Some might assume that financial freedom requires a substantial amount of knowledge, discipline, and wealth to begin with. While all of those can certainly advance you in your bid for financial freedom, perhaps the most important factor in your success is the ability to build good habits and let go of bad ones.
Habits are the building blocks of discipline. The things you do, whether you feel motivated or not, and figuring out which ones to cultivate and which ones to abandon is key.
Assessing Your Wants and Needs
What do you do when you need cash fast? The financial freedom answer would be that you have a liquid reserve that you can draw on if it’s an emergency, and if it isn’t, you can see whether it fits into your budget.
However, the habit you probably have is using your credit card, whether what you’re facing is a real need or just something that you want. Alternately, maybe you think of yourself as having no willpower, and you end up spending more than you intended, leaving you stressed out about how you’re going to pay your bills each month.
The first habit you can cultivate is honestly assessing how important the thing is. If it’s happy hour with your work colleagues, you can probably take a rain check if you haven’t made room for it in your budget. If your dog needs the emergency vet, there’s probably a little question in your mind about the necessity.
You can probably postpone buying something you really want until you can afford it, but a final dinner out with a friend who’s moving 3000 miles away might be a reason to splurge. Regularly assessing each expenditure in this way will help you make better choices.
Finding Other Solutions
So, what happens when you do the assessment and it does turn out to be one of the things you need to spend money on, even if it’s going to put you in a financial crunch? What if you haven’t yet built a substantial cushion? Here, you should try to look for a better solution than your credit card because of the interest rate you’ll end up paying.
Many people do not realize that an option that may offer a more favorable repayment plan is a personal loan. For more information on what to know about personal loans, where to get them, and what alternatives to them might be, you can review a guide to help you determine if this is the right solution. Make a habit of looking for alternatives to credit cards if that’s the financial solution you’ve always fallen back on.
Building a Financial Cushion
In the short term, looking for other solutions can help you, but in the long term, you need emergency savings for these situations. Three to six months of basic expenses is the amount most cited, but you may want more than this if your source of income is erratic and you are supporting people or have other financial obligations you must meet. While it takes time to build up an emergency fund in total, even a few hundred dollars will put you in a more independent position.
Pay Yourself
There’s a saying in the world of financial security and freedom that you should pay yourself first. This doesn’t mean you should go crazy on your favorite online shopping site with your next paycheck; instead, it’s about putting away money for your future. Prioritize not just that financial cushion but your retirement fund and your investments, which may ultimately end up being the income-producing tool that grants you your freedom.
It’s important to find ways to balance your investment and debt strategies even if you may need to devote more of your money to paying off high-interest debt at first, but even this is a form of paying yourself in that you are freeing yourself from that mounting interest.
One good way to ensure that you do this is to have various amounts of your paycheck automatically deposited in different accounts if possible. A portion might already go to an employer-sponsored retirement account. You can also direct some toward other accounts. One might be savings, money market, or similar accounts that you can easily liquidate in an emergency. Another might be money you use for investing.