Millennials had it tough in terms of reaching financial freedom even before the pandemic: wages have stagnated while the cost of housing, gas, higher education, and other essentials have exploded. To make matters more complicated, the pandemic has led to a stock market crash and other challenges that make reaching financial freedom more difficult.
So how can you form habits to reach financial freedom as we collectively trudge through the pandemic?
1. Define what financial freedom means to you
First things first, what does “financial freedom” actually mean?
Most folks define financial freedom as having the means to sustain the lifestyle you desire for you and your family for the foreseeable future. Others take this definition a step further and add that you can’t have true financial independence unless you can sustain yourself and your dependents for the rest of your lives.
Especially with the volatility of the stock and job market today, the first of these two definitions is more realistic for most of us. However, we’ll take into account the fact that saving and investing for long-term goals are key to your overall financial fitness.
Read also: How to make early retirement possible for you
As you define financial freedom for yourself, consider the type of lifestyle you currently have and what your ideal lifestyle looks like. Consider some of these questions to figure out the type of lifestyle you want to sustain. It’s also advisable to make reviewing your answers to these questions a regular habit so that you’re always on track:
- Home and family: Where and with whom do you live? Do you own or rent? Do you already have or want to have children?
- Work: In what industry or company do you work? Do you need further education or training? How much can you aspire to make?
- Hobbies and leisure: What types of hobbies do you have or hope to have? Where do you spend your vacation days?
- Daily living: What does your day-to-day life look like? What food do you eat? What type of medical care do you have access to? Do you rely on public or private transportation? What are your guilty pleasures?
- Social life: How do you interact with friends and family? How often do you travel? What types of activities do you engage in?
- Charitable activities: How do you support the people and causes you care about? How do you make meaning out of life?
2. Plan your short, medium, and long-term goals
After you’ve taken an inventory of your current vs ideal lifestyle, it will be easier to plan your short, medium, and long-term financial goals to ensure your financial freedom. This step is important to help you figure out how much money you’ll need to support yourself.
It’s important to get into the habit of being as specific as possible about your goals and to put realistic price tags on them.
Using your answers to the questions above, figure out what your expenses are going to be. How much does rent vs buying a house cost? How much does the education or training to take your career to the next level cost? What are your daily living expenses? How much do you spend on leisure and important causes?
3. Make a budget to ensure your financial freedom
Next, get into the habit of updating your budget. Your goal should be to balance spending with earnings in order to help you achieve your goals in a sustainable way. You may consider combining the 50-30-20 rule with the “pay yourself first” principle (PYF) to give your money a purpose.
According to the 50-30-20 rule, 50% of your income should go to essentials (i.e. essential groceries, but not dinner out), 30% for fun (i.e. drinks with friends, extra clothes, etc.), and 20% for meeting your financial goals (i.e. paying off debt, saving, and investing). Balancing these categories can help you take care of your needs in the present while also ensuring you can enjoy financial freedom in the future.
Similarly, the PYF principle simply teaches you to invest in the last category of the 50-30-20 rule (financial goals) before spending on anything else.
After you’ve created your budget, you can consider strategies to save money or increase your income if necessary.
4. Make financial hygiene a habit
Achieving financial freedom requires maintenance since it affects and is determined by every aspect of your life. Make it a habit to review your financial health and make the adjustments needed to support your goals.
Always keep the following basic financial hygiene habits in mind:
- Maintain an emergency fund in order to prevent yourself from falling into debt when disaster strikes.
- Prioritize paying off high-interest debts. It’s common to have credit card debt, but try to pay it off as fast as possible.
- Automate saving and investing using automatic transfers to take the “think work” out of abiding by the PYF principle.
- Keep learning! Part of achieving financial freedom is maintaining yourself informed about investment opportunities and cultivating personal finance knowledge so you can make the best decisions possible.
After some planning and putting good financial habits in place, you’ll be able to create a plan to reach financial freedom. Make it a point to regularly review your budget and habits to ensure you’re still moving towards your goals.
For more ideas on how to achieve financial freedom, consult the FlexAcademy library to help you in your journey!
