation’s independence. However, it also plays host to a lesser-known event—National Financial Freedom Day, which takes place on the first of the month. Both occasions pay tribute to a common thread: the pursuit of freedom.
Indeed, true financial freedom means having the financial resources to cover your living expenses indefinitely without having to actively work to generate income. When you are financially free, you can live life on your terms and spend your time as you wish without worrying about money.
For many people, financial freedom is within reach. However, it typically requires careful planning and discipline. In this blog article, we’ll explore five steps you can take to set yourself on the path to financial independence.
Here are five steps you can take to achieve financial freedom:
#1: Spend Less Than You Earn
In most cases, the ability to achieve financial independence doesn’t depend on your income level. Rather, the key is living below your means.
Thus, the first step toward financial freedom is spending less than you earn. That means creating a budget or spending plan and sticking to it, so you can contribute to savings each month and avoid high-interest debt.
If you don’t currently track your spending, now is a good time to start. You can begin by reviewing your income and expenses over the last 6-12 months to get a clear picture of where your money comes from and where it goes each month.
To save time, consider taking advantage of one of the many online budgeting apps available. Popular examples include Mint, YNAB, and Goodbudget. These tools allow you to connect your bank and credit card accounts and automatically categorize your expenses so you can easily understand your spending habits and identify areas for improvement.
Once you have a better idea of where your money goes each month, you can take steps to modify your spending habits if necessary. By reducing unnecessary spending and focusing on your longer-term goals, you can save and invest more money to secure your financial future.
#2: Eliminate High-Interest Debt
High-interest debt, particularly credit card debt, can be a considerable roadblock on the path to financial independence. With the average credit card interest rate hovering around 20-22%, maintaining a credit card balance can cause your debt to increase exponentially until it becomes unmanageable.
In addition, excessive debt can keep you from prioritizing other financial goals, like buying a home or saving for retirement. Therefore, the sooner you can eliminate high-interest debt, the sooner you can focus on your quest for financial freedom.
#3: Automate Healthy Financial Habits to Achieve Financial Freedom
Decision fatigue occurs when a person’s ability to make good decisions declines after a long session of decision-making. This can lead to poor or impulsive choices due to overwhelm and exhaustion.
In other words, the more active decisions you need to make regarding your finances, the more likely you are to fall back on bad habits. For example, instead of routinely contributing to your emergency fund or retirement savings, you might find other uses for your free cash at the end of the month that don’t serve your financial goals.
One of the most effective ways to avoid decision fatigue and stick to healthy financial habits is to automate your finances as much as possible. This may include your bill payments, contributions to savings, and investment selections.
Once you decide which habits to automate, be sure to review and adjust them as your financial situation changes. For instance, if you set your savings target at 15% of your income and get a raise, you may want to consider increasing your target to 20%.
Ultimately, automation reduces the number of decisions you need to make, thereby improving your chances of financial success. By putting your finances on autopilot, you’re less likely to make decisions that impede your progress toward financial freedom.
#4: Create an Investment Plan and Stick to It
Investing is one of the most effective ways to build wealth and achieve financial freedom. However, it’s essential to align your investments with your financial objectives and risk tolerance and stick to your investment plan over time, especially as markets fluctuate.
Unfortunately, investors tend to get in their own way when it comes to investing, leading them to fall short of their financial goals. According to Dalbar’s annual Quantitative Analysis of Investor Behavior (QAIB) report, the average equity investor routinely underperforms the S&P 500 Index due to poorly timed trading decisions.
Oftentimes, these decisions are driven by fear—either the fear of losing money when the market declines or the fear of missing out on hot investment trends. These attempts to time the market tend to do more harm than good.
For example, suppose you had invested $100,000 in a low-cost S&P 500 index fund on January 1, 1993. At the end of 2022 (30 years later), your $100,000 investment would have grown to nearly $1.6 million, assuming you reinvested all dividends, according to data from Dalbar and Morningstar.
However, the average equity fund investor’s $100,000 investment grew to just over $720,000 over the same period, according to Dalbar’s research—less than half of what they would have earned with a simple buy-and-hold approach.
Thus, if you want to achieve financial freedom, it’s essential not to let emotions like fear and greed derail your progress. Instead, work with a trusted financial professional to develop a long-term investment strategy and stick to it over time.
#5: Control What You Can and Ignore the Noise
As you navigate the path to financial freedom, it’s crucial to distinguish between the things you can control and those you cannot. For example, you can control your investment costs, tax liability, and behavior.
However, you can’t control market fluctuations, economic downturns, or sensational financial headlines. Moreover, trying to react to these uncontrollable factors often leads to financial mistakes.
By focusing on the factors you can control, you can actually improve your financial performance over time. For instance, research shows that lower-cost investments tend to outperform high-cost investments since they have fewer expenses to overcome.
Meanwhile, tax-smart investing and other planning strategies can minimize your tax liability, allowing you to keep more of what you earn.
On the other hand, paying attention to noise like market movements, economic data, and news headlines can derail your progress toward financial independence. Behavioral economists have found that when investors focus on this type of feedback, they tend to make short-sighted decisions that work against them in the long run.
Oak Capital Advisors Can Help You Achieve Financial Freedom
Financial success often requires a series of small, consistent steps rather than a single monumental leap. With the right habits, a sound financial plan, and a knowledgeable guide, it’s possible to achieve financial freedom and live life on your terms.
As you take steps to secure your financial future, consider working with a trusted financial advisor like Oak Capital Advisors, who can help you navigate the opportunities and challenges that arise along the way. If you’re ready to begin your financial journey, we invite you to request your complimentary Financial Independence Roadmap™.