Forbes - June 29, 2020
The Fourth of July is an occasion to celebrate America’s independence and the freedoms that we enjoy as citizens of this country. But in “the land of the free and the home of the brave,” many Americans are struggling from a lack of financial freedom, and suffering from the fear and anxiety of not having enough financial security.
What if this holiday could become a new occasion for people to declare their own independence and achieve a new birth of financial freedom? Even before the COVID-19 crisis, in a 2019 AARP study, 53% of adults responded that their households did not have an emergency savings account. Many other Americans are struggling with high-interest credit card debt.
Still others, who may appear to be doing fine from the outside, with steady employment and comfortable homes, get trapped in a cycle of consumerism. Those trapped in this cycle may feel that they can never get ahead or pause to rest because they need to work long hours to pay for the financial life they’ve chosen to build.
While the COVID-19 crisis may not end anytime soon, many Americans may be feeling extra motivated to take a new look at their personal finances. After the months of stay-at-home orders and other restrictions, what does financial freedom mean to you, and how can you accomplish it in your own life?
For this Independence Day 2020, here are five steps to financial freedom that you can take, starting today.
1. Be Prepared With an Emergency Fund
The effects of the coronavirus pandemic on the U.S. economy—and the massive surge in unemployment that it created—have reminded everyone of the importance of having some extra cash in the bank. A good rule of thumb is to have three to six months of your expenses readily available in an emergency savings fund, preferably in an FDIC- (or NCUA-) insured account at your bank or credit union.
Having a few months of cash in the bank can give you the freedom that comes from having financial peace of mind. Knowing that you have a few thousand dollars (or more) that you can draw upon in case of a lost job, unexpected car repair or expensive medical bill can help you move through your everyday life with a greater sense of calm and optimism.
Look for ways to automate your savings. Set a monthly goal for how much you’d like to save from each paycheck, and then set it and forget it with automatic transfers from your checking account to your savings account.
Saving money can create a positive momentum of its own. Once you build up your emergency fund to a certain amount, you may discover that you enjoy the process of saving money even more than you enjoy spending it. The more you save, the more you may want to save. Once you get used to living a more thrifty lifestyle, you won’t miss those extra purchases. Put the money into your bank or credit union accounts instead.
One of the most challenging aspects of the COVID-19 crisis has been the amount of uncertainty—about both the public health issues and the security of jobs and businesses. During the pandemic, nearly half of Americans have reported negative impacts to their mental health. Deciding to save is one thing over which you can exert some control. Gaining peace of mind about your finances could be great for your overall mental health.
2. Embrace the Freedom of Living With a Budget
Perhaps you are reluctant to set—and stick to—a budget, because you assume that having a budget means being deprived of fun and giving up your financial freedom. But the truth is: Creating a budget is all about freedom.
Having a budget gives you the reassuring sense of calm that comes from knowing where your money goes. This, in turn, can give you a sense of control. By understanding how much you’re spending on discretionary purchases and impulse buys, as well as life’s essentials, you can take control of your finances.
Your budget is a road map for your financial life, and a statement of your priorities and values. Living with a budget helps you achieve financial freedom by clearly stating what is important to you in life, and deciding how you want to allocate your money.
Having a budget helps you set clear goals and work toward your financial priorities with clarity and confidence. Want to buy a new car or take a vacation? Giving every dollar a job to do can help make it possible. Want to create a plan for a financially secure life in retirement? Your budget will help you prioritize saving and investing, month after month, throughout your working years.
Living without a budget is like flying blind. By establishing a budget, and living within the financial guidelines that you create for yourself, you can get better visibility into every dollar that you earn, spend and save. By applying a bit of discipline, you can be in better command of your financial life.
3. Declare Your Independence From Debt
Debt can be a valuable tool and is often a necessary part of your financial life, but make sure you understand the implications of having debt, and take care to borrow wisely. Know the difference between good debt and bad debt. Try to borrow only to pay for things that tend to increase in value or help you make money (homes, education, starting a business), instead of getting bogged down with high-interest credit card debt from everyday purchases.
Taking out a student loan can be good debt, when it enables you to complete your education and qualify for a better job. On the bad debt side, if you find yourself getting into trouble with credit cards, consider getting off the cycle of using your credit cards for every purchase.
Don’t get trapped by unnecessarily large mortgage payments or car payments. If you can’t comfortably afford your lifestyle, it’s time to make some big changes. Use this auto loan calculator to figure out how much car you can reasonably afford. If you are currently already in debt, make a plan to get out, starting with paying off your high-interest credit card debt first.
Even if you’re not independently wealthy, being debt-free is one of the best kinds of financial freedom that most Americans can aspire to having. Getting—and staying—out of debt will give you more flexibility to save money, invest for retirement and face whatever comes in your financial future.
4. Invest for a Brighter Future
Another great way to achieve financial freedom is to save and invest for a secure, comfortable retirement. Maximize your contributions to any tax-advantaged retirement savings accounts that you qualify for, such as a 401(k) plan or individual retirement account (IRA). If you’re an employee and your employer offers to match your plan contributions up to a certain percentage, make sure that you contribute enough to receive the full employer match.
If you’re already maxing out your tax-advantaged retirement savings accounts, consider setting up a brokerage account or robo-advisor account to invest in a diversified portfolio of stocks, bonds and mutual funds.
The COVID-19 crisis has generated massive volatility in the stock market, and no one knows how stock prices will behave in the short term. But over the long run, investing in a low-fee, diversified portfolio of stocks tends to be a great way to maximize your chances for long-term growth. Getting into the habit of saving a small amount of money today and investing it wisely can help you achieve financial freedom for many years into the future.
5. Let Freedom Ring for Others
If you’re already feeling financially free, your retirement savings are on track and you have a solid emergency fund, then consider using this July 4th holiday as an occasion to help provide freedom for others. Be generous. Give money away.
If you have children, grandchildren, nieces, nephews or cousins who are growing up and hoping to go to college, you can put money into their 529 college savings accounts. Depending on where you live, you may be able to claim a deduction on your state income taxes for doing so. Helping the young people in your family go to college can be one of the best ways to promote financial freedom for the next generation.
If you don’t have relatives of your own, consider donating to college scholarship funds or children’s charities focused on education. Investing in the next generation will help us all enjoy a higher level of financial freedom in years to come. If your own children can grow up to go to college and have a successful career, they’ll be better able to become financially independent. If your community invests in all of its children’s futures, the entire community will benefit.
Happy Independence Day
Financial freedom is not just about dollars and cents; it’s a state of mind. By getting out of debt, by prioritizing your spending on what really matters, by building an emergency cash savings fund and by investing for the future, you will build a stronger and more resilient foundation for your own life and for those you love. The sense of security and the safety net of having your personal finances in order can help you feel more confident, more peaceful, and, yes, more free.
This Fourth of July, many of us—from a social distance, of course—will be celebrating the idea of freedom and expressing gratitude for the liberties that we enjoy. But what if more Americans could use this occasion to really create financial freedom for themselves and their families? The COVID-19 crisis is a stark reminder that our financial lives can be disrupted by events beyond our control. But, even in these uncertain times, there are still many choices we can make to build resilience and keep reaching for financial freedom.
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