6 Steps to Financial Freedom

We all want a clear ready made plan to follow in order to achieve the goal of financial freedom. However, we rarely find one that we can use for our own finances because we all have different circumstances. Plus it doesn’t help most financial plans you find on the internet are only relevant to the US.

So I am going to share the steps I am taking in order to achieve financial freedom.

1. Budget and set goals

When you start thinking about your finances the first thing you are going to want to do is figure out what is currently coming in and going out. Once you have been able to list all of your income and expenses you can start to create a budget. I would recommend laying this out in a cash flow format.

As part of your budget you should also list all of your assets and liabilities. Remember an asset puts money in your pocket, a liability takes money out of your pocket. It is the sum of your assets minus the sum of your liabilities that determines your net worth.

Once you have a clear picture of your present finances you can start making goals for you to work towards. I like to set goals on a 1, 5 and 10 year time frame. It’s important to set goals as this will be the source of your motivation. My 1 year goal is to have enough money for a house deposit; 5 year goal for a rental property and £100 dividend income a month; 10 year goal to be in a position to work because I want to not because I have to.

Read: Build Assets, not Liabilities!

2. Build a small emergency fund

You need to have an emergency fund, you never know when something unexpected will happen. The boiler could break, you lose your job or car break down. When you are first starting out I would recommend building a small emergency fund initially, I aimed for £1,000.

To do this you will need to look at the cash flow part of your budget and work out how to get as much left over cash as possible. Any positive cash flow should put into an instant access savings account which you can draw on. If you have credit card or other debt I would only pay the minimum amount so you can put more towards building your emergency fund.

Read: Emergency Funds

3. Pay off any and all debt

If you have any high interest debt, you need to get rid of it a quick as you can.

Once you have managed to build your small emergency fund, you then need to direct all the money you were putting into building your emergency fund to paying off debt. There are two methods you could choose for paying off debt quickly: Avalanche or Snowball methods. With the avalanche method you pay off your debts in order of interest rate on those debts, highest to to lowest. The snowball method requires you to pay off your debt in order of size, lowest to highest.

There are pros and cons to each method, personally I like the snowball method more. The important thing to remember though, regardless of which method you choose, while you are focusing on one debt only pay the minimum of the other debts.

Step 3 includes all debts including car loans, but excludes your mortgage if you have one.

4. Build a fully funded emergency fund (3-6 months)

When you have paid off all your debts, congratulations!

You now need to have a fully funded emergency fund. For most £1,000 is good for a start but isn’t enough to give real peace of mind. Depending on your circumstances and mindset you should aim for between 3 and 6 months worth of expenses. For me that means a fund of around £2,500 – £3,000.

It is entirely up to you how much you should have in your emergency fund, I know some people who aim for a years worth of expenses. Just remember, you need to be able to access the funds quickly.

5. Save for a mortgage deposit

If you are interested in owning your own home then you need will need a deposit for the mortgage. I would recommend using a Lifetime ISA (LISA) to do this. The LISA allows you to deposit up to £4,000 per tax year, the government will then add a 25% bonus on all of your deposits. So in a single year you could save £5,000.

If you are able to save more than £4,000 I would still recommend using a LISA, but put the remaining amount of money into a savings account separate to your emergency fund.

Read: ISAs: Which ones should you have

6. Retirement, Mortgage over payments, Invest in assets

Sept 6 is more like 3 steps in one. In this step you need to really start thinking about your retirement savings, but at the same time over pay your mortgage to clear it faster.

If you have a workplace pension scheme, do not opt out! I would contribute either the minimum or the employer match, which ever is highest. Any other funds that you want to go towards retirement I would invest in a Stocks and Shares ISA. That being said if you have a pension scheme that allows you to tailor your investments, by all means invest fully into that fund.

With your mortgage, I would over pay as must as you feel comfortable with without being incurring any early repayment charges. If you do this you could reduce your mortgage term by years and save thousands in interest.

If you are contributing to a pension, paying off your mortgage and still have money left over, invest in more assets. Any left over money should be invested into assets that will appreciate in value and give you an income. By doing this you could effectively replace your job as your primary source of income.

Read: Pensions: start early, be consistent


None of the content in this article should be considered financial advice, I am not a financial advisor and you should always do your own research prior to investing. These are my opinions only.

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