How to Achieve Financial Freedom
If you have ever thought about ways to improve your finances, chances are you’ve pondered one of these topics. This list is a compilation of the best finance questions and answers designed to help cure shattered budgets and bring personal finance freedom and peace to individuals and families alike.
What’s the Fastest Way to Pay off Debt?
According to Nerd Wallet, the average American household has over $15,000 in credit card debt. With so many struggling to stay on top of their monthly payments and make progress towards defeating their debt, it’s not a surprise that methods of debt payoff rank as one of the top finance questions and answers.
There are two popular ways to pay off debt. The first was popularized by Dave Ramsey, the financial guru behind the The Dave Ramsey Show program and accompanying financial education course Financial Peace University.
Ramsey states that in order to successfully conquer debt on your first try, you must embark on the “debt snowball” method. This involves listing your debts separately, in order from smallest to largest.
Pay Towards the Smallest Amount
Pay the minimum on all accounts except for the smallest debt. Pay every extra cent towards the credit line with the smallest total.
This method is supposed to psychologically encourage individuals to keep paying down their debt even when they tire of reserving all their extra cash for their creditors.
The number of debts decrease faster, so by the end, they save the largest debt for last but by that time they are so pumped from knocking out all the other credit cards, they tackle the last one with gusto.
While this method has worked for many of Dave Ramsey’s followers, some experts criticize the method due to its inattention to interest rates.
If the credit card with the highest balance also had the highest interest rate, the debt snowball method would make the borrower pay much more in interest charges than the alternative method – the “debt avalanche” method.
The debt avalanche method requires the borrower to list their credit cards again, but this time according to interest rate instead of balance. The lower interest rates get the minimum payments, but the highest interest rate debt receives all the extra money available each month.
Once the highest rate debt is paid off, the next highest rate receives the most attention.
In the end, the borrower will pay as little as possible in interest, keeping more of their hard-earned cash for themselves. Either way, the fastest way to pay off debt is to devote as much money from the budget as possible towards the balance each month.
Depending on your attitude towards debt payoff, the debt snowball method might help you overcome motivational hurdles, or the debt avalanche method can help save additional funds in the long run.
Do I Actually Need an Emergency Fund?
While you’re working towards debt payoff, you must single-mindedly focus your extra cash on your goals. If a major expense pops up, it can derail your plans and force you to use credit to solve the issue.
Not only is it discouraging to see the credit balance jump back up, it only adds to the number of months your money goes towards debt payoff rather than towards building wealth.
Emergency funds are vital for everyone, but especially for people who are working towards paying off debt. The minimum balance of your emergency fund should be at least $1,000. This should be enough to pay for a major car repair or a sudden house expense.
Sometimes the purpose of an emergency fund can be confusing. For instance, let’s say you forgot to save up to buy holiday gifts for family members. Now it’s midway through December and you plan on dipping into your emergency savings to purchase last-minute presents.
While it might feel like an emergency at the time, gifts are not an urgent expense. Don’t drain your emergency fund simply because you forgot to plan.
This example brings up another important point about emergency funds: they only fulfill their purpose when paired with a reasonable, smart financial plan. You must budget for expenses you KNOW are coming, such as new tires for your car.
Saving Money for Bills
You can’t rely on your emergency fund for that – you have to proactively save for bills you know are on the horizon.
Ideally, your emergency fund should be large enough to cover three to six months of living expenses. This means you and your family will have enough cash to maintain your lifestyle for half a year if you lose your job.
When you calculate living expenses, include rent or mortgage payments, utilities, car payments, groceries, gas, phone and internet service and insurance bills.
For a small family, this total can add up quickly, sometimes to over $15,000. While it might seem unrealistic to be able to save that much, nobody ever said saving for an emergency fund should be fast. It may take you a few years to build up that total, but once you accomplish your goal, think of it as your financial safety net.
Besides saving for retirement, building a well-rounded emergency fund might be the most important financial goal you ever achieve.
Am I Saving Enough for Retirement?
If you are in the majority, you are not saving enough for retirement, according to a Federal Reserve Survey. The average family with adults between the ages of 55 and 64 only has about $104,000 in retirement savings – not enough to provide for a 20-year phase of life post-working.
The fear of running out of money during retirement is real and it’s also a realistic threat, making retirement savings another of the most popular finance questions and answers.
The most important principle of retirement saving is starting early. If you begin saving in your early to mid-20’s, you have a much better chance of living on a high percentage of your current income throughout retirement years.
The rule of thumb for the different age groups is as follows:
- In your 20s, reserve 10-15% of your income for retirement.
