How To Become Financially Free: 5 Steps To Freedom
The steps to become financially free are like the plans a builder must make before building a new home. I have dreamt about the day when I might be able to build a house. Finding a piece of land, picking out materials, floor plans, and finishes; it all sounds like so much fun! Of course, many parts of the home-building process are not as pretty to think about. Having detailed structural plans and a solid foundation to build on are much more important than finishes and decor.
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Before all of the fun, creative parts of building a new home can happen, soil tests, land surveys, permits, structural plans, etc. need to be established. What good is a beautiful custom home if the foundation is bad, it’s deemed uninhabitable, or it’s not up to code? A good builder will plan for success by ensuring the foundation can support the vision for what is to be built. To become financially free, I must first create detailed plans that support my vision and goals then set a strong foundation for my future.
Let’s dive into financial freedom and wellness basics. There are 5 steps to becoming financially free. These are practical steps you can take to achieve financial freedom by setting a strong foundation for your financial health and wellness.
Start here: Effective budgeting and cash flow planning is essential to your improved financial wellness. Download this FREE budgeting template pack!
Financial Freedom 101
1. Define What Financial Freedom Means to Me
Financial Freedom can be defined simply like this: Financial freedom means having enough income to cover my expenses. However, to achieve financial freedom, I need to be more specific. To define what financial freedom means to me, I need to answer three questions:
- Where is the source (or sources) of income that I want to cover my expenses?
- What expenses do I want to cover?
- How will my life be different financially free compared to not financially free?
Financial freedom to one person might mean having investment income that covers all of their needs and wants. Financial freedom to someone else might mean reducing (or eliminating) debt so that their regular income covers their living expenses with enough margin for savings allowing them to pay cash for future purchases and not go back or further into debt. Another might see financial freedom as having enough business or self-employment income to never have to work for someone else again!
None of these pictures of financial freedom are wrong. The first step to becoming financially free is to envision what financial freedom means specifically to you.
2. Manage My Cash Flow
Once I have defined what financial freedom means to me, that is, what vision I am trying to achieve, the next step is to manage my cash flow. Without managing my cash flow, achieving financial freedom is as likely as winning the lottery. Managing cash flow is different than simply having a budget. Cash flow refers to how my money moves during a given period of time.
Where my budget lists income minus expenses equalling zero, a cash flow plan dictates specifically where my money needs to go once it has been received. To manage cash flow effectively, I need to know exactly what to do with income once it has been received. One effective way to do this is by creating a percentage plan with an account system. The way this works is that I go through the process one time of creating a budget and calculating the percentage of my base income that needs to go to different pre-established categories*. Then, every time I receive income, I send the needed percentage to each individual account.
To learn more about cash flow and percentage planning, read this >> Save Time (& Money) with a Cash Flow Plan
*I like to break expenses into 4 categories: Function (Survival Expenses), Fun (Lifestyle Expenses) Freedom (Financial Goals), and Fulfillment (Griving and Growth).
3. Learn to Assess My Financial Situation
Once you’ve committed to managing your cash flow, it’s time to look at the big picture. To do this, you’ll calculate your financial health indicators* such as net worth. Net worth is the total value of everything you own (assets) minus everything you owe (liabilities).
Assets – Liabilities = Net Worth
Assets include things like:
- Property
- Accounts
- Possesions
Liabilities include things like:
- Credit card balances
- Car loans
- Student loans
- Mortgages
Calculating your net worth by adding up all your assets and subtracting your liabilities not only gives you a starting point, but also can help you set meaningful goals that will help you improve your financial health. In addition, regularly updating your net worth as a part of your financial wellness plan can help you stay motivated and on track.
*The four foundational financial health indicators are: Net Worth, Debt-to-Income, Liquidity, and Solvency.
4. Set Clear and Actionable Financial Goals
Once I’ve clarified your vision of financial freedom, learned to effectively manage cash flow, and established my financial health starting point, it’s time to define goals necessary for fulfilling my financial freedom aspirations. I do this with SMART financial goals.
