You know you want to become financially free, but you’re not sure how to get there. You need a financial freedom roadmap to follow that will show you how not just to have financial stability but to live a life of flexibility and opportunity.
But how do we come up with one? I’ve got good news for you: you’re in the right place. In this post, we’re going to talk all about how to create a concrete plan you can see and reference to help demystify your path to wealth-filled life by using a financial freedom formula. By the end, you’ll have the clarity you need to take your next steps toward your best healthy financial life.
Financial disclosure: this content is for informational purposes only and is not to be considered professional advice.
What financial freedom can look like for you
Savoring your time
Perhaps there is something about your current life that makes you see that there’s more than the 48 hours you have to yourself on weekends. If you’re a parent, that number is even less. Maybe you don’t want to dread Mondays, sprint to Fridays, and live for the two weeks of vacation a year, then rinse and repeat until you retire.
Reaching financial freedom can mean opening the doors back up to your life and your time. All the things you tell others you want to do or wish you could be doing can be your reality. Want to take a trip to Paris without worrying if you’ll afford it? Done.
If you have children and you want to be more present so you can enjoy the special moments that pass so quickly as they grow up, financial freedom can give you the gift of the time you desire.
You can be there to pick them up from school, attend their soccer games, have dinner with them and just be with them. It’s something you’ll be grateful for and as your children age, they’ll look back and be thankful for how you always showed up.
Financial capability
If you’ve got a travel bug and love to explore, it can be really tough to fly from country to country when your job puts restrictions on your time off (and your wallet). Being financially free means having the financial ability to reduce your reliance on your employer because your financial needs are being taken care of.
If you don’t need to go to work to pay for your mortgage payment, or your car note and credit card bills, your life would open up to all kinds of possibilities. From exploring the culture in Europe to witnessing ancient pyramids in Egypt, you can go where your heart leads you.
What is a road map to financial independence?
We can’t move in the direction of our goals if we don’t know where we’re going or how to get there. We have to create a strategic step-by-step process that’s easy to follow. And that’s where a financial freedom roadmap comes in. Luckily, the steps to take to reach financial freedom are quite simple. Simple to follow, harder to take action in practicality. But the good news is with time and patience, if you follow these steps, you will reach financial freedom and it will open the door to a full and abundant life you deserve.
How do you create a financial freedom roadmap?
1. Live below your means
It’s important to live below your means because after you pay your expenses you want to have as much money as possible to pay off debt and make investment contributions. Note that the majority of people in America do not live below their means. There are many studies that show 64% of Americans live paycheck to paycheck and it’s not just those with a low to moderate-income. Even among those who earn more than six figures, 48% are living paycheck to paycheck. The bigger the gap between your income and expenses the more money you have to advance your financial position.
2. Pay off high-interest debt
I can’t stress enough to prioritize paying off your high-interest debt because it’s the number one killer of building wealth. You are charged interest on your credit cards when you carry a monthly balance in which the money is coming out of your pocket. We want the exact opposite to be happening for your finances.
The sooner you can tackle paying off your debt the quicker your wealth-building process will be. The reason why we want to get rid of high-interest debt is that it eats at any gains that you may be made in the market. For example, if you’re getting an estimated 8% annual return from your stocks and/or ETFs portfolio but your high-interest debt on your credit card is 20.99% your credit card interest payments completely wipe out any gains that you’re making in the stock market because the interest rate is much higher.
You can invest and pay off debt at the same time but it is important to focus on getting rid of the high-interest debt as fast as possible.
3. Build an emergency fund
If something comes up like an expected hospital visit or a job layoff, you want to be prepared. Studies show that if a $400 unexpected expense showed up, the majority of Americans would not have the ability to pay for it. Your goal is to build your wealth in this accumulation phase of your financial freedom journey. Unfortunately, life be lifeing and when it happens you don’t want it to completely derail you from the strides you make toward reaching financial freedom.
4. Contribute to your retirement accounts
This is something you want to do with your employer as soon as you are offered the option. I first recommend getting your company match — for example let’s say your job offers a 6% full match, when you contribute 6% of your income and your employer adds another 6% that is free money. And you never want to leave free money on the table.
