I want to get financial freedom. I want to live life on my terms. I want to live a life in which I can do nearly whatever I want, whenever I want because money is not an obstacle for me.
I know you also want to be financially free. But, to become financially free you need to correct your behavior. Because financial freedom means 80% behavior and 20% knowledge.
In today’s post, I am going to share 5 behavioral-based steps. If you take all these steps I am sure you will become financially free.
So let’s get started.
Suppose you are thinking to buy new things for yourself. Like, You want to go shopping. or you want to buy a new phone, or you want to go to visit someplace this weekend and suddenly you remembered, next week you have to pay rent or you have to pay EMI for your car or bike or don’t know how many bills you have to pay. And you have a limited amount of money.
Either you can enjoy your life or you can pay your bills.
These types of situations, we face many times in our life.
The solution to this is – “You must live like no one else right now so that you can live like no one else later”.
Means, If you want to live like 1% of people in the future then you have to take all those actions that the other 99% of people are not taking.
Financial Freedom is 80% behavior and 20% knowledge
#1 No More Denial
If you throw a frog in the hot water then the frog will jump and try to get out from the of
But if you throw the same frog in the normal water. Then that frog will keep swimming in that water. Afterward, if you increase the water temperature slowly, then also that frog won’t know anything and in the end, it will die with hot water but it won’t come out.
In the same way, someone’s physical health won’t destroy instantly.
Your health destroys slowly. Your body gets minor changes due to an unhealthy diet and not doing exercise. We don’t notice that instantly and end up destroying our health badly in the future.
A similar concept is also applied in your finance. You should treat your finance as your physical health.
Like you can’t lose your 10kg weight in one night. In the same way, you can’t be a millionaire in one night.
Your financial situation doesn’t get worse suddenly. It becomes worsen due to decisions that you have taken in the past.
So to achieve financial freedom, the first step is to check your financial situation.
- Check, what is your income level?
- What are your expenses?
- Where do you spend your money?
- How much money do you save every month?
For example, You notice that you are living a good lifestyle.
You have –
- A Good House
- A costly Phone
- A Car
- All that is required for enjoyment and entertainment
But every month you are reaching your credit card limit. Your loan EMI takes a major part of your income and still, you continue to buy things.
All these things are indications that you are in a financial bubble.
That can blast anytime.
After realizing this thing, stop ignoring your financial situation. And take action seriously and fast.
#2 Get an Emergency Fund
Law of Murphy says, “If anything that can go wrong will go wrong”.
If something bad could happen, and you are not prepared for that, then that must get bad.
Imagine that You have decided to be a responsible person and you will invest your money in the right place instead of wasting it.
But the next day, due to some emergency, you have to spend your money.
By spending this money your financial planning gets affected.
This means you have to create an Emergency Fund first.
In which, you have to save a total of 1000$.
That is around seventy-five thousand Indian rupees.
You have to save this much money and you have to keep that money in a place where you can easily access it.
Remember you need not invest money from your emergency fund and not keep it in a saving account. Because you will easily spend it from there.
You can take cash and hide it behind your photo frame or keep it in your locker.
So that in an emergency, you can use that money
When some emergency comes and you need money, then you don’t need to use your credit card and do not need to take a loan from someone.
Make sure that, you don’t use this emergency fund for your Pizza bill and celebrating your birthday and for some reason, if you used this emergency fund then you have to fill it quickly.
This is a very important step because the money kept in your house gives you confidence and this is true, you also know.
#3 Debt Snowball
To build your wealth, the powerful weapon is your income and the big enemy is your debt.
Use the concept of Debt Snowball to eliminate your debt.
Like, if you throw a small snowball from a snowy mountain. Then snow will stick to it when going down and that will convert into a giant ball.
Same way if you start paying your debt like a snowball then very soon it will clear your all debt by becoming a giant ball.
We are living in a time where we are taught that debt is a good thing.
But a millionaire knows that there is much difference between ‘seeing rich’ and ‘real-rich’.
Remember – You can achieve financial freedom only if you have no debt.
For this, you have to make a list of all debt.
And in this list keep the low amount of debt the first and the big amount last.
And to start Debt Snowball, you have to be free from the low-amount loans, and the money saved from there, you will use to clear the next loan.
By doing this you will clear your all loan but doing this will not be easy.
But you need to remember that “You must live like no one else right now so that you can live like no one else later”.
Suppose you have taken a loan of Rs.10000 from your friend and you are paying Rs.1000 to him every month.
You have taken a new smartphone of Rs.25000 for which you are paying Rs.2000 EMI every month.
Your credit card bill is Rs. 50000 and you pay Rs.3000 every month.
Similarly, write down all your debts in the smallest to the largest order.
Now suppose you save only Rs.5000 from your income.
So, at first, you clear your friend’s debt in months by using these Rs.5000 and slowly clear your smartphone debt, credit card bill, and all other EMI.
By doing this you are creating your Debt Snowball that will clear your all debt very fast.
#4 Create Runway Fund
After getting debt free completely, when you have no debt to others. You need to work towards creating a runway fund.
The extra income that was going into clearing your debt.
By using that you save your 3 months’ living expenses. So that if you will face a very big emergency. Let your Job has gone.
Then you can live for 3 months without thinking about money.
By which you will have time to build new income sources or get a new job.
For doing this you have to make a list. Here you note down your month’s expenses.
Like monthly rent, food cost, internet, clothes, app subscriptions, etc.
After adding these all let you know that you spend Rs.30000 every month.
So at the start, you have to multiply this amount by 3 (3-month expense).
The amount comes out to be Rs.90000 so you need to get a runway fund of Rs.90000.
By which you secured for 3 months and now slowly increase 1-1 month.
Your goal should be to create 1-year Runway Fund.
For complete financial stability, at least you should have Runway Fund for a year.
So that you can survive by maintaining your lifestyle for a year without generating income.
#5 Invest & Enjoy
Now it is time to invest your money and do enjoyment as you have cleared off all your debt and created 1-year runway fund.
See this is a single trick to achieve financial freedom.
You have to do short-term sacrifices to get long-term gain.
After clearing a debt and creating a runway fund now it’s time to maintain your financial fitness.
Like once you become physically fit by working hard and going to the gym and doing exercise very aggressively.
At the later stage, you don’t need to do heavy weight lifting.
You just need simple maintenance. Similarly, to maintain your financial health.
Invest at least 15% money of your income for your retirement. As soon as your home loan and other loans are cleared your saving will increase.
Invest this saving, and the return you got from the investment, will be your actual wealth.
You can invest in Index Funds, Mutual Funds, Stock Funds, and any other profitable business.
Your aim should be to generate at least a 10% return annually that can be achieved easily.
When your invested money starts giving more money than your income then you will become financially independent and stable in real.
Because no one becomes rich in one day. But the small steps taken by you take you to a wealthy life.
In the end, I want to summarize all this in a single line. Financial Freedom is 80% Behavior & 20% Knowledge.
I have learned these concepts from the best seller book called “The Total Money Makeover by Dave Ramsey”