Over the past few years, Canadian families have been hit from all sides when it comes to their finances. First, there was the COVID-19 pandemic, which disrupted people in many ways, including financially. And just as the pandemic appeared to be waning, rapid inflation sent prices and interest rates soaring.
Given what so many have been through, financial freedom might be the last thing on your mind. Is it even possible to become financially free in the environment we’re living in?
What Is Financial Freedom?
People define financial freedom differently. Some equate it with financial independence, which means having enough income to cover your living expenses without having to work at a traditional job. To me, financial freedom means having enough money to be able to make big life decisions without worrying about the financial implications, being able to cover major expenses without going into debt, and having more control over how I spend my time.
17 Ways to Achieve Financial Freedom
If building a life of financial freedom sounds appealing, you don’t have to wait. You can begin to experience financial success almost immediately by making smart financial decisions. To help you get started, I’ve compiled the following list of 17 steps you can take to reach financial freedom.
1. Take Stock of Your Current Situation
Before starting your financial freedom journey, you need to know where you currently stand. What are the obstacles that are holding you back? Are you burdened with consumer debt? Do you need more income? What is the condition of your physical and mental health? These are all factors that, if not addressed, can prevent you from achieving financial freedom.
2. Track Your Spending
One of the best ways to assess your current situation is to find out where your money is going. Many people who struggle to make ends meet have no idea how much they spend each month.
To find out, print your bank and credit card statements for the past 90 days. Sit down with a calculator, and add up how much money is going to different spending categories. It could be a daily Starbucks habit, restaurants, tickets to concerts or sporting events, video games, online shopping, you name it. Everyone has their own things they spend money on.
This is a fantastic exercise and one that’s often very eye-opening. You may be shocked to find out how much you are spending in different areas. Once you know where your money is going, you can begin to allocate it more wisely.
3. Find Ways to Cut Expenses
If you’ve reviewed your bank statements and come to the conclusion that overspending is a problem, look for ways to cut your expenses. This doesn’t mean you can no longer have fun. But there may be areas where you’re over-indulging. For example, if you’re going out to eat five times a week, consider reducing the frequency to once or twice a week. That one move could save you up to $300/month, depending on where you like to eat.
You can apply the same principle to just about any spending area. And remember that it’s okay to say no to opportunities to spend money. Many people feel pressure from friends or family members who constantly invite them to do things that cost money. Practice saying no from time to time or suggest free activities, like spending time outdoors or staying home and playing board games.
4. Create a Budget
The idea of budgeting intimidates many people. But a budget is really just a plan for your money. You’ve probably heard the term, what gets measured gets improved. That’s true when it comes to your money. Every time you budget, you’re taking another step toward financial freedom.
And budgeting has never been easier to do. You can try the old-fashioned approach and use paper and pencil, or you can download a budgeting app on your mobile phone and automate most of the process. There is no shortage of free and paid budgeting apps to choose from.
5. Payoff Debt
High-interest, consumer debt is one of the biggest financial traps, and it’s keeping millions of people from achieving financial freedom. What kind of debt am I referring to? High-interest credit card debt, retail store credit cards, new car loans with massive monthly payments, and unsecured lines of credit.
Paying off debt isn’t easy, but it’s one of the best things you can do to improve your financial situation. But where do you start if you need to pay off multiple credit products? There are two popular methods: the debt snowball and the debt avalanche.
The debt snowball is a strategy where you pay off your debts in order from smallest to largest. The idea is to start with the easiest account first because it will give you the quickest ‘win’ and have you feeling motivated to pay off the next account. In other words, the debt snowball is all about developing a positive mindset toward paying off your debt.
With the debt avalanche, you pay off the highest-interest debt first, then the second-highest, and so on. From a mathematical standpoint, the debt avalanche is the faster way to pay off your debt, even if it’s not the most inspirational approach.
If quick wins are going to inspire you to action, the debt snowball is the way to go; if you’re a numbers person, try the debt avalanche.
6. Avoid Spending Money on Depreciating Assets
If you want to be financially free, it’s a good idea to spend less money on stuff that’s just going to be worthless in a few years. A depreciating asset is something that loses value as soon as you purchase it. The best example would be a new vehicle. You’ve heard it said that a new car loses 15%-20% of its value as soon as you drive it off the lot. While used car prices are higher than ever today, the principle hasn’t changed – cars are expensive, and they lose value.
The best way to buy the stuff you need or want without destroying your financial independence is to buy used as often as possible. A 4 or 5-year-old vehicle will be almost as nice as a new one and last for many years but will cost 30%-40% less, depending on the make and model.
