End the Paycheck-to-Paycheck Cycle: 10 Steps to Financial Freedom
Financial freedom looks a little different to everyone, but these 10 steps can get you on the right path.
Justin Cupler
Contributing Writer at Tally
December 11, 2022
This article is provided for informational purposes only and should not be construed as legal or investment advice. Always consult with a professional financial or investment advisor before making investment decisions.
Having financial goals is key to successfully managing your money. Without goals, you're flying with no target in sight. One common goal is financial freedom.
What is financial freedom, though? Honestly, financial independence can be drastically different from one person to another. Maybe your idea of financial freedom is being able to buy the boat you've always wanted, but your friend's idea of it is traveling freely.
One common theme in the strive for financial freedom is having your money work for you — instead of the other way around — and being able to do what you want to do instead of what you're told to do.
With this common theme in mind, we’ll cover the key steps to financial freedom and what financial freedom means.
What does financial freedom mean?
Financial freedom can mean many things to various people, but at its core, it means not relying on anyone else for your financial future. Not your parents, not a job — no one. You have amassed enough wealth that you could afford to retire from work and live out your days on the interest of your investments because you:
Learned all the necessary money-management skills,
Set yourself and your family up for financial success and
Rid yourself of interest-robbing credit card debt
What are the 10 steps to financial freedom?
Now that you understand what financial freedom is and what it means for you, you can start laying the groundwork to get there. These 10 steps to financial freedom can help you achieve this key financial goal.
1. Expanding financial literacy
The first step to striving for financial freedom is developing financial literacy, which is a general understanding of key financial processes and terms. You can gain this knowledge in various ways, such as personal finance blogs, videos, books, magazines and even online courses.
Topics and terms to learn about may include:
Tax-advantaged retirement accounts, like IRAs and 401(k)s
How to create an emergency fund
Credit card management
Different types of savings accounts
Budgeting methods
Stock market investment options, such as exchange-traded funds or mutual funds
2. Creating a budget
The steps to financial freedom start with learning how to manage money. Without proper budgeting skills, you’ll have difficulty understanding where your money is going each month.
Learning money management starts with a sound budget. There are countless budgeting options, but some popular and easy-to-follow budgets include:
Envelope budgeting sets a limit for every spending category, creating an envelope for that category and putting cash in the envelope. Once the envelope is out of cash, that category of your budget is exhausted.
Zero-based budgets ensure every dollar of your income has a job, whether paying a bill, paying down debt or going into savings.
50/30/20 budget splits your income three ways: 50% goes toward daily bills and living expenses, 30% goes toward your wants and 20% goes toward savings or paying down debt.
Regardless of the budget you choose, stick with it through thick and thin. If you fall off the budgeting wagon, pick yourself up and get back to it.
3. Living within your means
The desire to “keep up with the Joneses” has been a part of human nature for as long as we know. It’s common to see something your neighbor has and wonder how they can afford that when you can't. In some cases, you'll overextend yourself to buy that item.
While that big credit card purchase may feel good now, it can become a burden once the bill comes.
Instead of overspending to keep up, you can stay financially ahead by monitoring your spending habits and living within your means. In some cases, you can even live below your means.
For example, you may get a big promotion and finally have enough money to afford a luxury car you’ve always wanted. Instead of spending that extra income, consider putting that extra cash toward savings or debt repayment.
Or maybe you can afford that 3,500-square-foot, five-bedroom home, but your family only needs 2,000 square feet and three bedrooms. If you opt for a smaller home, you can use the savings to pay off debt or invest.
Living within your means isn’t just about the big purchases. It involves your day-to-day expenses as well. For example, let’s say you love to eat out often or have multiple streaming services to enjoy, but they strain your income. You can either cut back on those expenses or earn extra income in a side hustle to pay for them.
4. Protecting your family
Another step to financial freedom is having protections in place for your family in case something happens to you. One way is with a life insurance policy.
Generally, your policy should at least be enough to cover your debts, your children’s future college tuition, and 10 years of your salary. However, some personal finance experts simplify this by recommending a policy worth 10 to 12 times your yearly salary on a 15- to 20-year term.
With a life insurance policy, if something should happen to you, your family has peace of mind knowing they can pay off any remaining debt and continue living within the same financial means. Be sure to talk to a financial advisor to see if a life insurance policy fits your long-term financial planning.
5. Starting an emergency fund
Managing an emergency and unexpected expenses, like home or car repairs, without reaching for a credit card is another step in financial freedom. This is where an emergency fund comes in.
Most experts agree that having an emergency fund covering three to six months of your expenses is sufficient. However, this may not be possible given your current financial situation, so you may want to start with $500 or $1,000 and increase it later.
