Roadmap to Financial Freedom

Introduction

Financial freedom is a dream many of us harbor. It’s the ability to live life on your terms, without the constant worry of money. Achieving this level of financial security requires diligent effort, and one of the key tools in your financial arsenal is effective financial planning. In this article, we’ll explore why financial planning is crucial and how it can serve as your roadmap to financial freedom.

What Is Financial Planning?

Before we dive into the importance of financial planning, let’s define what it entails. Financial planning is the process of setting, prioritizing, and achieving financial freedom through careful management of your financial resources. It involves budgeting, saving, investing, and making informed financial decisions to secure your financial future.

The Benefits of Financial Planning

1. Clarity and Direction: Financial planning provides you with a clear understanding of your current financial situation and where you want to go. It establishes a roadmap that outlines your financial goals and the steps needed to achieve them.
2. Goal Achievement: By identifying your financial goals, you increase your likelihood of achieving them. Whether it’s buying a home, paying for your children’s education, or retiring comfortably, financial planning ensures you have a plan in place to make these aspirations a reality.
3. Budgeting and Expense Control: One of the fundamental aspects of financial planning is creating a budget. This tool helps you track your income and expenses, allowing you to identify areas where you can save money and allocate funds towards your goals.
4. Emergency Preparedness: Life is unpredictable, and unexpected expenses can arise at any time. Financial planning encourages you to establish an emergency fund, providing a safety net for unexpected events such as medical emergencies or job loss.
5. Debt Management: If you have debt, a well-structured financial plan can help you manage and eventually eliminate it. With a clear repayment strategy, you can regain control of your finances and free up money for savings and investments.
6. Investment Growth: Financial planning incorporates investment strategies tailored to your risk tolerance and financial goals. This allows your money to grow over time, ensuring you’re financially secure in the future.
7. Tax Efficiency: Effective financial planning considers tax implications, helping you minimize your tax liabilities legally. By optimizing your tax strategy, you can keep more of your hard-earned money.

Building Your Financial Roadmap to Financial Freedom

Now that we understand the benefits of financial planning, let’s discuss how to build your financial roadmap to financial freedom.

1. Define Your Financial Goals

The first step in financial planning is to define your financial goals. Ask yourself:

• What are your short-term goals (1-2 years)?
• What are your medium-term goals (3-5 years)?
• What are your long-term goals (10+ years)?

Your goals should be specific, measurable, achievable, relevant, and time-bound (SMART). For example, instead of saying, “I want to save money,” you could say, “I want to save $10,000 for a down payment on a house within the next three years.”

When you take the time to create these SMART goals, you are setting yourself up for financial freedom success. By creating these goals, you are giving yourself a direction to go, you start to understand what you believe is important in your life. If you find that your short-term goals are extremely important and your long-term goals are just something you hope for, you start to adjust how you think about what you want to achieve.

2. Assess Your Current Financial Situation

To create an effective financial plan, you need to know where you stand financially. Gather information about your income, expenses, assets, and liabilities. Create a comprehensive snapshot of your financial situation. By creating a snapshot of your financial situation, you are enabling yourself to better understand just where you are financially, at that current moment. When you have taken the time to gather all of this information, your brain will likely start to put together the pieces and realize how much debt you are in, how much money you are losing to interest, or similar thoughts.

When you are gathering your financial information, I want you to look for the following and write everything down, whether it be physically pen/paper or in a spreadsheet. Just get it written down somewhere that you will be able to look at it all in one place.

• Income: List all of your sources of income for your household. This should include what your gross (pre-tax) pay is and what your net (post-tax, take-home) pay is.
• Expenses: I want you to gather your bank statements and credit card statements for the past 3 months.
• Assets: You should gather a list of anything that is likely to make you money. This usually would include stocks, 401(k), IRA, or similar investment accounts. Assets can also be something like a rental property that you have rented out to someone else.
• Liabilities: Gather a list of all the items that you lost money on… this would typically include things like a car/truck/SUV with the accompanying auto loan, something this could include the house you live in, and any debts (loans, credit cards, etc) that you owe.

3. Create a Budget

A budget is the cornerstone of financial planning. It helps you allocate your income to various expenses and savings goals. Track your spending for a few months to identify areas where you can cut back or reallocate funds toward your goals.

In a future post, I will lay out more fine grained methods to creating a budget. For this article, we want to focus on creating a budget in simpler terms.

Make a new spreadsheet, have a column for the expense name, another column for the cost of that expense on a monthly basis, and another column for your monthly income. Add all of your monthly expenses together. Add all the income together. Subtract your expenses from your income.

