Financial Freedom In 5 Simple Steps

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Having received thousands of responses to my iHB survey (you can take this survey after signing up for my newsletter), one question that pops up often is:

“What should I do with my money?”

These people have started to take back control of their money, gotten on a Budget, and want to put a financial plan in place for their hard-earned dollars.

This is the same question I asked myself 12 years ago when I got engaged to my (now) wife in 2008 (and just after blowing through $100,000!).

I started with Dave Ramsey’s “Baby Steps” using the book, “The Total Money Makeover“. My wife and I were able to tackle our debt, and put some money away in an emergency fund.

I then began diving DEEP into the world of personal finance, reading thousands of articles, many books, listening to podcasts, and researching on investing forums to continue building our money plan.

Today I want to share with you the plan that brought us from a negative net worth, to a (multiple) six-figure net worth over the past decade. Eventually I was able to quit my job and take a year off to travel the country!

I’ve also helped others through Financial Coaching using these principals to help others achieve debt freedom, purchase homes, pay off mortgages, and achieve BIG goals.

And I truly believe that the quicker you can put these principals in place, the sooner you will experience true Financial Freedom in your own life, and be confident that you have a Roadmap to Wealth that works!

5 Steps To Financial Freedom

Step 1: Emergency Fund (Month Ahead) – Save One Full Month of Expenses

Step 2: Pay Off Debt and Invest in your 401k (Yes, at the same time)

Step 3: Roth IRA – Invest in a Roth IRA (up to the MAX)

Step 4: The Freedom Fund – Save (up to) 12 Months of Expenses

Step 5: Design Your Life – Invest Wisely and Enjoy the Journey

Step 1: Save One Month Of Expenses

The first step to building your Financial Plan is to create a savings account, and put away one month of expenses.

For those who are paid bi-weekly, this typically means putting away TWO PAYCHECKS worth of savings, getting you one month ahead on your budget. For others, this just means having 1 month of expenses set aside in a savings account for the NEXT MONTH.

This savings will serve two purposes:

This is your Emergency Fund. An emergency fund is money set aside in a savings account for EMERGENCIES ONLY. When life’s financial storms rock your world, this fund is the SOLID FOUNDATION that keeps your house upright.

Don’t use this for things that you can plan for (Christmas, car repairs, home maintenance, etc.), but ONLY for things that are unplanned and require immediate attention.

If an emergency occurs, use the extra funds, and then rebuild this MONTH AHEAD account before going back to the next steps.

This will stop your money stress. I’ve written about this in a previous post, but living paycheck to paycheck is stressful. Trying to line up your next paycheck with when certain bills are due, juggling monthly expenses, and living with a feast or famine mindset makes it almost IMPOSSIBLE to actually plan ahead.

Having all the money in your account BEFORE the month begins eliminates that stress, and allows you to make more rational money decisions, and plan ahead with clear vision.

How To Save One Month Of Expenses

The best way to save this money is to STOP SPENDING IT ON EVERYTHING ELSE!

Just Kidding!…..but, seriously.

The only way to hit this goal QUICKLY is to make it more important than ANY other financial goal in your life.

Cut your budget down to a bare minimum (no eating out, no daily latte, no more Target), and put every dollar saved into your savings account.

Here are a few ways to help you quickly save one month of income:

Automation. Sign up for a CapitalOne 360 Savings account ($25 bonus if you use THIS LINK and deposit $250). Once signed up, go into your new savings account and setup an automatic transfer from your checking account. (Screenshot below)

Start with a small amount, but I challenge you to double this amount each month!

Cut Expenses That Don’t Matter! I recommend you create a Priority List of what is important to you in life. And then I recommend looking at what you spend money on, and CUT ANYTHING that isn’t part of your priorities. I call this Priority Based Spending.

This has a two-fold effect:

1. You stop wasting money on stuff you don’t care about
2. You boost your savings account

Related: If you need a few tips on how to save money, check out this EPIC POST (with scripts and step by step instructions)

Sell Your Stuff! When we left on our CRAZY Year-Long RV Adventure, we had to sell (almost) ALL of our stuff. We didn’t own too many expensive things, but we didn’t realize we could make so much money selling our belongings.

Things really took off when my wife started posting things on Facebook Marketplace. We sold everything from bags of clothes, to books, to toys, furniture and extra junk in our garage. We made over $7,000!

