In a world that is constantly telling you who you should be, it can be difficult to stay true to who are and forge your own path.
Throughout my financial journey, I grew older, developed my own ideas, learned hard lessons from failures, and discovered more about myself than I ever thought I would. Completing the steps to financial freedom is easy – the path to self-awareness isn’t.
Nothing is more important than discovering who you are, what you truly want, and having the confidence to make the decisions necessary to get you to where you want to go in life. The steps to Financial freedom aren’t black and white. There isn’t a cookie-cutter formula for everyone. Why? Because everyone is different. Our lives are all unique. My steps are an outline for you to follow, but how you complete them is up to you.
Some say that leaves too many unanswered questions, but it’s those hard questions that I want you to answer for yourself. No matter what someone is telling, or what advice you are following, you will never FEEL successful with your money if you don’t believe in the work you are doing. You can’t blindly follow what someone is telling you. It’s up to you to do the hard work, to listen to your heart, and know in your gut you are making the right decision for you and your family.
The Financial Freedom Steps
Today, for the first time, I am sharing with you the steps I believe can bring financial freedom into your life.
- Establish Your WHY and Motivation
- Prioritize Your Financial Goals
- Bring Awareness into Your Life
- Create a Budget Calendar
- Create and Establish a Realistic Budget
- Employ the Cash Envelope Method
- Create a Plan of Attack and Pay Off Debt
- Maximize Retirement
- Focus on Long-Term Goals
All of these steps were huge AHA moments for me on my financial journey. They were the actions that forced me to ask the hard questions, allowed me to discover what was important in my life, and gave me the guidance and confidence I needed to stay dedicated to my mission.
1. Establish Your WHY and Motivation
You need to find a reason to stay motivated. For me, it is my son. He is my everything. As a single parent, I am responsible for his care and well-being. I cannot provide him with the life he deserves if I am irresponsible with my choices and my finances. He motivates me every day.
Starting this journey will only get you so far. Your passion will carry you only for so long. There needs to be an emotional motivation that continues to drive you. Have you considered your WHY? Why do you want to do this? Why are you here right now reading an article about money management and finance? There is an underlying reason, an important one, that you need to discover.
It’s critical that you identify your WHY. This will keep you going when you just don’t feel like it. When you understand clearly your WHY, you will be more focused and more dedicated to following these steps because giving up is no longer an option.
Perhaps to help you clarify your WHY, you should think about that one thing that is so important to you that if it were gone tomorrow, it would be devastating. Your WHY should include an emotional aspect, and it should be something specific.
Do you want to be financially independent so you can travel and see the world? This is not the kind of “WHY” I want you to settle on. It is a beginning to discovering your true WHY, but it is not the end. Perhaps, you want to travel with your family and create memorable moments in this short life.
In this example, there is something specific: Travel with your family. It also includes an emotional component: Create memorable moments in this short life.
I said earlier my son is my WHY. I want to provide us with a life we can love and seize opportunities with him without relying on debt or worrying about money.Your WHY should be so important to you, you get emotional speaking about it. It should be that important to you.Click To Tweet
Finding this purpose and motivation should be the first thing you do.
As we prepare to explore Step 2, I want you to keep in mind that with my process, I am providing a broad overview of the goals. It is up to you to customize it to fit you and your situation. On my journey, I discovered you have to be comfortable with your plan, and you have to be confident in it … no matter what people say.
2. Prioritize Your Financial Goals
Save for an emergency fund and prioritize your financial goals. I want you to map out your short-term goals (things to accomplish in the next 3 years); your medium-term goals (the next four to seven years); and your long-term goals (more than seven years out).
Your emergency fund needs to be part of your short-term goals. I don't care what the amount is, but it has to be an amount that allows you to sleep peacefully at night. What does that mean? It should be an amount that makes you feel safe and secure. Check out CIT Bank's Savings Builder to set up your emergency fund.
