You should know what financial freedom is before you start practicing the best money habits.
It's important to define what Financial Freedom means to you. The picture I have of my own financial freedom is not going to be the same as yours. Whatever your picture of Financial Freedom looks like, that dream is reached through the practice of Financial Fitness Habits.
It is impossible to meet the goal of financial freedom if we don't practice the best money habits.
Signs of an unhealthy state of financial fitness can be:
- We don't know what we spend our money on
- We have too much debt
- We spend money on the wrong things
While there is no magical solution for financial freedom, there are steps everyone can take to get their finances under control. Once we have our finances under control, we can implement steps for financial freedom.
1. First Step to Financial Fitness: Create a Household Budget
The first of the most effective money habits to reach financial freedom is to track your income and expenses. We may automatically remember our “big” bills, such as rent, mortgage, and utilities. However, other household budget expenses are not as easy to memorize. Some regular expenses fluctuate with cost, and smaller expenses are less noticeable. I discuss how to make a budget here.
You can use any of these apps to keep track of your budget:
Budget Formula: 50/20/30 rule
The recommended formula is 50/30/20. 50% of our income goes to pay for the things we need to live, 30% of our income goes towards those things we want for our lifestyle. 20% of our income goes into savings.
Use the Financial Freedom workbook to help you assess where you are now and decide upon both short-term and long-term financial goals. The Financial Freedom Workbook is the first step to establishing the best money habits.
2. Second Step for Financial Fitness: Saving Money
Ideally, you want to use 20% of your take-home pay to invest in savings goals. These savings can be used to set up an emergency fund. An emergency fund amount covers a period of six to nine months of your fixed expenses. Fixed expenses are your living expenses, such as your mortgage or car payment and medical insurance. More about an Emergency Fund Here.
Another important type of savings is a retirement plan. Once you have your emergency fund set up, you can set up a retirement savings account. Once you establish a savings account and a retirement account, you can research other types of investment accounts. Automatically saving 20% a week is one of the best money habits you can have towards reaching your financial goals.
Use the Financial Freedom Investing Money Worksheet to help you assess your savings.
3. Third Step for Financial Fitness: Investing Money
The remaining 30% of your total income is for wants. This is the amount assigned to a budget for travel, eating out, or home improvements. The budget for your wants is “disposable income.”
Mindfully plan in your budget the amount of money you will spend on the things you want. Set short-term goals for your expenses and savings. Set long-term goals for big-ticket items. Establish specific goals for money to be spent within specific time frames. Specific goals and measurable goals are essential components of the best money habits you practice.
An example of goals is:
- Vacation to see family: $3000 In June
- Buy a new mattress next month: $1000
- Save $1,000 a month for the next 5 years=$60,000
4. Fourth Step For Financial Fitness: Getting Out of Debt
Debt is an obstacle to Financial Freedom. The first step toward debt relief is to create an inventory of debts and amounts owed for each debt. What funds from your current budget are going to be used to pay off debt items? You may need to use a portion of your disposable income budget to make larger payments to get the debt paid off.
Start by paying off the smallest debt first. It is much easier to pay off a credit card than a student loan payment. Consolidate debt where possible. Are there any monthly expenses you can reduce?
Whatever amount you have saved by reducing your monthly expenses can be paid toward your debt accounts. Debt is a bad money habit that most of us have, and the best money habits, like setting aside 20%, can be used to break the debt habit.
Use the “Getting Out of Debt” worksheet in your Financial Freedom guide to build your debt reduction plan.
5. Fifth Step for Financial Fitness: Protect Your Assets.
If you want to have financial freedom, you need to understand both your liabilities and assets. Any debt or money owed is a liability. We've already covered different types of liabilities when we addressed household expenses and debt.
The next step is to understand your assets in terms of your wealth. Anything that you own, is part of your wealth.
The Assets page of the Financial Freedom workbook shows that an asset can be the money you have in your checking account. An asset can be the computer you own, jewelry, or a vehicle.
Once you have an inventory of assets, decide what you need to have to protect those assets. Homeowner's insurance is one example of asset protection. Home insurance can cover destruction to your dwelling or the cash value of possessions that are stolen.
When you know what your assets are, take the steps to keep those assets protected. Make sure to give yourself time to reach the asset protection stage as you grow in your practice of your best money habits.
Financial freedom doesn't happen overnight. We have to replace our current financial habits with financial fitness habits. We do this in incremental steps to make an impactful change for the long term.
Practicing these five habits all at the same time is a balancing act. Start with one habit, then build the next one. Remain patient with yourself, and congratulate yourself every time you practice one of the best money habits.