Do this:

• On your phone, go to the Facebook App and find Facebook Marketplace.
• Select “Sell“
• Add a photo of an item you want to sell. Fill in the description, price and location
• Post
• Deposit money you make into your Savings Account!

Start A Side Hustle. Still not saving as fast as you would like? Try one of these 20 Ways To Make Extra Money.

Want a shortcut?

Save Your EXTRA Paycheck. When you are paid every two weeks, twice a year you get a “3 paycheck month” (or for those paid weekly, a “5 paycheck month”, 4 times a year). Simply deposit this “extra” paycheck into your month ahead savings account. Do this for BOTH extra paychecks, and you are AUTOMATICALLY one month ahead.

Once you are living on a budget EVERY MONTH, and have put away one month of income, you officially have built the Cornerstone of your Financial Plan!

Related: Emergency Fund: Everything You Need To Know

Step 2: Pay Off Debt and Invest (Yes, at the same time)

Q: “Should I pay off my debt, or invest my money?”

A: Yes.

After you have saved a full month of expenses, you are now experiencing the first phase of Financial Freedom. You no longer stress about WHEN bills are due, or what to do if your car breaks down.

You are free from the day-to-day stress of money.

You have also built a habit of saving money every month, and now it’s time to put it to work.

Step 2 involves paying off your non-mortgage consumer debt, and investing in your 401k plan (if your company offers a match).

Read below to see why this is the BEST way to start building wealth and get to the next phase of Financial Freedom.

Pay Off All Non-Mortgage Debt

Every financial adviser and guru agrees that paying off your non-mortgage debt is one of the MOST IMPORTANT things you can do with your money.

This is because consumer debt is bad.

Bottom line: Paying interest on ANYTHING that goes down in value, is a double whammy to your wallet.

Here’s a quick list of common debts that you will want to pay off AS QUICK AS POSSIBLE:

• Income Tax
• Credit Cards
• Student Loans
• Car Payments
• Medical Debt
• Payday Loans
• Personal Loans
• Overdue Bills

I’ve written 2 Step By Step Guides on getting out of specific debt:

1. Destroy Your Car Payment – A Step By Step Guide
2. Pay Off Credit Card Debt For Good: A Complete Guide

For ALL debt payoff, I recommend using the Debt Snowball Method. You simply put your debts in order from SMALLEST to LARGEST, and focus ALL extra money toward the smallest debt first, and only pay the minimum payment on the other debts.

This allows you to knock out your first debt quickly, and build momentum toward your next smallest debt (just as a snowball gains size as it rolls, your payments grow as you knock out each debt).

And the same principles used above to save one month of income, apply here as well.

Cut expenses that don’t matter. Sell your stuff. Get a side hustle.

And DO NOT STOP until all debt is PAID OFF!

The BONUS is that when you are debt free, you have a HUGE snowball of extra money each month (that you were using to pay off debt) that can now go toward Step 3 (Roth IRA)!

Note: Getting out of debt does not happen overnight. It takes a true COMMITMENT to never borrowing money again, and could take up to 18-24 months of dedication to your budget. Often sooner, sometimes longer.

But on the other side of debt freedom is the opportunity to grow your wealth exponentially (through investing), and achieve BIG financial goals (buy a house, BIG vacation, upgrade your car, pay off your mortgage!). IT IS WORTH IT.

Invest In Your 401k (Up To The Match)

If your work has a 401k plan with a company match, you need to invest in it WHILE you are paying off your debt.

I’m going to repeat this, because it’s important.

If your work has a 401k plan with a company match, you need to invest in it WHILE you are paying off your debt.

Many experts recommend stopping ALL investing until you are debt free.

I disagree.

Keeping a sharp FOCUS on paying off debt is important, and I am all for using WINNING psychology to stay motivated (you’ll notice I recommend paying off debt by balance, not by interest rate, i.e. Snowball).

But losing out on a 50% or 100% return on your investing, as well as the tax savings is just plain BAD MATH.

Plus, I don’t think $50 per paycheck is going to STOP your debt payoff progress enough to justify losing hundreds (or thousands) in a company match, and tax savings.

I also wrote extensively about the 401k plan in THIS POST (item #2), but there are several more reasons to start NOW!

• Your job is not paying you enough. If you are not investing in your company 401k match program, that means you are leaving money on the table. This program is PART OF YOUR COMPENSATION, so not electing into it is like working for LESS than you are supposed to be paid.

• You will barely notice the money gone. Since this investment comes BEFORE taxes are taken out, you are investing MORE than what is missing from your take home paycheck. For example, if you invest $100, your paycheck only goes down about $80.