Another tip is to leverage the sharing economy for items that you don’t need to use that much. Instead of buying an expensive RV for your occasional camping trip, rent one on an app like Rvesy.
Need a tool for a one-off project? Instead of spending hundreds of dollars at Home Depot, borrow from a friend, or rent it instead. Here is a Canadian-based tool-sharing app that connects tool owners with people who need to use tools for a specific project.
I like to focus my spending on experiences, like travel, rather than on things. As they say, you can’t take it with you when you go.
7. Build an Emergency Fund
At some point, to achieve financial independence, you will have to save money – a lot of it. If you have little to no money set aside, your first savings goal should be to build an emergency fund. An emergency fund will help you break the debt cycle of dipping into your credit card or line of credit every time you face an unexpected expense.
Your emergency fund doesn’t have to be big at first. Start with a goal of $1000, enough to cover an emergency car repair or an unexpected vet bill.
Once you hit $1000, try to reach $2500, then $5000, and so on. Personal finance experts have differing opinions on how much money you should save in an emergency fund. I’m fairly conservative, so I like the idea of eventually setting aside up to 12 months of income. If the COVID-19 pandemic taught us anything, it’s that there are no guarantees in life, and our finances can get turned upside down very quickly.
Remember that an emergency fund should be considered short-term savings. Put the money in a savings account, where you’ll earn a little interest, but your principal will be safe. You should never invest your emergency fund in the stock market.
8. Avoid Lifestyle Inflation
Lifestyle inflation is one of the most common traps for anyone living in the Western Hemisphere. That is, as our incomes increase, so does our standard of living, aka expenses.
You know what I’m referring to. As soon as you get that new job, the raise, or the big bonus, you’re already thinking about how to spend it on a bigger house in a nicer neighborhood, a newer vehicle, or that kitchen renovation you’ve been putting off.
One of the superpowers of financially independent people is having the ability to maintain the same lifestyle as their income increases. Instead of spending the extra money on more expensive things, they invest it in things like the stock market or real estate.
9. Invest in Your Career
Many people don’t realize how much money they’re leaving on the table at their job. They’re not taking advantage of their employee benefits, asking for raises when appropriate, or doing what they could to advance their careers. Companies are in a battle for talent like never before, and there is a shortage of skilled workers across most industries.
If you work in a corporate job, take a look around. You might be surprised how much more money you can make by leaning into your career for the next 12-24 months.
10. Start a Side Hustle
Perhaps you’ve maxed out your earning potential in your 9-5. The good news is that it’s never been easier to make more money. With advances in mobile technology, there’s a side hustle out there for almost anyone, regardless of age or ability. And I’m talking about paid survey websites that pay a couple of dollars a month.
Do you have marketable skills like writing, editing, teaching, web, or graphic design? You can make good money by offering your services as a freelancer. If you have extra space in your home or an entire property? You can rent it out on websites like Airbnb or VRBO.
If you own a reliable vehicle and enjoy being around people, consider driving for Uber. Gig economy jobs, like ride-sharing or food delivery apps, won’t let you quit your 9-5, but they will provide the money you need to build your emergency fund, pay off debt, or increase your savings rate.
11. Increase Your Savings Rate
Speaking of increasing your savings rate, that should be a priority if your goal is to achieve financial freedom. In the past, the conventional wisdom has been to save 10% of your income. But while that’s a good starting point, you’ll achieve financial freedom more quickly if you can save more money as your income grows. There’s no “right” number. For some people, 10% will be enough. Others will want to save 20%, 25%, or more.
12. Save for Retirement
For most Canadians, long-term savings means retirement savings. While government benefits like CPP and OAS are one source of retirement income, they won’t be enough to live on. If you’re unsure of how much you should be saving for retirement, speak to an investment advisor or financial planner. They can help you or align your savings with your long-term financial goals.
13. Find (Legal) Ways to Lower Your Tax Bill
Canadians pay some of the highest income taxes in the world. And while we receive many benefits in return (healthcare, affordable education, solid infrastructure, etc.), taxes can be a real burden. Thankfully, there are things you can do to pay less income tax.
I recommend maximizing your contributions to tax-sheltered investment accounts (RRSPs and TFSAs). At tax time, make sure you’re taking advantage of the various tax credits and tax deductions that are available. Any tax professional can assist you with this, or you can use an online tax software program, like TurboTax or Wealthsimple Tax. These programs are affordable and easy to use. They can identify potential tax savings opportunities you may otherwise miss.
14. Pay Off Your Mortgage Early
Everyone seems to have a different opinion about how quickly you should pay off your mortgage. Some people are resigned to the fact that they will always have housing expenses, so there’s no point in allocating extra money to their mortgage principal. That mindset is understandable; after all, Canadians have enjoyed ultra-low mortgage rates for almost two decades.
