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The (Not-So) Quick and Easy Path to Financial Freedom

The internet is ablaze with talk about financial freedom, or financial independence, or early retirement. These terms are synonymous, and represent the same idea – no longer needing labor income because you have enough passive income to cover all of your monthly expenses.

Achieving financial independence is a major goal for my wife, Vanessa, and I. It might even be our only financial goal, because it encompasses so many other aspects of personal finance. To get there, we have to continue growing our income, managing our expenses, and investing the surplus savings. Most small financial decisions move us closer or further away from that primary goal.

achieving financial independence

The internet is ablaze with talk about financial freedom, or financial independence, or early retirement. These terms are synonymous and represent the same idea – no longer needing labor income because you have enough passive income to cover all of your monthly expenses.

Achieving financial independence is a major goal for my wife, Vanessa, and I. It might even be our only financial goal because it encompasses so many other aspects of personal finance. To get there, we have to continue growing our income, managing our expenses, and investing the surplus savings. Most small financial decisions move us closer or further away from that primary goal.

But on our blog, I have readers who sometimes say that reaching financial independence is not possible given their current situation. Many believe that in order to get there, a healthy six-figure income is necessary.

You’re able to get there quicker with higher wages, all else equal, but a massive income does not guarantee financial independence. Discipline and a good plan will go much further than earning power when it comes to managing your finances and securing a viable nest egg.

Just consider all of the people who have earned millions of dollars, yet still filed for bankruptcy. Do the names Muhammad Ali or Michael Vick ring a bell? Star athletes, lottery winners, and other big earners are among the most commonly cited examples, but this happens all of the time.

How can this be? Lifestyle inflation, or the tendency to increase spending as you increase earnings, definitely plays a role. It’s a fact, people who make more money tend to spend more money. There’s nothing wrong with spending more if you have the resources, but lifestyle inflation harms your ability to grow your net worth and reach financial independence.

The key to achieving financial freedom includes proper planning, a simplified lifestyle, and a bit of self-control.

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Plan for Freedom

The first step toward achieving financial independence is actively thinking about the future instead of solely living for today. If you constantly chase after all of today’s luxuries, there will be little left for tomorrow. This is the trap that snares many Americans because there are endless opportunities to spend money each day. Some people get caught up in their current lifestyle and fail to plan for the future.

I believe a better way exists: enjoy today, while still planning for the future. To accomplish this, Vanessa and I like to sit down and brainstorm. We talk about our wants, needs, and goals in life. We then make a list of the goals that we both desire. For example, consider one of our past goals:

  • “We will pay off all debt within 1 year.”

We set this goal after both finishing our degrees. We had about $25,000 is total student loans and limited income. But we knew we could achieve that goal by setting yet another goal:

  • “We will keep expenses under $15,000 in our first year of marriage, and use all additional income to pay down our debt.”

And how did we keep living expenses below $15,000? You guessed it. More goals:

  • “We will sell our Toyota and share a car this year.”
  • “We will cook at home, and eat out only once per month using Groupon or another discount site.”
  • “We will use only our window A/C unit and portable heaters in our home this year, keeping the main central unit off to save on utilities.”

This is just one example from our first year of marriage. We did accomplish our goal and continue to set new goals. Your goals can be anything you want to achieve financially. The key is thinking about it, setting the goals, and working hard to accomplish them.

Increase Your Cash Flow

It’s nearly impossible to achieve any financial success without a commitment to saving. It’s a boring topic, and one that people avoid, but if you can’t commit to spending less than you earn, it doesn’t matter if you make $50,000 per year or $250,000 per year. You’ll always have an empty bank account.

To start saving, you need to know where your money goes. The important part is tracking your cash flows, so figure out a method that works for you. We don’t like budgets, so we use Personal Capital to automatically track all our spending and saving. When you know where your dollars are being spent, you can break things into necessary expenses and frivolous expenses. Some of the latter can be cut out.

However you decide to track your money, remember to maximize your time. Don’t spend hours each week tinkering with it. Automate everything that you can. Most employers allow automatic contributions to your 401(k). Most banks allow automatic bill payment and account transfers for free. You need to automate these tasks when possible.

Once you have an idea of where the money goes, you can begin to make some lifestyle changes. I don’t know exactly what that means for you, but here are a few ideas to get you started:

  • Start selling your excess stuff on Craigslist and Amazon.
  • Stop buying crap that you won’t use.
  • Start buying groceries on sale and eating at home.
  • Stop paying retail prices when discounts are readily available.

As you begin making lifestyle changes, you will have additional monthly income available. With that additional income, you can increase your savings and increase your 401k contributions. Many books have been written talking about “paying yourself first.” They all mean the same thing – invest in yourself and your future before consuming today.

Invest and Pay off Debt

You need to do something with your additional savings. Your local checking account may not be the best place to keep additional liquid cash because inflation will erode the value. You’ll also want to pay off high-interest debt or consider investing**. It can be a tough call between the two, but here is a quick order of operations to get you started:

  1. Consider an emergency fund*
  2. Contribute to your retirement plan** up to the maximum amount that your employer matches.
  3. Pay off all high-interest consumer debt
  4. Pay off any other non-mortgage debt (student loans or anything else) and/or continue investing in a tax-advantaged retirement account (401k, 403b, IRA, etc.). Some people would rather be out of debt, while others would rather build a nest egg. You can also do both.
  5. Pay off your mortgage early and/or continue investing.

*An emergency fund is a liquid savings account that helps prevent you from acquiring more debt. If you have a stable job, you can build a small emergency fund that will cover any immediate, unforeseen expenses. If you have no job security, a larger emergency fund is much more important. Put this money in a money market fund** or online savings account that pays the highest interest.

These basic principles are key to financial success, and yes, freedom.

Jacob teaches more than 75,000 monthly readers how to build lasting wealth and secure financial freedom. The opinions expressed here are his own. He is a Ph.D. candidate in financial planning and has passed the CFP® Exam.

**While we can’t offer investment advice, Haven Life reminds you that investing involves risk, and should be based on your personal financial situation, objectives, and tolerance for risk.

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About Jacob Lumby

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Haven Life is a customer-centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.

Our editorial policy

Haven Life is a customer centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.

Our content is created for educational purposes only. Haven Life does not endorse the companies, products, services or strategies discussed here, but we hope they can make your life a little less hard if they are a fit for your situation.

Haven Life is not authorized to give tax, legal or investment advice. This material is not intended to provide, and should not be relied on for tax, legal, or investment advice. Individuals are encouraged to seed advice from their own tax or legal counsel.

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Haven Term is a Term Life Insurance Policy (DTC and ICC17DTC in certain states, including NC) issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001 and offered exclusively through Haven Life Insurance Agency, LLC. In NY, Haven Term is DTC-NY 1017. In CA, Haven Term is DTC-CA 042017. Haven Term Simplified is a Simplified Issue Term Life Insurance Policy (ICC19PCM-SI 0819 in certain states, including NC) issued by the C.M. Life Insurance Company, Enfield, CT 06082. Policy and rider form numbers and features may vary by state and may not be available in all states. Our Agency license number in California is OK71922 and in Arkansas 100139527.

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