Five Steps to Financial Freedom

I know, I know. You’re extremely busy and your life is so complicated that setting up a budget or getting your financial house in order feels just overwhelming. But I can assure you that setting aside some quality time with a calculator, a cup of coffee, pen and paper, and your spouse (if you’re married) will save you major headaches going forward … especially when you or your spouse comes down with a case of the “really wants” or the “gotta haves.” A budget, and especially a YNAB budget in conjunction with Mint’s money management software, is just the first step in the long path toward financial responsibility and freedom.

Your financial security lies in the following five areas:

1. Budgeting

The foundation of personal finance is a budget. I know, just the word sounds intimidating, as well as boring and uptight, right? My brother-in-law is an accountant and during college he and his wife budgeted everything to an extreme. The family still jokes about the way he would ration a 2 liter of Coca Cola for an entire week. But budgeting doesn’t have to be rigid and boring. Most people, even if they don’t keep a budget on a paper, keep a daily budget in their mind. Ever thought twice before buying that book or new pair of jeans, because you know if you spend the money you won’t be able to buy that sweater or make your cell phone payment? Then you’re already budgeting. It’s important, though, to start listing out your specific budget to gain a bird’s eye view on your money, what you spend it on, how often, whether you’re over-spending in areas you could cut back on, etc. Need help on how to get started creating a budget? I can wholeheartedly recommend YNAB (You Need A Budget).

2. Reduce in your costs

After you’ve started your budget, you will have a clearer picture of where you can start cutting your expenses. Do you really need that $9 lunch? Can you find cheaper car insurance? Can you switch banks to PerkStreet and start getting rewarded? (read: How to Switch Banks in Six Easy Steps) These are the kinds of questions you’ll be asking yourself as you start discovering where you can shave expenses here and there and maybe even uncover ways to make extra money. Every dollar  counts in the long run … and the short run too.

3. Dig yourself out of debt

Maybe you shouldn’t have taken out that loan to go on a European cruise … or charged the entire trip on a credit card that you’re still paying on four years later. Maybe your student loans have gotten the best of you and they’re taking decades to pay off (hint: try to refinance with a Credit Union Student Loan). Or maybe you wished you had waited to find a great deal on a solid used car instead of buying that brand new car. Whatever your case, it’s very difficult to make money or save money while you’re in debt. Why? Because when you borrow money, you’re being charged a fee to be able to use it. This fee is called “interest” and it’s what you have to pay on top of the money you borrow. Using credit isn’t necessarily a bad thing; we all need a good credit history to make the bigger purchases in our lives, such as a mortgage to buy a house. But if the monthly payments on your credit card or other personal loans begin growing and it’s getting harder and harder to make those payments, then it’s time to get your financial life in order.

What’s the secret to digging yourself out of debt? Pay more than the monthly minimum every month … much more. You aren’t really “saving” if you’re losing money by taking longer to pay off borrowed money. Why take 5 to 10 years to pay off a credit card with the minimum amount every month (the minimum will cost you thousands of dollars in interest), when you could pay it off as fast as possible and save for bigger, better things? (hint: refinance to a zero interest credit card)

4. Save your money

There are many ways to save money (read 17 Sneaky Savings Strategies). They key is to put your money into a savings account and allow it to grow. It does you no good to put $200 into savings only to withdraw it 10 days later to cover an overdraft in your checking account — that’s why budgeting is so important as a first step.

5. Invest for your future

Virtually all of us will need a nest egg to fall back on once we retire or if we want to retire early. Don’t get lazy with investing for your future (retirement) and mistakenly believe that someone else, such as a family member, spouse or Social Security, will save for you and dig you out if and when you’re in too deep.

Take advantage of the fabulous benefits of investing in IRAs and/or your company’s retirement plan — doing so is essentially taking out an insurance plan on your financial life.

If you aren’t sure how to begin investing, check out Wiser Adviser or sign up for Scottrade and read my series on Exchange Traded Funds. If you’re one to aggressively learn new things, Scottrade has a fabulous “Knowledge Center” that teaches newbie investors the ropes. It really is a great reason to open an online brokerage account with them.

Financial freedom is worth every penny

It’s also worth every effort you put into it.

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