To create clear and actionable goals, I will work backward from the vision of financial freedom that I initially established. I’m answering the question, “In order for my life to look like this (my vision of financial freedom), what also needs to be true?” Once I have answered that question and defined all of the pieces needed to bring my picture to life, I can turn those individual pieces into SMART goals that are Specific, Measurable, Achievable, Relevant, and Time-bound.
5. Model My Behavior and Lifestyle Around My Values
Remember our new home builder? The builder needed to have a clear blueprint with sold structural plans. He also needed steps to carry out the vision. Since few individuals can build a home with an unlimited budget, it would be likely that there would need to be priorities set when it comes to what all and in what order steps are completed. To become financially free, I need to know what my values are so that I can model my budget, cash flow plan, and goals with what’s most important to me.
One way to do this is by remembering the ‘Yes = No’ rule. Whenever you say ‘Yes’ you are saying ‘No’ to something else. Thoughts precede behavior. When I clarify what is most important to me before I take action, I make it easier to say ‘Yes’ to more things that bring me closer to achieving my financial freedom goals.
Read more about the Myths of Budgeting and how you can shift your mindset for financial wellness.
Cash Flow Planning for Financial Freedom
Examples of Budget Categories for Cash Flow Planning:
Freedom Example – Goal Line Items:
- Debt Reduction
- Vacation
- Emergency Fund
- Retirement Saving
- New Car Purchase
Function Example – Survival Line Items:
- Housing
- Utilities
- Insurance
- Food
- Gas
Fun Example – Lifestyle Line Items:
- Restaurants
- Entertainment
- Memberships
- Subscriptions
Financial Freedom Tips: Separate My Needs from Wants
A common strategy for budgeting is to divide expenses into fixed and variable then use whatever is left over to achieve your goals. Unfortunately, this strategy is often unsuccessful. While understanding which of your expenses may fluctuate from month to month is important when setting initial spending goals and limits, focusing only on whether expenses are fixed or variable does not give you any more control over your spending.
An alternative method is to instead categorize your expenses based on needs and wants. In other words, break down your monthly spending based on what is necessary for SURVIVAL and what is a part of your chosen LIFESTYLE. When you look at expenses this way, it allows you to create a budget that aligns with your values as well as easily set priorities when it comes to how you allocate your income.
Once you have categorized your expenses based on needs and wants (survival and lifestyle), look for ways to prioritize spending and incorporate your goals so that your budget reflects your values and financial objectives.
Activate Your Financial Freedom Success by Optimizing Cash Flow
After you’ve established your base income and expenses, you can create a cash flow plan. A cash flow plan is the intentional steps you will take week after week to move your money through a system that builds the life you envision and provides a framework for achieving your goals. Imagine a builder with only a blueprint of the home they were trying to build but no plans to actually carry out that vision. Or, imagine going on a trip and only having a map but no plans around how and when you will travel, where you will stop, or who will bring what on the trip.
A blueprint or roadmap without an implementation plan is ineffective and costly. By breaking down how much of your base income needs to be sent where each time it is received, you will activate your budget providing structure to your spending and progress toward goals.
Interested in fine-tuning your cash flow? Check out Improve Financial Wellness workbooks and one-on-one programs to skyrocket your progress! > LEARN MORE
Educating Yourself for Financial Freedom and Empowerment
Continually improving your financial literacy will empower you to make informed decisions and therefore incrementally improve your financial health and wellness. By understanding the importance of budgeting, cash flow planning, setting clear goals, and embracing practical techniques, you pave the way for a financially secure and fulfilling future.
A financial freedom plan is your blueprint for building a foundation for success. This blueprint, or roadmap, for your money, puts you on a path to life with less financial stress and more progress toward your goals. Your financial freedom plan simplifies essential habits like mindful spending and cash flow planning by focusing on your unique values, priorities, goals, and individual circumstances. In addition, your financial freedom plan sets the foundation for success by focusing on financial wellness habits, behaviors, and mindset needed to improve your financial health.
