Hey, if you’re like me, you've probably dreamed about what life would be like if you didn’t have to stress about money all the time.
Financial freedom is more than just a trendy word. It’s namely, one of the goals that are not materialistic that you can have in life in order to use the money to exchange it for time, so that you don’t depend on doing tasks to generate money. It allows you to break away from depending on the paycheck to paycheck stress. The sooner you start working toward this goal, the more achievable your dream of early retirement becomes. Of course, one of the main things to focus on is to use your money towards this goal instead of using it for buying material stuff. There are many personal finance books that recommend ways to achieve that.
I’m currently reading the most popular ones and summarizing the ideas every couple of months at BYO banking. Many of them focus on financial freedom, passive income, and in general, how to be your own bank to depend less on traditional banks and on employers. Here I did a summary of the 3 most influential financial books with 12 tips. I’m currently reading the books that the Youtuber Ali Abdaal recommended for financial freedom (such as millionaire Fastlane or Million dollar Weekend), which are giving some new insights, on even going further than the traditional ways of generating passive income and I will write an article about these books soon.
Here I’ve got a straightforward 7-step process to guide you toward financial freedom based on these books and my experience. Let’s dive in.
What Exactly Is Financial Freedom?
First, let’s get one thing straight: financial freedom doesn’t mean being incredibly rich, at least not necessarily. It’s about being in control of your finances to comfortably pay your living expenses and afford your life goals. It’s about spending more time on what truly matters to you, instead of being tied down to earning money just to get by. Many of the financial books focus on how to generate money but they also emphasize that money helps having a comfortable life and getting this freedom, which allows you to have time in the things that makes you happier, which are usually having meaningful relationships (with family and friends), and having time to be healthy (such as cooking, or doing sport) and in general free time to do what you want.
For many, reaching financial freedom is the key to early retirement. So, how do you get there? Here’s a step-by-step guide that can help you along the way. Moreover, I will generate an article next week on ideas for passive income that may help you achieve this financial freedom.
7 steps to achieve financial freedom before 50 at a glance
1. Clearly Define Your Financial Goals
Start this process by defining what financial success looks like for you. Take some time to visualize your goals and write them down with specific details. The more precise you are, the easier it’ll be to create a plan to achieve them.
Try to make the goals specific and achievable and with a deadline in mind so that you can check how are you doing and you can see how you’re getting from one point to the next one.
For example, instead of saying, "I want to save money," say, "I want to save $50,000 in five years to put a down payment on a house."
2. Track and Analyze Your Spending
Once your goals are clear, the next step is understanding your current financial situation. Track and analyze your spending habits so you can identify where your money is going and where you might cut back.
You can track your spending with apps, spreadsheets, or even a simple notebook. The goal is to be as thorough as possible. Every dollar counts, and knowing exactly how you spend your money will make it easier to follow through with the next step. In fact, I'm creating an App, which code I will probably publish for free in this website so that you can analyze your spending and create a Budget!
3. Create a Budget
Now that you know how much you’re spending and where, it’s time to create a budget. The aim here is to reduce unnecessary expenses and ensure you’re saving money each month.
A popular method is the 50/30/20 rule: allocate 50% of your after-tax income to needs (such as housing expenses and food), 30% to wants, and 20% to investments and debt repayment. This rule provides a balanced approach to managing your money while still allowing some room for enjoyment.
In particular, I like to allocate the fix expenses and the investments already at the beginning of the week, so that I know that I have money to do this and then if I like and still have enough money for the “wants” I can go for it. But at least I don’t compromise with the most important part, which is, being sure you can pay your costs and you can invest.
What if you’re able to saving more than this 20% because you don’t need so many “wants”? You can see here how I would allocate 10k € if I had that in my bank for example.
4. Pay Off Your Debt
Debt can be a significant barrier to financial independence, so paying it off should be a priority. The faster you can clear your debt, the sooner you can focus on building wealth.
You might consider the debt snowball method (paying off the smallest balances first) or the debt avalanche method (paying off the highest interest rates first). Both strategies can keep you motivated and help you make consistent progress toward financial freedom. Here you have a full guide with 12 tips more on how avoiding debt can lead to financial freedom.
5. Start Investing
Saving is essential to have an emergency fund (of about 1 to two times your monthly salary, in case some emergencies come up) or at least keep some of your money in flexible interest accounts so that you can retrieve that within a couple of days at most as recommended in this guide. But to build real wealth, you’ll need to start investing. Investments can grow your money over time, helping you reach your financial goals faster. Investment is one of the real passive-income strategies. It’s the one where you require the least effort while making money. Of course, it can be less lucrative than other passive income ideas such as making a course or writing an eBook, but in the long-term, if the investments are diversified, you’re supposed to have high returns. Here I would recommend the Youtube video on passive income ideas from Ali Abdaal, where it’s quite clear that investments is the one passive income idea giving more value, requiring less time to start and to maintain.
Focus on long-term investments, diversify your portfolio, and invest in assets that match your risk tolerance. Remember, the markets will have ups and downs, so patience and a long-term view are crucial.
6. Create Multiple Streams of Income
One of the best ways to achieve financial freedom is by creating multiple income streams. This reduces your dependency on a single source of income and can significantly boost your savings.
Consider taking up a side hustle, starting a small business, or even finding ways to turn a hobby into a profit. The more ways you have to earn money, the less likely you are to be financially stressed. Of course, the idea is to do this side-hustles in a way that they are also fun for you, so that it doesn’t feel as extra work. That’s why combining it with a hobby, or your expertise is key. Some of these side-hustles can become passive income in the near future. So, they imply investing time at the beginning and every time less and less of that time, while becoming another source of income. Affiliation, the generation of a Youtube channel, a blog post or a podcast are examples of such possible streams of income. As for the previous point, we recommend to take a look at the video of Ali Abdaal where he explains some different examples of sources of income here.
7. Save for the Future
With your budget in place, debt under control, and multiple income streams working for you, the final step is to save for the future. This could mean building an emergency fund, contributing to retirement accounts, or investing further to grow your wealth to prepare for retirement early. According to your experience and seeing how much % you can achieve per year on interest and passive income and how much you spend per year, you can have a plan on how much you need for your retirement. Usually, a rule of thumb is that you can generate the famous 4%. This means, that if you get to achieve 500k€, you would have to be able to survive with the 20k€ that you get yearly on passive income by having these 500k€ invested. Of course, in many countries in Europe, living with 20k€ may mean to live a little bit frugally, but it’s possible. At the end it depends on you and your lifestyle. If you usually spend 40k€ per year, then you will need at least 1 million € to be able to live comfortably with the money invested. That’s why, having multiple forms of passive income that generates more than 4% on a fixed invested amount is key to achieve such financial freedom. You can read more about this 4% idea in this article.
As you go along, you might find opportunities to save even more or increase your income streams. The key is to stay consistent and keep your long-term goals in mind.
Conclusion
To sum it up, achieving financial freedom is about taking control of your finances, reducing stress, and creating a life where you’re not constantly worried about money. While the journey can be challenging, following these seven steps can put you on the path toward early retirement and a more comfortable, fulfilling life.
If you found this guide helpful, feel free to share it with others who might be on the same journey. Here’s the guide to breaking free from financial stress with 7 steps to achieve financial freedom before turning 50 to help you retire early.
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