• You snooze, you lose. The money is not there indefinitely. If you don’t earn the match this year, you can’t go back and make up for it. Add that to missing out on the magic of compounding interest, it becomes harder to catch up the longer you wait.

Starting is as easy as contacting your company’s payroll department, and asking about the 401k plan. Tell them you want to contribute “up to the match”, and to start as soon as possible.

Ask them how much will be invested per paycheck, how much “match” will be invested, and what the difference will be to your take home pay. Put your HR department to work, and enjoy your FREE MONEY!

And just for fun, here’s the numbers:

• $50 per paycheck invested
• $50 company match per paycheck
• At an 10% (market average) return rate, invested for 30 years:

Total after 30 years: $434,264!

It’s a no brainer!

Note: If there is no match, just skip to Step 3.

Step 3: Open A Roth IRA And Invest Automatically

So far, you’ve built a SMART Budget that works, put away thousands of dollars in your CapitalOne 360 savings account (plus the $25 Bonus!) to get yourself a month ahead of your paychecks.

And you have simultaneously tackled your debt AND invested in your 401k up to the match to get FREE MONEY and start building wealth.

You are now in the next phase of Financial Freedom, congrats!

The next step in your journey is opening up a Roth IRA account, and setting up a recurring investment.

And I actually recommend opening this RIGHT NOW, just to establish the account (you’ll see why below).

The Roth IRA is special for a few reasons:

• The Roth IRA allows you to invest using “after-tax” (your “take home pay”) dollars. But then it grows TAX FREE, meaning whatever gains you get from the investment can be taken out with NO TAXES at retirement.

• The Roth IRA can double as an Emergency Fund if needed. Any money you put in yourself is called the “principle”, and you can withdraw that “principle” any time you need to.
  • Note: If you need a larger emergency fund, after funding your Roth IRA, I recommend beefing up your MONTH AHEAD account (see Step 4 below). Withdrawing from your Roth is a LAST RESORT only!

• Once the Roth IRA has been open for 5 years, you can withdraw up to $10,000 of both the principal AND investment returns, Penalty and Tax Free as a “first time homebuyer.” The IRS says if you haven’t owned a home within the past 2 years, you are a “first time homebuyer.”
  • After 5 years, you can also use this for unreimbursed medical expenses if you’re currently unemployed. Hopefully you don’t find yourself in a situation like this, but it can be a real ‘life saver’ if you are.

This flexibility is why I always recommend opening a Roth IRA before maxing out your 401k (after the match), or opening a Traditional IRA.

If you have over $3,000 to invest, I recommend going directly to Vanguard, opening your Roth IRA, and investing in one of their LOW-FEE (less than 0.20%) Index Funds or Target Date Funds. The is the LOWEST FEE way to invest, and Vanguard is where I invest a majority of my money currently.

For those who want to automate the process and have less than $3,000 to invest, I’ve recently discovered Betterment, which allows you to invest ANY amount to get started.

There is a fee (0.25% flat annual fee + fund fees [typically under 0.06% because they use Vanguard funds]), but it’s minimal compared to walking into a Financial Advisory firm and asking for them to open a Roth IRA for you (sometimes over 5% to start, and 1-3% annually).

Just read my post on Breaking Up With My Financial Planner if you aren’t convinced.

Plus, Betterment will build a balanced portfolio for you, so you don’t have to choose what to invest in. Betterment uses almost all Vanguard Index Funds, and instead of a $1,000 (or more) minimum investment, you can invest as little as $1!

Open A Betterment Roth IRA today!

Regardless of where you invest, the most important thing is to open the Roth IRA today, and then automate your investments when you’ve completed the first 2 steps of your Financial Plan.

I recommend an automatic transfer the day after payday, every payday.

Just like your 401k account, there is a MAGIC to automatic investing. Every payday, putting a little (or eventually, a LOT) away into your Roth IRA will start to show you the POWER of compounding interest.

Eventually, you will want to put away $500 per month, which will MAX out your Roth IRA for the year ($6,000 is the MAX for 2019). If you are paid twice a month, that’s a $250 per paycheck investment.

If you do this every month, every year, look what can happen with average market returns after 30 years of investing:

• Monthly Investment: $500
• Average Market Return: 10%

Total After 30 Years: $1,085,660

From $0 to $1 Million in 30 years!!

All automatic. All TAX FREE when you retire.