The Emergency Fund
You might have heard it needs to be somewhere between $500 and $1,000. If you don’t have an emergency fund, something is better than nothing. However, I have learned $1,000 doesn’t get you very far these days. What if I need tires? We are looking at a minimum of $600. What if my son becomes sick? If it is something major, it wouldn’t cover my deductible. A $1,000 sounds nice on paper, but everything is becoming so expensive. What if you were out of work for a month, how far will $500 get you?
Having a baby really changed my perspective on this, and it was why I needed to find a plan that worked for me. Even though I had scraped to save $1,000 in an emergency fund, it didn’t give me any peace at night because I was worried I would not have enough money if something happened to my son.
So, instead of following somebody else’s steps and getting rid of debt before putting 3 to 6 months’ worth of expenses in an emergency fund, I started working on larger emergency fund earlier on in my journey. I needed the peace of mind that I could take care of my family.
As you establish your goals, make sure they are attainable. Don’t set yourself up for failure. Remember, we are working toward your financial freedom. You didn’t get where you are overnight, and will not get out of the situation overnight. So, be realistic. It's okay to dream big, just make sure you set up small attainable goals that you can complete along the way.
Organize your goals into the three categories (short, medium and long) and then prioritize them in order of importance. In order to create a realistic plan, goals will guide where the money needs to go, like in your cash envelopes, your checking account, your savings account or your retirement account.
3. Bring Awareness into Your Life
Track your spending and know where every dollar goes. You will never experience true financial freedom if you constantly ask, “Where did my money go?” When you track your spending and can see visually where every dollar goes, you can begin to shape a better financial future.
The numbers don’t lie. They will show where you can make better decisions. It will bring awareness to you about your spending habits and patterns.
If I am being honest, that awareness was a slap in the face for me. I saw how I turned to shopping to make myself feel better. I had to deal with my spending honestly.
Bringing financial awareness into your life is one thing, but being honest with yourself is even harder. You need to track your spending and know where every dollar is going to bring awareness into your life, and be sure to deal with your spending habits honestly.
4. Create a Budget Calendar
Be prepared for all of life’s events, not just paying the bills, by creating a budget calendar. This is much like a regular calendar that includes appointments, holidays, vacations and events. However, on this calendar you will mark down when your bills occur, when you get paid, when infrequent obligations are due (like property taxes)
So many times, people get the notion they are financially prepared because they pay their bills on time or are even a month ahead of time. However, what they fail to realize is to be prepared involves more than just paying bills. It involves everything else that pops up and ruins our finances. In other words, we need to be prepared for life — not only those things we anticipate (like holidays and back to school), but also those things that fall beyond our control (like a wedding invitation, a flat tire, or a new roof).
Your budget calendar will be your guiding light when planning out your paychecks.
5. Create and Establish a Realistic Budget
Decide and implement a budget schedule that works for you. This is where I introduce my Budget by Paycheck Method, where I plan out how my paycheck will be used. I determine what bills have to be paid with that check, how much money needs to be set aside to pay the rent or mortgage, and any other expense.
For me, one of my biggest AHA moments came when I worked out my Budget by Paycheck method. I tried and failed to successfully create a budget. I actually gave up trying to do a budget for a year. But, then I got pregnant, and I knew I had no other choice than to get ahold of my financial life.
When I finally abandoned trying to force myself into someone else’s method, I started working on my own system. I ended up incorporating the Calendar Method, the Paycheck Method and the Cash Envelope System. The Budget By Paycheck Method allows you to bring a level of fun to financial management, which adds a level of excitement. Here are the steps I follow for my Budget By Paycheck Method, and ultimately creating a realistic budget in my life.
- Establishing my purpose and WHY
- Tracking and categorize spending
- Identify regular bills
- Utilize the Cash Envelope Method for variable spending
- Create a budget calendar
- Prioritize savings goal
- Create a plan of attack for your debt and pay it off
- Create a realistic budget using the Paycheck Bill Tracker
- Tweak and perfect for a better budget in the future
My method helped me track my expenses and face the reality of what I was spending. Until you are willing to address this, you will always be left with confusion and regret. So, not only did I track my bills, but I identified and prioritized those bills, and I figured out how much discretionary cash I had … money I could use for what I call “variable spending,” for things like food, clothes, gas, household items and gas.