Save money for your emergency fund, setting aside this cash in a separate bank account so it doesn't get mixed in with other money. Preferably, place it in a high-yield savings account to earn compound interest.
6. Setting up and funding retirement accounts
Does your employer offer a sponsored 401(k) program? If so, this is a simple way to begin a retirement account and make big steps to financial freedom.
First, find out if your employer offers a contribution match. For example, the company may match 100% of your contributions up to 4% of your salary. If it offers this match, check your budget to see if you can meet the maximum match, which is basically free money.
If not, start at the highest contribution rate you can afford and increase it by a percentage point each year or every time you get a raise until you maximize the employer match and start building a significant retirement fund.
If you're self-employed or your employer doesn’t offer a 401(k), you can look into a Roth IRA or a brokerage account for post-tax retirement savings. Consult a financial advisor before opening retirement accounts; remember, it’s never too late to start.
7. Managing high-interest debt
High-interest debt can get in the way of financial freedom. Many experts say anything with an interest rate higher than a standard mortgage or student loan is considered high interest. So, most car loans, mortgages and federal student loans won't fall into this category, but personal loans and credit card debt usually will.
There are two main ways to manage your high-interest debt: debt avalanche and debt snowball.
Debt avalanche
In the debt avalanche repayment process, make minimum payments on your high-interest debts, then apply any extra money you have left to the debt with the highest interest rate. Repeat this every month until that debt is paid off, then move on to the debt with the next highest interest rate.
Continue this process until you're debt-free.
The debt avalanche is the most cost-effective process because it focuses on interest rates, saving you the most money along the way.
Debt snowball
With the debt snowball plan, make minimum payments on your high-interest debts, then apply any extra money you have left to your smallest debt. Repeat this every month until that debt is paid off, then move on to the debt with the next lowest balance.
Continue this process until all your debts are paid off.
While you'll likely pay a little more in interest charges with the debt snowball method, it can give you a boost of confidence and motivation when you pay off low balances early in the process.
8. Forgetting self-care
All this investing, saving and debt management will consume a lot of your discretionary income. But don't forget that you still have a life to live and enjoy along the way. Try to budget some money for yourself as one of the steps to financial freedom.
Whether it’s money for takeout or to go out on the town with friends, this self-care cash will keep you motivated and satisfied while working toward future financial independence.
9. Building wealth
Once your high-interest debts are paid off and your emergency fund is set up, it's time for one of the final steps to financial freedom: building wealth.
When saving for wealth building and developing a retirement plan, the common rule is to save at least 20% of your income.
One way to start is by maximizing all your retirement accounts, such as a 401(k) or traditional IRA. As of 2023, you can contribute up to $22,500 into your 401(k) and $6,500 into an IRA. If you're over 50 years old, those limits increase to $30,000 in a 401(k) and $7,500 in an IRA.
Remember that there are income limitations to Roth IRA contributions that will impact how much — if any — you can save annually.
Suppose you’ve maxed out your retirement account and still haven’t saved 20% of your income. In that case, you can consider putting the rest in a range of interest-bearing investments, including:
Bonds
Mutual funds
Real estate investment trusts (REITs)
Annuities
Before settling on your final investment strategies, consider speaking with a financial advisor or investment professional to determine your best strategy.
10. Setting long-term goals
Once you start building your net worth, you might wonder how long you need to continue on that path until you’ve finally reached the end of the steps to financial freedom and no longer need a salary. This is the ultimate financial independence.
Here’s how you can determine your savings to reach this long-term goal.
Add up all your monthly expenses and multiply them by 12 to get annual expenses. For example, if your expenses are $5,000 per month, your annualized expenses would be $60,000.
Now, look back at your investments to get their average return percentage. If you can't find this average, a safe average to assume is 6%.
Divide your annualized expenses by 0.06 to determine how much you need in your investments until the interest covers your yearly expenses. Using the $60,000 number above, this would come out to $1 million in investments before you're truly financially independent.
If you plan to earn money in some side hustle or potentially start a new, more rewarding career, consider this income in your calculation.
While these calculations can give you a general benchmark to aim for, it’s always best to consult a financial advisor.
The steps to financial freedom are clear
From budgeting to growing your wealth, the 10 steps to financial freedom are clear and simple. The key is to take those first steps as early as possible because the sooner you get started, the shorter the path will be.
Remember, financial freedom is a long-term goal. So don’t get discouraged. Pick yourself up, dust off and get back on track. Your future financially independent self will appreciate all the hard work you're putting in today.
Tally† can help you along your path to financial freedom with its credit card debt repayment app. Tally offers a lower-interest line of credit to help repay your higher-interest credit card debts.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 to $300.