Open your Roth IRA and start building wealth TODAY!

Step 4: The Freedom Fund – Save (up to) 12 Months of Expenses

At this point, you are in great financial shape. Let’s recap what you’ve worked through so far:

1. You are now a month ahead. You saved 1 month of expenses, and your paychecks are now going into your savings account. This doubles as your emergency fund.
2. You paid off your non-mortgage debt AND are investing in your 401k. This is a REALLY BIG DEAL. You are no longer throwing money away on things that go down in value, AND you are collecting free money and tax savings with your 401k plan.
3. You opened a Roth IRA and are maxing it out. You are automating your savings into the most flexible investing account, and are starting to build tax-free wealth!

Now it’s time to complete your Freedom Fund!

Step 4 of Financial Freedom isn’t just another Emergency Fund (though you can use it for that if you want).⁠

Related: Complete Guide to building your Emergency Fund

The idea is to build up a stack of cash to not only protect against larger emergencies, but to push you toward YOUR definition of Financial Freedom.⁠

The exact number here is a PERSONAL DECISION, and you will need to do what is right for your family.

When asked “how much should I save“, I usually respond with “what amount will help you sleep better at night?“

Or phrased another way, “what amount makes you excited to get up in the morning?!“

When we owned a home, Michelle and I had a Money Market account that we built up as a large emergency fund.

⁠But in reality, when opportunities arose, we used those funds to invest in growth instead of waiting for failure.⁠

The Freedom Fund is exactly that; a pile of money saved to help you eliminate money stress for good, and start living YOUR version of Freedom sooner!⁠

For some of you, simply having 3-6 months of extra expenses saved will help you sleep better at night, and will increase your life enjoyment by 1,000%! It will eliminate your worry of larger emergencies like job loss, and allow Freedom from money stress completely!⁠

For others, the extra funds will allow you to pursue opportunities you have always dreamed about, or find a way to build a life NOT so dependent on a job you hate.

Whatever your Freedom is, save enough in here to feel like you’re living a life you want to live.

I recommend putting these funds away in a Money Market account you don’t have DIRECT access to (CapitalOne currently pays almost 2%), and build this AFTER your are investing in your 401k and Roth IRA.⁠ But this money needs to be liquid, NOT invested in the stock market.

Save for this just like you did when building your Month Ahead account. Automate your savings from each paycheck, and watch the balance grow!

Step 5: Design Your Life – Invest Wisely and Enjoy The Journey

Once you reach Step 5, you are in a VERY GOOD financial situation.

You have no consumer debt, plenty of savings, and are putting away a good percentage of your income in tax-advantaged investment accounts, well on your way to retirement.

And now you are ready to start thinking BIGGER.

Step 5 is a “Choose Your Own Adventure” path, where you get to define what you want life to look like.

I call it the “Design Your Life” stage, where you now get to go after those BIG dreams, and put your money toward your them.

This might include:

• Buying A Rental House
• A 2-month European Vacation
• Pursuing FI/RE (Financial Independence / Retiring Early)
• Funding Your Kids College Savings
• Paying Off Your Home
• Quitting Your Job To Pursue What You Love
• Investing MORE
• Giving MORE

Once you have Automated your investments so that you can retire comfortably, you are free to DESIGN YOUR LIFE to reflect what YOU find important.

At this point, you are truly Financially Free to create a life you enjoy.

Here are a few ways you can enjoy Financial Freedom in step 5, and Design A Life you want to live.

Pursuing Financial Independence

Forget retirement! Go after Financial Independence instead!

If you haven’t heard of Financial Independence, it’s essentially saving enough money so that you never have to work for money again. It’s when your investments and savings start earning more than your expenses.

The key difference between “retirement” and “FI” is that being financially independent does NOT mean you have to stop working.

In fact, many people who reach FI do so because they WANT to pursue something they enjoy more than their day job.

I’ll spare you the full details here, but essentially you need to save 25x your annual expenses to be considered Financially Independent. And it needs to be invested in low-cost index funds (I always recommend Vanguard).

So if you want to pursue this, I recommend investing a HIGH percentage of your income (over 40%). This includes maxing out your 401k, Roth IRA, and a Health Savings Account (HSA) as well, and cutting costs on down to a minimum to help you save the most possible.

For further reading on this, I highly recommend the book, The Simple Path To Wealth. JL Collins goes into detail on how to retire early, and it is a very good read.