6. Embrace the Cash Envelope Method
Force yourself to ask the hard questions about your spending to improve your finances. Nothing will help you more than becoming what I call an all-cash spender.
Do you have to do this for the rest of your life? No, but it is what helped me pay down $25,000 in credit card debt, save money, and gain control of my financial life.
Here is the Cash Envelope Method in a nutshell: When you figure out how much money you have to spend from each paycheck (yes, I mean a budget!), and you have tracked your spending so you know what you owe and when you owe it, you start putting cash into envelopes to use for your variable spending … things that fluctuate from month-to-month.
On the one hand, you have fixed expenses like rent/mortgage, car payment, life insurance, auto insurance, cable/internet and cell phone. These are the same month-in and month-out.
But, on the other hand, you have costs that vary on a monthly basis, like how much you will spend on food, clothes, entertainment, household items, pet food, and gas. When you figure out what categories you need, you will have to determine how much cash you are putting in each envelope.
When it comes time to make purchases, you use the money in the envelopes. Please, please, please … do not be like me when I first started. I got scared that I was going to run out of cash, so I started swiping my debit card. When I did this, it messed up my checking account balance, and I had to pay overdraft fees. I solved this problem by eventually creating a miscellaneous cash envelope, which provided me a little cushion and gave me some peace and comfort.
7. Create a Plan of Attack and Pay Off Debt
You will never get anywhere paying minimums on your credit cards, student loans, auto loans or mortgages. The longer you take to pay a debt off, the more interest you pay. Interest is like throwing money away. Yes, interest is the cost we incur to buy something today while promising to pay it back in the future.
First, list all of your debts: How much you owe, what your monthly payment is, what interest rate you are paying, and when your due date is.
Second, decide if you will use the snowball or avalanche method. If you are unfamiliar with the snowball and avalanche method, it refers to a plan to pay off your debts. If you follow the snowball method, then you will pay off your smallest debt first, then the next biggest one. If you use the avalanche method, you will pay off the debt with the highest interest rate first.
I don’t care if you use the snowball or avalanche method (or a combination of both). However, whatever method you use, prioritize your debt and start knocking it out. I should add, during this step, we are not looking to pay off the mortgage. We’ll talk more about that in Step 9.
The goal here is to allocate the same amount of money toward your debt every month. Let’s say you pay $1,700 in debt payments a month. Then, you better plan on paying $1,700 a month (or more when you get pay raises or find extra income) until you are debt-free. This will help you cut years off your original debt repayment plans and save you thousands of dollars. Every dollar you save in interest is a dollar you can save or invest.
Once a plan of attack is created, your debt journey becomes less stressful.
This is the step that gives you hope. For the first time you will see the mountain you have to climb, and you will get a glimpse of the end.
8. Maximize Retirement
Invest 10 to 15% of your income as you strive to make the maximum contributions you can, while automating your savings.
Remember, I said you need to make your plan your own. This is where I made my plan my own. Other “experts” will tell you to stop making any investments until you pay off debt.
However, I don't care if you have a savings goal or if you are paying off debt, if your employer is willing to contribute to a 401(k) on your behalf, you better take advantage of it. Whatever percentage of your income they will match, make sure you are investing that much. Why? It’s free money. It’s like getting a raise.
When we put our money into a retirement account, we are investing in things like mutual funds and bond funds to earn interest. If your employer will pay a 50% match on your contributions up to 6% of your earning, that is huge. You have immediately earned 50% on your money (providing you are fully vested). So, for every $1 you invest, you are actually putting in a $1.50.
If they are going to offer you that money, you should take it!
- Ready to start investing? Get $5 for free when you use this link to make your first investment with Acorns.
As so many people have said, there is no force on this earth like compound interest. The sooner you start investing in your retirement, the greater chance you have of building a nice retirement fund. As your account grows, you will be able to better withstand the downturns in the market, and there will be downturns.