Roth IRA – if you make under $75,000 a year you can contribute to a tax-advantaged account called a Roth IRA. The money that goes into this account is already taxed all of your working years, it grows tax-free.
When it comes time to withdraw, since the money was taxed going in, you don’t have to pay anything to retrieve your money unlike a 401k. This means more money in your pocket. This is also a benefit because most people earn more as their career progresses, so the contributions that you make now are taxed at a lower rate than in the future.
If you make more than $75,000 you won’t be able to qualify for a Roth IRA directly but there is a way around it through what’s called a ‘back door Roth’ or a Roth conversion. Despite its sketchy name, it’s totally 100% legal. It just requires a little bit more planning and paperwork. But taking advantage of tax-advantaged retirement accounts like this is encouraged and well worth the effort.
5. Increase your income
You want to increase your income so you can maximize your ability to pay down debt and make larger investment contributions each month.
One way to do this is to negotiate for higher pay at your current job. If that’s not a possibility, you can switch jobs frequently – once every few years. This is known to be an effective way of quickly increasing your income.
Each time you get a new position you have the chance to negotiate higher than your previous salary. When you take full advantage of this you give yourself your earning power. And with more money to take home each paycheck, you can put in larger investment contributions to help you get closer to your goal of financial freedom in a shorter amount of time. You’re essentially moving up your timeline to your financial freedom roadmap.
6. Track your net worth
When you track your net worth you’re able to measure your progress with your investment contributions. Tracking your net worth keeps you motivated and aware of how far you’ve come and how much further you need to go to reach your goal.
I use Personal Capital to help me track my net worth. It’s a free tool that conveniently displays all your investment and bank accounts in one place so you can track your progress in real-time.
Though it’s good to have it as a tool on your phone, it’s best to check it monthly. Checking your investments daily can cause you unnecessary stress.
You want to use it as a tool to check your progress over time, but you don’t have control over how the stock market performs every day. If you find yourself starting to obsess about your investment portfolio performance, consider removing the app from your phone and checking on your desktop to avoid hyper-focusing on your investments.
Use tracking your net worth as a tool, just make sure the tool doesn’t start running you.
7. Repeat steps 1-6 until you reach financial freedom
This process is not something you do once, but continue until you reach your goal. Just like working out, you don’t build muscle by lifting weights once. It’s by habit and routine that you begin to develop. Follow the steps in this financial freedom formula and you’ll see how your financial life will begin to transform well before you reach your goal.
How to calculate your FIRE Number
A common question for people while trying to discover how to reach financial freedom is how to calculate your financial independence number aka your FIRE number. I’ve included the formula here in case you are curious about how to calculate yours.
Related: The Difference Between Financial Freedom and Financial Independence: What You Need To Know
You will have achieved financial independence by the use of the following formula.
THE FORMULA
Your annual expenses x 25 = financial independence
For example, let’s say my annual expenses is $50,000.
$50,000 x 25 = $1,250,000.
I would be financially independent when my assets reached 1.25 million. This is because I would safely be able to withdraw $50,000 every year for the rest of my life without relying on being employed.
Very simple. But easier said than done!
I’d like to note, that this is a very simplified explanation of financial independence according to the FIRE movement. There are many nuances that play a factor in whether withdrawing $50,0000 per year for the rest of your life is sustainable such as the state of the economy and inflation but for the sake of discussing the definition of financial independence, we will keep it simple.
Your financial independence number is found using your annual expenses as an input into a mathematical equation. The total is a set number that says all my expenses are taken care of for the rest of my life without relying on employment income.
What are the challenges to financial freedom?
On our way to improving our finances, we must acknowledge the reality that our life circumstances have real challenges that can make financial freedom feel like a distant dream.
It can be discouraging to only discuss the positives and the how-to’s to get there. If we understand that there are real challenges that can be overcome on the journey we are better equipt to handle them because we expect the roadblocks to our goals. And if we know what they are when we see them, we will know how to respond and push past them.
Childcare costs- Childcare costs have almost doubled in the past 20 years. Try to get creative with your solutions: can you adjust your schedule to be more aligned with your partners to reduce daycare costs? Can nearby family assist? Perhaps taking a year off, or reducing work to part-time is an option to consider. If your employer offers flexible spending accounts as part of the employee benefits package you can take advantage of this to offset daycare costs.
