5 Steps to Debt-Free Financial Freedom

in Financial Planning by

KEY POINTS
  • Plan for emergencies.
  • Take the time to create a financial plan.
  • Stick to your plan and don’t waiver in the face of volatile markets.

On this day in 1776, our founding fathers signed a piece of parchment that resulted in America’s freedom and 240 years of annual celebratory weekends filled with fireworks, hamburgers, hot dogs and watermelons. Imagine if all it took to gain financial freedom was to grab your Macbook or iPhone, e-sign up for the right apps, and commit to a financial plan. These days, it actually can be that simple, especially if you have a little motivation and a guide to lead you in the right direction.

This Independence Day, I challenge you to commit to your financial freedom. And here are five easy ways to get started:

1. Figure out where you stand.

When Thomas Jefferson sat down to write the Declaration of Independence, it took him nearly a month to finish it. He was planning for the future, and so should you. When you’re laying out a financial plan, start with the basics. Figure out how much you take in, spend and save each month. Go through all of your monthly expenses and assess which ones you can cut out. When you force yourself to look at the numbers, it will be easier to prioritize which things you can cut back on.

And if you’re not saving enough? Set a monthly spending goal to stay in check. It will not surprise you that… I recommend Personal Capital’s tools to do this! But I promise, it makes it really easy to see your income, spending and cashflow over the month in one place. If you are realizing that cutting back on spending won’t be enough to help you save more, it might be time to ask for a raise or start searching for a job that pays more. If you have any high interest debt, make it a priority in your plan to pay it off as soon as possible. We’ve stuck with the Declaration of Independence for nearly two and a half centuries; set your plan, follow it and enjoy the many other beautiful aspects of life without the worry of being financially constrained.

2. Contribute to tax-advantaged accounts.

Americans thoroughly despised King George III’s taxation laws and tried to avoid taxed items. So in similar fashion and in the spirit of the Boston Tea Party, find ways to reduce your income taxes. You probably shouldn’t dump tea into a river, but you can definitely dump parts of your income into tax-advantaged retirement accounts.

In traditional 401k accounts, the two tax advantages are 1) you don’t pay taxes on that income now (i.e., your taxable income is lower) and 2) your investments grow tax-free. You don’t pay any taxes until you withdraw funds at retirement. (That’s why it’s a good idea to put income-generating assets in your retirement accounts).

In Roth retirement accounts, while you pay taxes now on your income, you still enjoy the following two tax advantages: 1) your investments grow tax-free and 2) you don’t pay tax when you withdraw. If your retirement account (whether a 401k or a Roth) is employer-sponsored and comes with an “employee match” – take advantage of it! That’s essentially free money.

3. Plan for emergencies.

Paul Revere devised a system of lanterns to alert the minutemen and was famously known for his ride to Lexington warning them of the approaching British invasion. And just like Paul Revere, you have to plan for emergencies and set up your insurance. To know how much you should have in your emergency fund, add up all of your must-have expenses for the month (think rent or mortgage payments, food, car payments, phone bills, utility payments, cable and other things you can’t live without). Tuck away 3-6 times that amount, and you’ll have a few months of buffer if you unexpectedly lose a job or fall on hard times.

4. Stay the course during volatile markets.

America’s first president, George Washington crossed the Delaware River in 1776 to launch an offensive attack on British troops, despite the weather being icy and unpredictable. Regardless of the weather conditions, Washington pushed on, and we can learn the same type of tenacity when it comes to investing even in times of market volatility. No one can predict the future, but investing is a long-term strategy, and wise investors know that making sudden moves during volatile markets is ill-advised. So don’t worry about Brexit, and carry on investing. The British can pat themselves on the back for becoming independent. But without any animosity, we really did do the independence thing first.

5. Diversify your investments.

56 delegates of the Second Continental Congress, ranging from 26 to to 70 years old, signed the Declaration of Independence. Eight of those delegates were born in Britain, and all had various reasons for joining the Congress. We fought against a monarchy so that we could gain diverse opinions from the people. Your portfolio should reflect diversity too. While the U.S. represents about half of the world’s economy, investing in international and domestic stocks in a variety of sectors is a great way to help minimize risk and gain exposure to assets that can perform well.

The Road to Your Financial Freedom

Take the time this weekend to celebrate the birth of our nation, enjoy time with family and friends and begin your financial independence plans with these few tips. You may even be so inclined to check out our Retirement Planner to make sure you’re on track to sipping Mai Tai’s on the beach by 65. The Personal Capital team wishes you the very best July 4th!

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Kathie Chuang

Kathie Chuang

Kathie is a marketing intern at Personal Capital. She is a a rising senior at the University of Chicago studying economics and statistics.
Kathie Chuang

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