Work to maximize your retirement by going above what your company matches. Aim for 10 to 15%. You can contribute up to $6,000 in all your IRAs, whether traditional or Roth. If you are 50 or older, you can make a “catch up” contribution of an extra $1,000, bringing the total to $7,000.
What you choose to invest in will depend upon your retirement strategy. You will definitely want to talk with a financial adviser to see what is best for you. Some common advice is to invest in Roth IRAs when you are younger and in a lower tax bracket. With a Roth IRA, you invest money after it has been taxed. With a traditional IRA, you use pre-tax dollars. So, when you withdraw money from a Roth IRA, you pay no taxes on it because it was taxed already. But, with a traditional IRA, you pay taxes on withdrawals in retirement because the money grows tax-deferred.
9. Focus on Long-Term Goals
Use all extra income to fund goals that are important to you. For some, it might be savings for their child’s college, maybe paying off a mortgage, perhaps building wealth, or giving back. The nice thing is you get to decide what is best for you.
It’s a good idea to pay off that mortgage before you retire because you don’t want a big payment when you start living off a smaller income that is pulled from your retirement account. You have to be careful that you do not spend lavishly in retirement and deplete your savings (unless, of course, you were so focused and built an incredible nest egg).
When we are building wealth, it is not just about us, but what we leave behind to our loved ones and the institutions that were important to us, whether it is a school, a church, a synagogue, a mosque, or a nonprofit agency.
All of these long-term goals require personal decisions and sacrifices. When you get to this step, all of your extra income should be allocated on your long-term goals.
The Financial Freedom Steps
To obtain financial freedom in your life there will be temporary sacrifices, but that does not mean you have to strip away all the things that bring happiness to your life. I believe life is short, too short to give up such a huge portion of it to struggle.
True success is never just about the numbers. It’s also about learning how to manage your emotions, listening to your heart, walking your own path, and figuring out who you really are. A financial journey is a self-discovery journey. One that we all need to embrace.
Print out the Financial Freedom Steps HERE.
The link to the printable doesn’t work:(
The link to the printable doesn’t work:(
When paying off credit card debt, do you include auto loans in the credit card debt or do you handle paying off auto loans after you pay off credit card debt?
Great article, quick question…..kind of personal.
Recently married and realizing my husband’s credit is FU**ed!!! Debt, collections, late fees and ect….plus I have my own debt. Should we wait to clear up his debt or pay-off everything from smallest to biggest
I work in the financial industry and from my experience, it is most beneficial to pay of collection accounts first. Then, start tackling the debt. The key to success is not to allow any other payments to be late! Also, download a credit tracking app to keep track of what’s having the most effect. When you’re “out of the hole” or close to your goal, apply for small credit card and use it solely for gas purchases or something routine. Pay the balance in full each month. This will help the upward trend for your credit score. Hope this helps!
Rachel Snyder says
I love these ideas! I rely a lot on online ordering groceries and basic household supplies (laundry soap, paper towels, etc) and then do store pick up. I have 4 young kids and it is much faster, more convenient, and more economical this way. But how do I utilize the cash envelope system with this more and more common shopping option?
Hi Rachel! Sometimes it’s just not feasible to use cash to keep yourself in check, and then your spending becomes really hard to track! I think you should feel free to use your credit and debit cards AND track your spending daily. I built a tool that should help you do just that. Check it out at hellofin.app. I hope it helps you as much as it has helped me!
The thing that I’ve struggled with the most when I budget is actually tracking how much I’ve spent per month per category. I can’t remember to add it up every time I spend, and if I do it at the end of the month, it’s hard to remember what those transactions on my statement were when I look at it. So I made a tool to help me. I hope it helps other people too! Check it out at hellofin.app.
I like seeing people motivated to live a Dave Ramsey lifestyle. His steps to financial freedom really work. Just wanted to suggest that you might want to look into the YNAB app if you haven’t already. It works great with the DR step by step method and is very easy to use – so much simpler than spreadsheets, calendars, and such. It also is set up so you budget for each paycheck. 🙂