Financial freedom doesn’t require a high income or 7-figure inheritance. It's more about feeling secure about paying your current bills and saving for the future. Think you're not quite there yet? It may be closer than you think.
What is financial freedom?
Financial freedom means being able to pay for your life with little worry. "It's a general state of mind," says Michael Rusinak, vice president of Financial Solutions at Fidelity. “You get to a point in life where you feel you can cover everything comfortably and confidently. And you feel secure in your future needs.”
There are 2 keys to achieving financial freedom, according to Rusinak. First, you have a good understanding and control over the necessary expenses in your life, like food, housing, and bills—and saving for your future. Second, you have the income needed to handle all these obligations.
The key is that your lifestyle is one that you can easily maintain. Someone who can comfortably pay for a modest lifestyle might feel more financially free than someone who earns a lot more money but keeps raising the bar on their spending.
Making some spending and saving choices that support your long-term goals can pay off, while enjoying your life. Read Fidelity Viewpoints: Hitting $1 million and 5 ways to outsmart lifestyle creep
Achieving financial freedom
Here are 6 steps to help you on the way to financial freedom.
1. Understand your spending to build your roadmap
Budgeting is a basic money management skill. A budget is simply a method of organizing your financial tasks so that you know where your money is going.
“Simply understanding where your money is going can help you feel more confident about your finances,” Rusinak says. He uses a spreadsheet to track all his monthly spending across categories like food, housing, transportation, and utilities.
There are ways to track your spending automatically, like Fidelity’s spending and planning tools, which help you track expenses, investments, and debt in one place and understand how they affect your financial plan.
2. Right size your budget
Making the most of what you have is key to financial freedom. Over the long term, learning to control spending and save consistently are skills that can help you do just that.
If you’re looking for ways to get started, consider a no-spend challenge to help get further insights into your expenses and find ways to trim them. And to kickstart savings, try the 52-week money challenge.
3. Build your income
Since income is the other side of financial freedom, finding ways to earn more can help you reach that goal. “The higher your income versus expenses, the more financially secure you’re going to feel,” says Rusinak. For some people, building up income may be a bigger priority than cutting spending—after all, spending can only be cut so far.
For example, a side hustle could help you earn extra money for hobbies and other fun spending. Or you could return to school and invest in a professional degree to get a higher paying role. Read Fidelity Smart Money: 13 ways to make money fast
As your income grows, you may need to review your budget to make sure that your savings are increasing as well.
4. Save for emergencies and for retirement
Feeling secure about the future comes from preparation. Planning for unexpected expenses and saving for retirement are critical to the journey.
For emergency savings, consider saving $1,000 worth of essential expenses as an initial goal. Then keep going until you’ve saved at least enough to cover 3 to 6 months’ worth of essential expenses. Read Fidelity Viewpoints: How much to save for emergencies
For retirement, if you have a workplace retirement plan, like a 401(k) or 403(b), consider saving at least enough to get the employer match, if there is one. That’s like free money so it can make sense to capture it if you can.
Ultimately, Fidelity recommends saving at least 15% of your yearly pre-tax salary for retirement, which includes any employer contributions. If you earn $100,000 a year pre-tax, 15% would equal $15,000 a year or $1,250 per month.
If you can’t save 15% right away—don’t give up. Save what you can and work to increase that amount over time. Small amounts can add up. Read Fidelity Viewpoints: Just 1% more can make a big difference
5. Choose appropriate accounts for savings and investments
There are many ways to save and invest, but the right one depends on your goals. “Every dollar should have a job. By understanding the goal of each dollar saved, you can best determine what account you should use,” says Rusinak.
For example, Fidelity suggests emergency savings should generally be kept in highly liquid, easily accessed accounts. Read Fidelity Viewpoints: Investing for short-term goals
But for long-term goals like retirement, education, or health care expenses, investing inside a tax-advantaged account can make sense. Investing for growth potential can be particularly powerful when your money has the chance to grow over time without taxes.
Each type of tax-advantaged account is made for a specific purpose and may come with pros and cons.
Retirement accounts like traditional and Roth workplace savings accounts (401(k)s/403(b)s) and IRAs offer tax breaks and the ability to invest in a variety of ways. There can be a 10% penalty from the IRS on withdrawals before age 59½ but there are some exceptions.
A health savings account (HSA) is a tax-advantaged account you can use now and in the future. Enrollment in an HSA-eligible health plan, also referred to as a high-deductible health plan, is required to make HSA contributions. HSAs are triple-tax advantaged, which means contributions may be tax-deductible, investments have the chance to grow tax-deferred, and when withdrawals are used for qualified medical expenses—they are tax-free.1
529 plans are flexible, tax-advantaged accounts designed specifically for education savings. Money saved in a 529 plan can be invested for the future. Any earnings on contributions grow federal income tax-deferred, and withdrawals are federal income tax-free when used to pay for qualified higher education expenses.2
There are provisions that allow for scholarships and there are other ways to use money that may be left in the account after your student has completed their education, including a transfer from the 529 to a Roth IRA established for the beneficiary.3
6. Tackle debt smartly
There are 2 types of debt management to consider: paying off debt and planning debt you may take on in the future.
Should you always pay off debt as quickly as possible? It depends. Fidelity’s general guideline: If the interest rate on your debt is 6% or greater, you should generally pay down debt before investing additional dollars toward retirement. Read Fidelity Viewpoints: Should you pay down debt or invest?
Rusinak suggests a similar mindset when deciding whether to borrow for other goals.
“When considering taking on new debt it is important to consider first what other funding sources may be available and, if debt is an appropriate funding source, whether the new debt obligation can be supported by your budget and how it affects your other financial goals,” he says.
The trick is, as ever, balancing spending and saving choices today with future aspirations. The good news is that there are many ways to get to the same place: financial freedom.
Planning on your own or with a professional
Financial freedom is about making the most of what you have. Starting with a financial plan can help design your roadmap to get there, including your major goals, not just retirement. Fidelity has planning tools that can help you along the way and there are multiple ways to work with Fidelity professionals if you need any help.
