A couple reviewing a financial plan to help them reach financial freedom.
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Financial freedom is a term often mentioned in conversations about personal finance, yet its true meaning varies from person to person. For some, financial freedom is the ability to live without worrying about daily expenses, while for others, it represents the long-term goal of not needing to rely on a steady paycheck. Whatever your definition, achieving financial freedom involves making smart financial decisions, saving consistently and investing strategically. Though financial freedom may feel like a long way off, with the right planning, you may be surprised as to how achievable it can be. A financial advisor can help you and your family get on the path to financial freedom – whatever it means to you.
What Does It Mean to Be Financially Free?
The meaning of financial freedom varies from person to person, but it generally involves reaching a point where money isn't a constant source of stress. To some, being financially free means you have the flexibility to make choices that enrich your life, rather than choices driven purely by financial necessity.. Even though there's some variability in how people think about financial freedom, here are four common themes:
Having an emergency fund: This safety net ensures that unexpected expenses, like a medical emergency, home repair or job loss, won't derail your long-term financial goals. Typically, your emergency savings should cover three to six months of essential living expenses. But you may decide you need more depending on your circumstances.
Achieving financial independence: Being financially independent means your passive income exceeds your living expenses. When your investments are generating enough income to support your lifestyle, you no longer need to rely on a job to meet your financial needs.
Managing debt responsibly: High-interest debts, like credit card balances, can be a significant barrier to financial freedom. Paying off debt or keeping it at manageable levels can give you the ability to save and invest more aggressively, bringing you closer to financial freedom.
Living below your means: You don't have to deprive yourself, but being intentional about your spending and prioritizing savings and investments goes a long way. By avoiding lifestyle inflation, where increased earnings lead to higher fixed and variable expenses, you can focus on building wealth rather than living paycheck-to-paycheck.
How to Set Goals to Attain Your Financial Freedom
Financial freedom doesn't happen overnight. Whether you want to live debt-free, travel the world or own your dream home, you need to set goals to define what financial freedom and success look like to you. Here are four common tips to help you get started:
Set "SMART" goals. To reach financial freedom, you need goals that are "SMART" – specific, measurable, achievable, relevant and time-bound. Instead of vague goals like “save more money,” aim for something concrete like “save $20,000 for a down payment within two years.”
Break down big goals. Some dreams can take decades to achieve. Breaking them down into more manageable milestones can make the journey less overwhelming.
Set goals with different timelines. If you set all your goals for retirement age, it'll be hard to stay motivated in your younger decades. Set goals with different timelines to maintain momentum. For example, you might be working toward saving for a wedding next year, a house in five years, and retirement in a few decades.
Check in with your goals. Life circumstances change, and your plan should evolve with them. Regularly review your financial progress to make sure you stay on track. Whether you need to adjust your savings targets or reallocate investments, staying flexible is important for the success of your goals.
Managing Debt to Become Financially Free
A couple discusses strategies to become financially free.
While debt can serve as a tool to achieve certain financial goals, such as buying a home or financing education, mismanaging it can lead to significant financial stress. Understanding how to handle debt in a way that supports your long-term goals is an essential part of reaching financial freedom. These three common strategies can help you manage debt while working toward financial freedom:
Understand different types of debt. Not all debt is created equal. "Good debt," such as mortgages or student loans, is typically considered an investment in your future. These debts usually come with lower interest rates and have the potential to improve your financial position over time. "Bad debt," on the other hand, includes high-interest credit cards or personal loans taken out for non-essential purchases. Identifying which types of debt are hindering your financial freedom can help you create an effective plan to tackle your debt moving forward.
Develop a repayment strategy. The debt snowball method, where you focus on paying off the smallest debts first, and the debt avalanche method, which prioritizes paying down high-interest debt, are both popular strategies. Paying off high-interest debt first can save you money in the long term, while eliminating smaller debts quickly can boost your morale and keep you motivated.
Use a budget to avoid future debt. Generally speaking, the less debt you take on, the easier it will be to achieve financial freedom. To avoid taking on debt, create and stick to a realistic budget. Prioritize essential expenses like housing, utilities and groceries, and set aside money for debt repayment. Avoid using credit cards to cover unnecessary purchases. In other words, live within your means to help prevent the accumulation of new debt.
Bottom Line
A couple adjusts and sets goals to become financially free.
Financial freedom is the ability to live life on your own terms without stressing out about financial obligations. It may also mean having enough savings, investments or income streams to support your lifestyle without relying on a paycheck. Achieving financial freedom isn't necessarily easy, but it can offer the peace of mind to focus on personal goals, rather than financial stress. No matter your definition of financial freedom, you'll need specific goals and a healthy perspective on debt to get there.
Financial Planning Tips
A financial advisor can help you reach financial freedom by creating a personalized investment strategy that grows your wealth and manages risk. Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now.
If you want to build your savings up consistently, consider setting up automatic transfers from your checking to your savings accounts. This approach could help you make saving a routine part of your financial life.