But times change, and today, mortgage interest rates are higher than they’ve been in a long time. The argument for making accelerated mortgage payments is stronger than ever. Everyone’s situation is unique, but know that not having a mortgage payment will help you in attaining financial freedom.
15. Give Generously
This one may seem a bit odd. After all, how can you improve your financial health by giving your money away? Doesn’t that lead to having less money? Aside from it being the right thing to do, giving generously improves your money mindset. By learning how to let go of money, you gain control over your money instead of your money controlling you. It’s all about having the right perspective. It reminds you that there are more important things in life than money.
16. Create a Will
Financial freedom means ensuring your loved ones, including your spouse and any children, will be looked after when you pass away. But if you haven’t created a legal will, you don’t have control over what happens to your estate when you die. To avoid that from happening, create a legal will online in less than an hour with the help of companies like Wilfull and Epilogue Wills. If you don’t mind spending more money, or your estate is complex, you can have your will done through a lawyer.
17. Be Properly Insured
Financial security is a key component of financial freedom. Unfortunately, most Canadians lack financial security simply because they are underinsured. One sign that you don’t have enough insurance coverage is that your only policy is the one you have through your employer. You can complete an insurance assessment online through companies like PolicyMe, or reach out to a licensed insurance advisor.
There you have it, 17 financial freedom tips that you can begin to follow today. You don’t need to pay money to a financial advisor to achieve financial freedom. With a little bit of research, some discipline, and a whole lot of patience, you can not only become debt free, but you can start on the path to financial freedom.
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Regarding the concepts mentioned in the article you provided, let's discuss each one in detail:
Financial freedom refers to a state of being where an individual has enough financial resources to make significant life decisions without worrying about the financial implications. It means having enough money to cover major expenses without going into debt and having more control over how one spends their time. Financial freedom can be achieved through careful financial planning, budgeting, saving, and investing.
Steps to Achieve Financial Freedom:
The article outlines 17 steps that can help individuals achieve financial freedom. Let's briefly discuss each step:
Take Stock of Your Current Situation: Before embarking on the journey towards financial freedom, it is important to assess your current financial situation and identify any obstacles that may be holding you back.
Track Your Spending: Understanding where your money is going is crucial for effective financial planning. Tracking your expenses can help you identify areas where you can cut back and allocate your money more wisely.
Find Ways to Cut Expenses: If overspending is a problem, look for ways to reduce your expenses. This could involve cutting back on non-essential purchases or finding more cost-effective alternatives.
Create a Budget: A budget is a plan for your money and can help you prioritize your spending and savings. There are various budgeting apps available that can simplify the process.
Pay off Debt: High-interest consumer debt can hinder financial freedom. Paying off debts, starting with the smallest or highest-interest ones, can improve your financial situation.
Avoid Spending Money on Depreciating Assets: Spending less on items that lose value over time, such as new cars, can help preserve your financial independence. Buying used or leveraging the sharing economy can be cost-effective alternatives.
Build an Emergency Fund: Having an emergency fund can provide a safety net during unexpected expenses and prevent reliance on credit cards or loans.
Avoid Lifestyle Inflation: As income increases, it's important to avoid increasing expenses proportionally. Instead, consider investing the extra money to accelerate financial freedom.
Invest in Your Career: Maximizing your earning potential through career advancement, taking advantage of employee benefits, and seeking opportunities for growth can contribute to financial freedom.
Start a Side Hustle: Supplementing your income through a side hustle can help increase savings and accelerate progress towards financial freedom.
Increase Your Savings Rate: Saving a higher percentage of your income can expedite the achievement of financial freedom. The ideal savings rate varies for each individual.
Save for Retirement: Long-term savings, particularly for retirement, are essential for financial security. Consulting with an investment advisor or financial planner can help determine the appropriate savings amount.
Find (Legal) Ways to Lower Your Tax Bill: Maximizing contributions to tax-sheltered investment accounts and taking advantage of available tax credits and deductions can help reduce income tax burdens.
Pay Off Your Mortgage Early: Accelerating mortgage payments can lead to financial freedom by eliminating a significant monthly expense.
Give Generously: Giving money away can improve your money mindset and help you gain control over your finances.
Create a Will: Creating a legal will ensures that your loved ones are taken care of and your estate is distributed according to your wishes.
Be Properly Insured: Having adequate insurance coverage is crucial for financial security and protection against unexpected events.
By following these steps and making smart financial decisions, individuals can work towards achieving financial freedom.
I hope this information helps you understand the concepts discussed in the article. If you have any further questions or need more information, feel free to ask!