Inflation – inflation has more recently become a challenge as our dollars are losing their purchasing power. But when you invest you can keep up with inflation in the long run. In the short term, try cutting out any unnecessary costs that are eating at your budget like unused subscriptions and annual fees.
Unexpected expenses – Vet bills from when your dog gets sick, your car breaks down, or anything can steer you off course when you’re not expecting it is a pain. You can be prepared for this by saving a portion of your paycheck to contribute to an emergency fund. There’s nothing fun about an emergency but you’ll be relieved that you’re prepared when they do happen because you have the money to cover the unexpected costs.
Illness – Many of us take our health for granted – until we fall sick with the illness. Make it a habit to focus on your health. Healing and prevention are key. Do what’s necessary to maintain good health habits, which can look like choosing to purchase quality, nutrient-dense foods and getting movement and exercise in, even if it’s just a daily walk. Taking time to de-stress and practice self-care will help to keep your immune system functioning to its best ability for the betterment of your overall wellness.
Debt – whether you have consumer debt or student loan debt or a combination of both, debt is the biggest deterrent to growing your wealth. Prioritize paying this off as soon as possible.
Create a debt-pay-off plan that suits you and work toward debt elimination. In most cases of debt, some sacrifice has to be made whether it’s taking on a side hustle to put more towards debt repayments or cutting back on lifestyle choices, or some combination of both.
Though it may take some time, this process is temporary. Once you knocked out your high-interest debt, you can breathe a sigh of relief and focus more intently on your financial freedom roadmap.
Low income – it is challenging to grow your wealth and pay off debt when there isn’t much left over once bills are paid. Focus on growing your income to really kick start and accelerate your wealth-building process. Grow your skills, ask for a raise, get a side hustle – whatever works best for you to grow your income so you have more power to build your wealth and dream life.
High cost of living – if you live with a high cost of living it can be very hard to have much leftover at the end of the month if rent is high and everything is expensive. Consider moving to a more affordable neighborhood or to even a lower cost of living state.
The obstacles become less discouraging when you understand that it is simply part of the process. Each person’s obstacles will look different, but when you face them don’t despair, there is always a way to get through them!
What role does cryptocurrency play in financial freedom?
Cryptocurrency has the potential to gain higher returns on your investments than the traditional stock market.
This means that those with a modest income can potentially get more bang for their buck by investing in cryptocurrency like Bitcoin as opposed to the stock market. Keep in mind that higher returns come with higher risks and results are not guaranteed.
The average return on the S&P 500 stock market returns on average 8-11% and in the last 10 years the stock market has done a 20% annualized return. The return on bitcoin for the past 10 years has been greater than that – at 230% annualized return.
We don’t know what the future holds as past performance does not guarantee future results. But cryptocurrencies like Bitcoin can be a good option to grow your wealth. Not all cryptocurrency is the same so be sure to do your research. A small allocation to your portfolio can be a good start and offers good diversification.
Free Financial Financial Resources
Mint – a free budgeting app that allows you to connect all of your bank accounts in a convenient place so you get a big picture look at your financial health. The app also allows users to track spending and savings and set and track budget goals. This was the first budgeting tool I ever used and I still recommend it because it gives such a great overview of your finances in one place.
Personal Capital – a free net worth tracking tool that syncs with your retirement and brokerage accounts in real-time. You can see how your investments are performing without having to track them manually or check each account individually. It also offers tax-minimization strategies and tax-loss harvesting.
Every Dollar – a free zero-based budget app you can access from anywhere while on the go. The free EveryDollar app lets you customize your budget, create savings funds and track your debt payments. It syncs with your bank account to automatically import transactions and create custom budget reports. This helps you always have your budget handy.
Wrapping up
To sum it up we’ve covered what financial freedom can look like for you, what a financial freedom roadmap looks like, some of the challenges you’ll face, and some helpful tools to help get you through you along the way. You’re ready to take on your future with clarity, now go give yourself the life you deserve.
7 Step Financial Freedom Roadmap: An Instructive Guide To The Path Of Financial Success
Cassandra is a personal finance blogger who helps millennial and gen-z women level up their money game for financial freedom.
