Financial freedom means different things to different people. To some, it is the power to do what you really want in life without depending on anyone else. To others it could mean not living paycheck to paycheck, or being tied down by debt. It can also mean simply saving for a specific goal in the future, such as a comfortable retirement, money for a child’s college tuition, or a down payment for a first home.
No matter what your definition of financial freedom is, however, you need a plan to meet your specific goals. Here are four steps to help you achieve financial freedom.
Step 1. Determine your long-term financial goals and objectives
Before you can set up a proper financial plan, you need to know where you’re going. You wouldn’t head out on a cross-country trip without having a plan. Most people don’t even go to the grocery store without a shopping list. But when it comes to financial planning, lots of people seem willing to just wing it.
To increase your chances of success, it’s important to clearly define what you want to achieve. For example, you might want to set up a fund for a newborn child, with the goal of having $35,000 by the time she’s 18. This is a clearly defined financial goal with a targeted amount of money and an end date. It’s much easier to meet a specific goal than it is to reach some objective at an unspecified time in the future.
Step 2. Define your investment strategy
Once you’ve clearly defined a financial goal, the next step is to build an investment strategy to meet it, keeping in mind that investing is a process with both risks and rewards.
Let’s take a hypothetical example. Say you’re interested in saving $35,000 for a child’s college tuition and are able to save $100 per month. Even if you start on day one, putting away $100 per month for 18 years in a monthly compounding 1% APY savings account will only give you roughly $23,535. That’s $11,465 short of the mark. And that’s before inflation, which reduces the purchasing power of money over time.
Step 3 – Build Your Portfolio to Match Your Goals
Investing in the market can potentially help you earn higher returns on your money. But It’s very important that your portfolio help you meet your goals. You must balance between choosing to take enough investment risk to earn an appropriate return, and not taking so much risk that you suffer big losses when the market experiences a downturn.
That’s why you should have a diversified portfolio that’s not overly concentrated in any single stock or industry. You should also avoid trying to time the market. Doing so often leaves investors sitting on the sidelines too long, waiting for the perfect moment, or selling at exactly the wrong time, and locking in a big loss.
By investing small amounts of money over time, investors can take advantage of dollar cost averaging to smooth out the price they pay for investments.
Step 4 – Set up a Monthly Saving Plan and Don’t let Emotions Overtake Long-term Goals
Finally, it is important to put your strategy on auto-pilot and forget about it. Over analyzing markets can lead to ill-timed investment decisions. Even after major market corrections, or downturns, investments tend to recover.
There have been 3 major market corrections in the last 30 years — in 1987, 2000 and 2008. In each of these cases, the stock market recovered within 10 years. If investors had sold right after these corrections, they would have missed the eventual market recovery and stock price appreciation that followed.
The rewards of financial freedom comes from sticking to long-term investment goals.
Stash can help you implement a long-term strategy. You can start investing in just 2 minutes, with as little as $5.
Turning on Auto-Stash can also help you invest automatically according to your schedule, whether that’s once a week, or once a month. An automatic investment strategy is one possible way to accumulate wealth over time.