Financial freedom is a goal targeted by many people, but few actually know how to achieve it. This concept goes beyond the simple accumulation of wealth: it represents the ability to live the life you want without being blocked by money-related constraints. But how do you get there?
Here are the 8 steps to financial freedom:
- Assess your financial situation
- Set your goals
- Create your budget
- Save and invest
- Diversify your sources of income
- Reduce your debts
- Follow and adapt your plan
- Work on your ongoing financial education
Step 1 : Assess your current financial situation
Before you can think about how to achieve financial freedom, you need to understand your personal situation.
This awareness is the first step towards developing a solid, achievable plan.
Drawing up a financial statement
Behind this scary word lies a simple analysis: a balance sheet is essentially an overview of your assets and liabilities.
Assets: these include all property of value, such as a house, shares, savings, etc.
Liabilities: these are all the debts you have, whether it’s a mortgage, student loan or credit card debt.
The difference between your assets and liabilities is your net worth.
It’s the key indicator of yourfinancial health, providing a snapshot of your financial capacity at any given moment.
Understanding your debts and assets
Now that you know your net worth, it’s time to analyze the nature of your liabilities and assets.
The aim is to identify how to act on them.
Keep in mind that not all debts are created equal:
- Some may have a much higher interest rate
- Some can be repaid more quickly
But it’s also possible to merge several of them, through a credit repurchase, and get a better rate in the process.
By the way, if possible, you should always try to negotiate the rate of a debt, as we’ll come back to later.
Similarly, not all assets are created equal:
- There are more liquid ones
- Some are more profitable than others.
For example: money in a savings account is much more liquid than money invested in real estate, but its rate of return is much lower.
At the end of this assessment, you should realize how close or far you are from financial freedom, and be able to estimate how much work it will take to get there.
Step 2 : Set your financial goals
You now have a clear picture of your current financial situation, good. Let’s take a look at how to determine your financial goals, which will serve as a roadmap for your journey to financial freedom.
SMART objectives
When it comes to defining objectives (whether financial or otherwise), the SMART method is widely used.
A SMART goal is one that is Specific, Measurable, Attainable, Realistic and Time-bound.
For example, instead of saying “I want to save more money”, without having a clear context and objective, a SMART objective would be “I want to save $10,000 in 12 months”.
The importance of short- and long-term objectives
Defining both short- and long-term goals is a real way of working towards your goal (long term) while maintaining your motivation (short term).
A short-term goal may be to build up emergency savings, pay off a high-interest debt or accumulate a certain sum as a downpayment for a mortgage.
These are regular victories you can go out and get, and they’ll motivate you to push towards your ultimate goal.
A long-term goal, on the other hand, would be linked to your retirement, permanent investment in assets generating passive income, or the creation of a genuine financial legacy for your children.
They’re harder to foresee because you can’t write a plan now to achieve them, they’re more of an ultimate vision of what you want to achieve.
Step 3 : Create a budget
Now that your financial goals have been validated, let’s get down to creating a budget: the essential tool for managing your personal finances proactively rather than reactively.
Why a budget?
With a budget, you’ll know exactly where your money is going each month.
Having this overview really gives you control over your personal finances and allows you to identify expenses you can restrict, and ideally eliminate.
A simple example: if, after evaluating your situation in step 1, you realize that spending $300 a month on restaurants is far too much, you can, thanks to step 3 and the creation of a budget, set a real limit on this item of expenditure, with a new budget of $100 a month maximum.
The budget is the real framework for your financial life.
Without a budget, it’s easy to spend more than you earn, which will completely compromise your goals and, ultimately, delay your financial freedom.
How do you create an effective budget?
Creating your budget is similar to creating your balance sheet (which we saw in step 1).
List all your sources of income and all your expenses:
- Rents,
- Salaries
- Ready to go,
- Outputs
- Leisure
- …
Next, identify the areas where you can cut costs as much as possible, so that you can allocate this money to savings and investments (which we’ll look at in step 4).
Several techniques exist to help you save, the most famous (and certainly one of the most effective) being the 50 30 20 rule. This rule requires you to divide your expenses as follows:
- 50% for your needs
- 30% for your leisure activities
- 20% for savings
If you can follow it, that’s a great place to start! If not, you can find other tips, such as the money-saving charts specially designed to help those who find it hard to save naturally.
Without it, you’ll be heading in the wrong direction and your habits won’t change.
Creating a budget is great, managing it is even better!
Step 4 : Save and invest
We’re getting to the heart of the matter and the very essence of your financial independence! Saving and investing are the two pillars that will enable you to build your financial freedom.
Saving and investing: in that order!
Saving and investing are two completely different things.
Saving means not spending a certain amount of money and putting it aside for future needs or emergencies. It’s a prudent approach that aims to preserve your capital in case of need. Money remains liquid and available.
Investing, on the other hand, means using that money to buy assets that will hopefully increase in value or generate passive income over time. As a result, the risk is higher, but so is the potential return.
Unlike the economy, money is much less liquid…
That’s why it’s so important to be able to save before investing! The last thing you want is to find yourself in the situation where you have to get back the money you invested to meet needs that your savings should have met. That’s the worst thing you can do.
