Finances

7 Steps to Financial Freedom

This article is from a video presentation that I was working on and plan to release in the future. The goal of this article is to outline some simple steps you can use to get out of debt and start building wealth. We have researched some of the most successful financial gurus on how they reached their goals. Most of them follow something very similar to this. We have followed these steps ourselves, and even with some setbacks, we are on track to retire before 50! 

Step 1 – Income Sources

Identify all of your income sources and add them up. What does your day job bring in? What about the average you make of your side hustle? After all taxes come out, add all of this together to figure out what your net operating income.

Split your income based on how often you are paid (i.e. monthly, bi-monthly, weekly, or bi-weekly). This is so you can structure your bills and pay them based on your paycheck. If your bills are lopsided and all due near the beginning of the month, try to get some of those due dates moved.

Step 2 – Identify All Bills

Identify all of your bills and when they are due.

Now prioritize all of your bills and expenses!

  • Rent or Mortgage and Car payments are the first bill or expense to prioritize.
  • The second is your Utilities (Electricity, Water, Sewage).
  • The third is Groceries.
  • The fourth will be any Credit Card or Loans.
  • The fifth is our “nice to haves” such as Cable and Cell Phone.
  • And the final expense would be “Fun Money.” If you don’t give yourself something, you’ll cheat.

We added in the fun money for those of us not as disciplined (me). This allows for you to have a little reprieve as you hunker down and make it happen. If you are more disciplined, take this one off and use it in the next few steps.

Step 3 – Make a Budget

Now that all of our income and expenses are put together, we can start to formulate a good budget. This budget can focus on many different things such as ridding yourself of debt, or saving up for a new car. In this step, you will need to identify what your budget priority is going to be. This budget needs to be broken down to:

Pay off your debt

or

Manage what you invest

For this particular article, we are focusing on getting out of debt. The investing will come later.

We personally have multiple bank accounts that we divide our paychecks into for these different bills and expenses. We have an account for our personal home repairs/car maintenance, pet/vet fund, holiday/birthday fund, grocery fund, family activities fun, and savings account.

Related: Budgeting

Step 4 – Pay Your Bills

Now that you have identified what bills you need to pay, take care of them in accordance with your budget. Let’s get out of debt!

  • To start, save at least one mortgage or rent payment in your savings account for an emergency.
  • Once all of your bills are paid, it is time to “snowball” all of your debt.
  • Pay the minimum payment on all of your credit cards and loans while snowballing the highest interest rate (not including Mortgages and Car loans).
  • Take the credit card or loan with the highest interest rate and take everything left over from each pay check and dump it into that particular debt (If you have credit cards with low balances, you can pay them off first for “small victories”).
  • Once that is paid down, do the same thing for the next highest interest rate.
  • Rinse and repeat until all debts are paid off.

Step 5 – Build Emergency Savings

Now that you are debt free and have a budget, it’s time to save up some money… It’s time to treat your savings as a bill. Pay yourself first! You will need to look at your expenses again, and multiply them by three.

  • This money saved will go to your “emergency fund”
  • This fund will be 3 months’ worth of your expenses. This is in case of any issues with your income in the future.
  • This fund will also be used in case of any unexpected emergency expenses.
  • If you use any of this money, treat it like a loan and pay it back right away.

Step 6 – Save and Invest

As mentioned in step three and now that the emergency fund is created, it’s time to start saving and investing. From here, you will start to save money for future things you want to purchase. This is so you are not using the credit card or taking out loans. 

This does not mean you cannot take out a car loan in the future (some car loans have APR rates so low, that it’s ok). However, the fastest way to financial freedom may involve having a used car for a while…

You should try to live off of 70% of your income or less. The general rule that we like to follow is at least 5% to savings and 10% invested in a retirement account (401k/IRA/Roth IRA) and 10-15% towards real estate or stocks.

Another great investment option is Real Estate. You can read about our first real estate investment property here.

Related: 6 Ways to Invest in Real Estate

Related: House Hacking 101

Step 7 – Rinse and Repeat

Rinse and repeat with your budget. Once you get your savings account to a comfortable level, you can stop putting money in savings and invest more of it towards your retirement accounts or other investments like real estate.

401k’s are good accounts to invest in because most employers will match a certain percentage of your contributions. If you are investing in a 401k, always invest what your employer would match. That matching is FREE money!

IRAs are pretty good accounts to control where your money is being invested. It is important to know the difference between a regular IRA and a Roth IRA. When you take your money out of an IRA, you will have to pay taxes on the payment. Depending on your tax bracket when you retire, you can lose a small fortune to Uncle Sam. With the Roth IRA, you pay the taxes before the money hits the account and when you withdraw it, you will not be taxed.

I personally am not putting too much into my Roth IRA (Thrift’s Savings Plan) as it is not what I am banking on for retirement. It will just be a nice chunk of change when I turn 59.5. I am using real estate as my vehicle to retirement. If I get to a point to where I don’t want to deal with it anymore, I can sell all of my assets and move them into dividend paying accounts and live off of the dividends. I don’t think I’ll get tired of it and plan to pass the real estate to my children.

Congratulations!

If you make it through these seven simple steps, you are on the road to financial freedom. Everyone’s situation is different and not everyone can save the same amount of money. What’s important is that you build a good financial plan and stick to it.

Mike Cavaggioni
Mike Cavaggioni

Mike Cavaggioni is an Active Duty Officer in the U.S. Navy, Real Estate Agent, and Real Estate Investor located in Honolulu, HI. He is the founder of Average Joe Finances and host of the Average Joe Finances Podcast. He is the CEO and founder of Compass REI Properties, LLC; a rental property company in Virginia. Mike owns real estate in Hawaii and Virginia and is building a community for people to come together to learn and build their wealth.

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