Pay Off Your Mortgage

If having ABSOLUTELY NO DEBT sounds like the best thing in the world to you, paying off your home may be the best path to pursue.

This can GREATLY reduce your expenses, and give you more FREEDOM and flexibility to design the life you want. People I know who have done this are now able to travel more, or quit a soul-sucking job, or are even starting a business. Having no mortgage unlocks Financial Freedom on a whole new level!

To pay your house off quickly, you can treat it just like your previous debt. Take any and all extra money each month, and pay EXTRA on the principal of the mortgage.

There are some great resources out there on this, but I currently enjoy Dave Ramsey’s Mortgage Payoff Calculator

Simply input your current mortgage details, and then add in your “Extra Payment Amount” and it will show you how much quicker you can pay off the mortgage.

It also shows how much interest you will NOT pay by paying it off early. WOOHOO!

Bonus: Selecting “show full payment schedule” lets you see month-by-month how quickly your balance will go down.

If you want to be mortgage free, play around with the numbers on that calculator, commit to a monthly amount, and then challenge yourself to put ANY extra money on the house as well.

Quitting Your Job To Pursue What You Love

This is where we decided to take Step 5. Our full story can be found HERE, but essentially we sold everything and took a year off to travel, and now I am building I Heart Budgets as a business.

For years I have wanted to build this site as a resource to impact thousands of lives (honestly, MILLIONS is the goal!) and help people become financially free. But my insanely stressful day job and lifestyle were stealing my freedom to do so.

So we sold everything, including the house, and hit the road for a year of adventure and growth. We traveled to 25 states and the experience has changed our lives.

We were able to do this after 11 years of diligent budgeting, saving and investing, and now are able to use our money in pursuit of something better.

Once you are on Step 5 of Financial Freedom, you can start running the numbers on what it would look like to quit. Whether that’s changing to a lower-stress, lower paying job, or trying your hand at entrepreneurship, you have built yourself the flexibility to make that choice.

Here are some quick guidelines I recommend:

• If you don’t have a good amount invested already, I don’t recommend quitting with no income . Maybe ease yourself into a lower stress job, or pursue freelance or part-time work. Being able to continue investing in your 401k/Roth IRA accounts goes a LONG way
• Bump your Emergency Fund up to AT LEAST 12 months of expenses before quitting. We had a sizable amount of equity and savings, which has translated into 36 months of expenses for our current lifestyle. This allows me to build my passion business without worrying about feeding my family.
• Run the numbers. If changing jobs to lower pay, make sure you can still retire when you want. Run the numbers and make sure you can still put enough away. My friends Corey and Jessica are doing this, and enjoying part-time work while still pursuing Financial Independence. They call it #SlowFI, and I absolutely love it.

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Those are just a few ideas of what Step 5 can look like for you.

This is where the “Personal” comes back into Personal Finance, and I want you to be able to build a life you enjoy.

The core principles of Step 5 are:

1. Invest Wisely. Don’t buy depreciating assets. Invest in things that give you a return. Whether it’s maxing out retirement accounts, investing in Real Estate, Building a Business, or simply paying off your mortgage, make sure your dollars are growing. That doesn’t mean you can’t enjoy a new flatscreen TV or fancy car (if that’s your priority), just make sure it’s in the budget and don’t borrow money to buy it. (Bonus: Only buy fancy cars that will go UP in value, like classics or exotics)
2. Enjoy The Journey. No matter which path you choose, make sure you enjoy the journey. Financial Freedom is about building a life that makes you want to get out of bed in the morning. If you can’t enjoy the journey, consider if the destination is worth pursuing.
3. Stay On A Budget! Of course you know I’d bring it back to this! The budget is the key tool to building a life you enjoy. Make a plan and stick to it, the rest will play itself out!

What Is Financial Freedom Worth To YOU?

Here’s the deal.

Everyone is on a different path with their money. Everyone has different goals, mindsets, and reasons to get their money right.

But, there are core principles that, when followed, WILL result in wealth.

If you start taking ACTION on the 5 Steps To Financial Freedom TODAY, you will be on the path to wealth, and you WILL experience freedom from the day-to-day stress of money.

YOU have to start. No will do this for you.

Ask yourself this question:

“What is Financial Freedom worth to ME?”

If you really want freedom from money stress…

If you want to wake up and know you are BUILDING WEALTH instead of PAYING OFF someone else…

If you want to build a new generation in your family tree that has Financial Control…

YOU need to take ownership and start NOW!