This is your unbudgeted money. If this is positive, then it means that you have an amount of money that you can allocate towards getting out of debt. If this is negative, it means that you are living above your means… in other words, you are spending more than you are making. This is where you get to start adjusting expenses for future projections so that you can get a better idea of how you can spend differently so that you can get yourself out of debt.

4. Build an Emergency Fund

There exists a common step that is touted across the internet, made famous by Dave Ramsey of putting $1,000 into a savings account as your starting emergency fund. When I talk with my clients and get a plan setup for them, I include this same type of step. I may customize it for that particular client, but initially, you want to be sure that you have something to fall back on, in case of emergency.

This doesn’t mean… “oh, I didn’t budget properly, let’s just take from the emergency fund.” No, an emergency fund is designed so that if something happens, like your heater dies, your water tank dies, you end up in a car crash… something that is very outside the ordinary day, you have something to fall back on to help cover the cost of these emergencies.

You shouldn’t touch it unless it’s a true emergency. I recommend that you have this money saved at a different bank, potentially without quick access to it through a debit card, but this may be a step that some folks won’t be able to overcome.

Eventually, after you have saved up between $1,000 and $2,000 for your initial emergency fund in a savings account and you have paid down your debts, I recommend you establish an emergency fund with at least three to six months’ worth of living expenses. This fund provides a financial safety net, allowing you to cover unexpected expenses without derailing your financial plan, such as in case of a lost job.

5. Pay Off Debt

In another post, I will discuss some different methods of prioritizing paying off debt, in this article I’m just focusing on a general plan. First, you should have all your debts listed and including the name of the debt, the minimum payment, the interest rate, and the total debt amount owed. Organize these debts by the highest interest rate at the top of the list, with the lowest interest rate at the bottom. This now becomes the order in which you attack the debts in priority order.

While you are paying on these debts, you need to be sure that you stop using your credit cards altogether. Additionally, on the credit cards, you should only pay minimum payments on any debts that aren’t your top priority. Once your top priority debt is paid off, use that payment and add it to the next debt, compounding the amount of money you allocate towards getting out of debt.

6. Invest Wisely

Once you’ve addressed high-interest debt and built an emergency fund, focus on investing. Diversify your investments based on your risk tolerance and time horizon. Consider using tax-advantaged accounts like IRAs and 401(k)s to maximize your savings. As I am not a Registered Investment Advisor (RIA) nor a Financial Advisor, I’m going to leave this section as a generalized section. When you are at this step, I strongly suggest that you start reaching out to a Financial Advisor or RIA for assistance and guidance on how you can best put your money to work for yourself.

7. Review and Adjust Your Plan

Regularly review your financial plan to track your progress and make adjustments as needed. Life circumstances change, and your plan should adapt accordingly. Initially, you will likely have to be reviewing your plan on a daily to weekly basis so that you continue being aware of how much you can spend, where you can spend, and when you need to be making extra payments towards debt or investments.

Your plan should be fluid, flexible. If something happens and you need to deviate from the plan, deviate for that month and use the next month to get back on track. You’ll find that your path to financial freedom isn’t a clear cut path. You’re going to find that you’ll hit bumps and snags along the way, causing some setbacks. This is okay, you just have to work through the challenges and push on.

Common Financial Planning Mistakes to Avoid

While financial planning is essential, there are common mistakes you should steer clear of:

1. Procrastination: Waiting to start financial planning can significantly delay your progress toward financial freedom. Start as early as possible.
2. Neglecting an Emergency Fund: Many people skip building an emergency fund, leaving them vulnerable to unexpected expenses.
3. Ignoring Debt: Failing to address high-interest debt can hinder your ability to save and invest effectively.
4. Not Seeking Professional Advice: Financial planning can be complex. Consider working with a financial coach, certified financial planner (CFP), or financial advisor to ensure your plan aligns with your goals.
5. Lack of Regular Review: A plan that isn’t regularly reviewed and adjusted can become outdated and less effective over time.

Conclusion

Financial planning is not just for the wealthy or financially savvy—it’s a tool that can benefit everyone. By creating a well-thought-out financial plan, you’re taking significant steps toward achieving financial freedom. Remember that the journey to financial freedom may have ups and downs, but with the right plan in place, you’ll have the guidance and structure needed to stay on course.

Take the first step today, define your financial goals, and start crafting your financial roadmap. Financial freedom is within your reach, and with determination and a solid plan, you can make your dreams a reality.