- In your 30s, reserve 15-25% of your income for retirement.
- In your 40s, reserve at least 35% of your income for retirement.
Saving for retirement should not be pushed to the back burner. Though your child’s college education is important, it does not overshadow your quality of life after you cease working.
The amount of money you have saved may directly correspond to how long you live – you need more money for better insurance plans and better health care.
At the very least, you should be maxing out your IRA contributions each year. If you start contributing $5,000 per year to a Roth IRA at age 32 (which equals about $416 per month) and it achieves a 5% return, at age 65 the balance will reach over $420,000 at a tax rate of 25%.
Start saving just 7 years earlier, at age 25? The IRA fund will be worth over $630,000. The power of compounding interest can’t be beat.
And if the rates are good to you and you achieve an average 7% return instead, your 40 year savings could result in a fund worth over $1 million, even though you only contributed $200,000 total.
Retiring a millionaire isn’t a bad goal to have, but it starts with steady monthly contributions. Figure it into your budget like any other bill and your 65 year old self will thank you kindly.
How Do I Make More Money?
Many financial problems are solved through an increase in cash flow. First, analyze your standing at your current job. Are you in a position where you can expect upward mobility? If advancement is not possible, consider looking for a position at another company.
Would additional education or certifications in your field improve your chances of climbing the ladder either at your current company or another organization? Look into avenues of widening the scope of your abilities. In some cases, your company may even reimburse you for the portion of the cost of training.
Get a Side Hustle
You also are not limited to one job. You can start a side hustle and bring in serious extra cash on the weekends or in the evenings.
Become a personal trainer. Become an Uber driver. Pet or house sit for vacationers in your neighborhood. Sell your handmade items at flea markets or online. Deliver food for Door Dash. Clean houses. The ideas are endless.
Remember, a form of “making more money” is simply spending less too. If you have a large emergency fund, consider increasing the deductible on your car insurance. That way you’ll pay less each month towards your insurance bill but you have the cash on hand to take care of it if something happens.
Think about cutting out cable for a few months…or even a year. If you pay $100 a month for your favorite channels – when you can probably access them online or wait until they come out on Netflix – you could find yourself with an extra $1,200 at the end of the year. It’ll leave you more time for pursuing your money-making hobbies too.
How Can I Improve My Credit Score Fast?
Your credit score doesn’t define you, but it sure can have a serious effect on your life. Sometimes even potential employers run credit checks. Will they like what they see when they view your credit report?
The first step towards improving your credit is paying all your bills on time – ALL of them. Your phone bill and your utilities count, not just your credit cards.
It might help to set up bill due date reminders on your phone or write down notes in your daily planner. You can also schedule automatic payments to come out of your checking account which may be the easiest solution.
Next, pull your credit report for your own review. You’re entitled to three free copies per year and you can access them using AnnualCreditReport.com. If there’s a faulty entry, contest it and see an improvement to your score.
Your Credit Line
In general, you should try to utilize 30% of each credit line or less. If you are maxed out on one or more credit cards, devote your extra cash towards lowering the totals each month until you are at least below this limit.
Sadly, if you have had a bill sent to collections, it will stay on your report for 7 years. Time is the best remedy for bad marks like these.
Time is also good for other parts of your credit report, as the score will rise the longer you keep your lines of credit open for use. Closing a credit card will have an immediate negative impact on your report, so only do that when completely necessary.
Stay steady and up-to-date with your payments and don’t submit too many inquiries at once for new lines of credit, and you’ll see a gradual improvement. There is no true quick-fix solution, but you can begin repairing bad credit immediately.
How Do I Achieve Financial Freedom?
First, decide what financial freedom looks and feels like to you. Do you want no debt whatsoever? Are you content to carry car payments and a mortgage as long as you don’t need credit cards to get by?
Financial freedom is defined differently from person to person, and only you can determine your overall goal. For most, financial freedom includes security. Security includes no credit card debt, a fleshed out emergency fund and an on-track retirement savings plan.
It also helps to have diversified streams of income so you have a source of cash to fall back on if your main job falls through.
Stick to Your Budget to Have Success
To start building your personal version of financial freedom, you first must construct a budget and stick to it. Write down your income and expenses and see where you can make changes to free up more money each month.
Eliminate hurtful, high interest debt and save, save, save your extra money. If you need quick cash to help, you can borrow money against your car.
Review the solutions offered in many of the other popular finance questions and answers in this article, and you can achieve the financial freedom you are after. It will happen one day, one penny and one decision at a time.