8 Steps To Your Financial Freedom
Effective financial management is key to ensuring you live your best life. Building your personal wealth is not about being able to buy more things or increasing your social status. Money can deliver both. However, the foremost reason for managing your money well is the choices it allows you, providing true financial freedom.
You may never have been taught how to manage money properly. That is, unfortunately, all too common. Effective money management allows you to understand your monthly income and expenses so you can budget appropriately. Crucially, it enables you to plan for the short and long-term. Without it, many overspend beyond their means or spend money that they could save.
Building your skills in financial management should be a top priority for you. Doing so could allow you to save thousands each year, achieve great life goals, pay off your mortgage early, provide more for your children and many more. Just like an exercise regime or learning to cook healthy and nutritious food, sound financial management is one of your life’s foundations. However, it requires a set of skills and good habits to ensure you achieve your financial goals and live the life you want. Here are some simple steps you can take to start managing money the right way:
1. Create your financial goals
Set your long-term goals. Understanding how much money you will need by when is vital. For example, do you want to buy a house, pay off your mortgage early, retire at a certain age or go on a global travel expedition? Whatever your long-term goals, define them. And be specific.
Once completed, prioritise them. This allows you to focus on what matters most or what you want to achieve first. By setting your goals, you can calculate how much money you can afford to set aside for each per month or year. Naturally, focusing on your dream holiday does not stop you from planning for your retirement.
It is also important to set short-term goals. These could include paying off your credit card, reducing your expenses by 10% or finding a cheaper mortgage deal.
Put your goals into a plan, and you have a much greater probability of achieving financial wellbeing.
2. Define your budget
Consider yourself the Financial Director of your own company. Your job is to understand the amount of money you earn fully. Then review the amount you have in the bank, savings and investments and all the expenses you must pay every month. To create a budget, list your expenses in the format best suited to you. Include all your essential expenses such as mortgage or rent, energy bills, car payments, fuel or public transport costs, mobile phone, insurances, subscriptions like Netflix, Sky, and Spotify and the average you spend on food each month.
An Excel spreadsheet is perfect for organising and tracking outgoings. Its formulas also make automating your calculations easy, so you don’t have to do them yourself. As a result, it becomes much easier to track your expenses against your monthly income, revealing how much disposable income you have available. Once you know that, you can still go out for meals, to the cinema or buy clothes, but you know exactly how much you can spend without going overdrawn and getting into debt.
3. Pay off your debts
Debt is one of the most common causes of stress (see our blog How Debt Can Affect Your Mental Health). It is essential for your financial and mental wellbeing to prioritise debt reduction as much as possible. First, review your outstanding balances, whether loans, credit cards or overdrafts. Determine the total amount and calculate the repayments you can make after you have paid your essential expenses. Create a specific budget within your spreadsheet for these repayments and set a deadline for becoming debt-free.
4. Create an emergency fund
If 2020 taught us anything, it is that life is unpredictable. That’s why you need to be prepared when the unexpected hits your finances. We all face unforeseen circumstances from time to time; creating an emergency fund provides the financial buffer you need. For example, if you lose your job, as many have during the pandemic, you can still cover your essential bills whilst you look for your next role. Also, bear in mind unexpected problems with your home or car. Try and build a fund that would cover your monthly expenses for at least three months.
5. Keep on top of your credit rating
Your credit rating indicates how an external party such as a lender would assess you. Finance companies carry out a credit check whenever you apply for credit. Each lender will try to predict your future behaviour based on how you have acted in the past. Increasingly, they will look at your current income against expenses. They will also review any issues you have had in making monthly repayments with other lenders. Factors such as how much debt you hold, the credit products and the number of credit applications you have recently made are all assessed. A credit report allows you to track your finances and see what the lenders see, preventing any unknown surprises. The likes of Clearscore have an information page with a five-minute checklist for taking charge of your credit report. They also supply a free credit check and report.
6. Invest for your future
You spend money every month on essentials, interests and luxuries. Hopefully, if you follow steps 4 and 7, you will save some of your money. As a result, you will be able to work towards your aspirations and create a financial safety net should unforeseen circumstances arise.
However, suppose you really want to become financially independent and able to achieve your biggest goals. Then you will need to make your money grow. That means investing. There are lots of ways you can invest your money, from buying shares to government bonds, cryptocurrency to time-honoured assets like gold. The key is to understand your attitude to risk and how you find suitable sources of information or advisers to help you make the best decisions for you.
There are low-risk ways to invest, with many leading investment firms offering low-risk funds. Treasury gilts are particularly safe. However, let us assume you have a higher appetite for risk. In that case, higher risk funds will also bring higher returns if forecasts for those investments prove accurate. But remember, losses are also more possible.
You can read about investing in monthly magazines like Investors’ Chronicle and Money Week. Websites like This is Money and moneysavingexpert are very useful. The financial pages of numerous UK newspapers such as The Times or The Observer carry lots of helpful advice, and there are an array of forums on investment opportunities.
Whatever strategy you decide on, investment is essential in helping you achieve everything we have talked about in this article.
7. Save every month
Once you have calculated outgoings against your monthly income, you can start deciding how much of the remaining balance you spend and how much you save. Aim to put in a minimum amount into savings or an ISA every month, so you continue to build foundations for your financial wellbeing. You may use your savings for your emergency fund in step 4. Alternatively, you may save for the long-term, allowing you to achieve the financial goals you defined in step 1.
The beauty of this process is that you are in control. You define your goals, your budget and ultimately, where your money goes every month.
8. Find experts to help you
Investing your money wisely, planning for your retirement and ensuring your children are well provided for, are subjects that require specialist knowledge to get the best results. That’s why it can make a huge impact by getting the right help.
If you have a friend or family member who is highly knowledgeable about money, use their expertise.
Otherwise, find an independent financial advisor with who you can build rapport. IFAs are regulated and properly trained to understand the full range of products and providers in the financial markets.
Use helpful websites like moneysavingexpert.com or moneyhelper. Both provide valuable tools for calculating budgets, understanding the effects of interest, how much you could save on energy bills and many more.
Always remember, getting your finances in order may seem strenuous right now. However, in the future, when you are debt-free, on a beach, sipping mojitos, life will feel sweet. You can make that happen. Start today by taking these 8 steps and create your own path to financial freedom.
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