Efficient investing: stocks, bonds, real estate…
Equities are the ABCs of investing. Admittedly, they are riskier, but if you remain reasonable and simply buy ETFs, or funds that have proved their resilience over the last 30 years, you shouldn’t have any unpleasant surprises over the long term, and you should enjoy attractive returns.
Bonds are much less risky, but you won’t get as good a return.
Moreover, government bonds, like those recommended in most life insurance policies, should be avoided. Being the creditor of a structurally bankrupt Western state is not the best route to financial freedom…
Finally, real estate is a sure thing! Buying a property to rent out guarantees regular cash flow. However, be careful to select a property in an attractive area with market potential.
The only obstacle with rental property is banking leverage: you have to take out a loan with a bank if you want to buy.
Step 5 : Diversify your sources of income
Importance of diversification
A salary, investments… That’s a good start! Because the real goal is to achieve maximum diversification.
Diversifying your sources of income will protect you against threats to your life and wealth.
Fired from the job that paid your salary? No problem! Your real estate income will compensate.
Sudden drop in your stock market investments? Don’t worry, you still have income from your web activity.
Do you get it? The aim is to depend as little as possible on a single source of income. If it disappears, you remain financially comfortable because you have other sources of income.
Examples of passive income sources
You probably already know most of them. Here are a few examples:
- Rental income,
- Stock dividends,
- Book or music royalties,
- Cashback,
- Revenue generated by a blog or website,
Of course, these sources of income need to be built up, which will take time and perhaps money… But once set up, if you manage to monetize the time invested in these passive incomes, they’ll bring you a steady stream of money, almost automatically, and with little effort required: the true path to financial freedom.
Passive income can also come from side business: work you do in addition to your main job. The side business can exist through a business you’ve created specifically for it: for example, if you launch an online store to sell products over the Internet.
Step 6 : Reduce your debt
If you have no debt, you can skip this part. If you do have debt, then linger on this point, it’s extremely important.
Debt is one of the biggest obstacles tofinancial freedom. Especially those you’ve contracted at a high interest rate.
Ways to reduce debt
There are several ways to pay off debts, and we’d like to introduce two of the simplest and most effective.
The first is the “snowball” method: this involves paying off the smallest debt (in terms of amount) first, while making the minimum regulatory payments on the others. Once you’ve paid off the smallest debt, you move on to the next, and so on.
For the second, we stick to mountain jargon with the “avalanche” method. With this technique, you pay off the debt with the highest interest rate first. The aim is to eliminate the debt that weighs most heavily on your finances as quickly as possible.
Eliminating debt: in what order?
Our advice is to focus first on high-interest debts, which means using the avalanche method.
The reasons for this are simple: if you eliminate the biggest debt first, you’ll free up money faster, which will be available for investment elsewhere.
Second reason: by keeping interest rates high, you increase your chances of having to take on another debt to pay off this one, as the rates are so high and complicated to assume.
But we’re well aware that it’s not always easy! And some of you may prefer to choose a more moderate repayment schedule. In that case, apply the snowball method, focusing on the smallest debt first.
Step 7 : Follow up and adjust your plan
Adjust your plan? But why?
Well, even with a well-thought-out plan for financial freedom, you’re bound to experience surprises and setbacks… Stay ready to adapt! We’ll show you how.
The importance of regular follow-up
Keeping track of your situation is like your compass on the road to financial freedom: good tracking will tell you whether you’re heading in the right direction, or whether you need to make adjustments.
Follow-up can be as simple as checking your accounts once a month, or as complex as carrying out a complete financial audit every quarter.
It’s up to you! The aim is to set up a follow-up that will enable you to identify if there are any problems that may be hindering your progress, and conversely to identify which good practice is helping you to improve your standard of living.
How do you adjust your plan?
If you find that you’re not/no longer on track to achieve your goals, it’s time to adjust your plan!
To know how to correct the plan, you need to understand the cause, the factor that led to the failure.
Have your expenses increased unexpectedly? Are your investments not performing as well as expected?
No problem, just review your budget (step 3) if you’re running out of savings, and re-evaluate your investments (step 4) if they’re not delivering the results you’re looking for.
Step 8 : Don't forget financial education
Last but not least, develop your capacity for continuous learning.
Keep abreast of financial news
On the road to financial freedom, education is key: the world of finance is constantly changing, crises are accelerating, new products are appearing regularly and new laws are being introduced to regulate them!
Staying informed is vital to maintaining and improving your financial health. You’ll avoid making decisions that go against the grain, and you’ll be able to adapt your investment portfolio and habits with ease.
Financial education resources
Books, blogs, podcasts, online training courses… It’s never been easier to access quality information.
For blogs and podcasts, we leave it up to you to make your choice, as they are available in quantity and quality.
Our only advice is books! Here are the timeless ones you must read at least once:
- Rich dad poor dad – Robert Kiyosaki
- Think and Grow Rich – Napoleon Hill
- The $100M offer – Alex Hormozi
- Unshakable – Tony Robbins
Achieving financial freedom is a journey. A journey that requires planning and discipline. That’s what these eight steps are all about: from assessing your current situation, to diversifying your sources of income, to ongoing financial education. Don’t forget to enjoy the journey – it’s not a destination! Savor the process of financial freedom and celebrate your victories.
Discover our other investment articles: