4 Steps to Financial Freedom

freedomBeing financially free for me means being in total control of your money matters. For me it means you know how to earn and spend money, and make it work for you and not the other way around. Talking about financial freedom may seem complicated, if not frustrating. Many of us are confused about where to begin. Fortunately, I can summarize it to you in four, easy steps.

Build your emergency fund

First of all, you need to make sure that you are adequately protected when unfortunate events come. If you got struck with illness, disability, or worse, death in the family, you can tap into this pool of money to provide for your needs while you are yet to get back on your feet.

Save up for retirement

While making sure you have enough in your rainy day funds, it’s also important to safeguard your future. While retirement may seem like a faraway dream, it’s important to get started early rather than catch up later. If you haven’t heard of the power of compounding yet, it proves really effective when you reap the fruits of your early efforts.

Pay off your debts

You will have a hard time focusing on savings and investments if you have yet to pay off all your dues. Additionally, you wouldn’t want to face your retirement years still paying for remaining debts. Focus on this now and enjoy later.

Invest

If you have some extra money left after savings and debt repayment, you’d want to build your wealth more by making wise investments. Choose carefully and pick a nice mix of low risk and high risk investments for balanced results.

Debt and Savings

Which is more important, paying off your debts or saving money? It’s still the never-ending debate between financial experts from all over the world, and unfortunately there is no easy answer to this.

Many gurus insist that paying off debt should come as priority, simply because the interests that debt accrues are higher than what will be earned by putting your money in a savings account. Indeed, when you reflect on this, interests from debt really negate what you will earn with savings.

On another perspective, one of the reasons why people get into debt is because they didn’t have enough savings to cover for them during times of financial crisis, thus they were forced to borrow money. This is why other experts claim that saving money shouldn’t be halted while in the midst of debt repayment.

Personally, I agree with the latter claim. For me, it could take years to ever finish repaying off all your debt, and during that time, it’s such a big waste on the money that should grow towards your retirement. While in the midst of debt repayment, you can lessen the amount you put into your savings, but I don’t advise stopping entirely. While this approach doesn’t make sense mathematically, it should benefit you in the future.

How to Keep Your Debt Under Control?

debtAs I’ve said before, debt is unavoidable in life. Mortgage loan, car loan, credit card debts, you’ll always have some form of debt in your financial life. While a healthy amount of it won’t necessary ruin you, things can get ugly if you don’t learn how to keep it under control. These are my top tips for managing your existing debt.

Pay on time- stop wasting money on late payment penalties and revolving interests. You’ll be paying anyway, so why be late? If unexpected things happen and you really can’t make it on time, call your lender so that they can find a way to help you out, some may be kind enough to extend your due date.

Pay above the minimum- as much as possible, I really recommend paying your dues in full, but I completely understand how things can get rough sometimes. If paying in full is impossible, at least pay above the minimum amount. If you make it a habit to pay only the minimum each month, you’ll never get rid of your debts.

Don’t add any more credit- if things are starting to get messy, don’t add any more fuel to the fire. Stop using credit for a while if you’re struggling with your payments. Also remember NEVER to take on a new debt to pay off the existing one.

Use cash- it could be easy to forget and go overboard if you always bring your plastic cards along. Whenever paying for your basic needs, spend only the cash that you’re meant to use.

Watch out for your credit rating- there are many perks to having good credit rating aside from the ability to borrow money. Once you see a decline in your credit score, your creditors might increase your interest rates as well, which is not good because it can take longer for you to get rid of the debt with the higher interests.

Find a secondary source of income- if paying your debts start to become a burden and you feel deprived of the things you want, getting a second job can help you pay off your debts faster and buy other stuff that you desire.