Steps To Financial Freedom

1. Reduce Your Spending

This first step is the hardest part. However, the more you reduce unnecessary and discretionary spending the more you will have to invest and grow. There is no one-size-fits-all plan here. If you are the sort of person that needs a Starbucks latte - or two - every single day, then that just means you will have less to save and invest and therefore will have to wait longer to become wealthy. A penny saved is a dollar earned. More

2. Lower Your Debt

Debt - and interest payments - are a thief of your future wealth. If you reduce spending and save money you will be able to pay down your debts. Whether it is credit card debt or a car loan or college debt or debt in any other form, every interest payment you make is building someone else's wealth: you are helping them retire early. Do not begin to invest until you have a really good handle on your debt. Mortgage debt will take years to retire but everything else should be paid down and off as quickly as you can. More

3. Prepare For Emergencies

Sh*t happens. In 2022, a Federal Reserve survey found that 32% of Americans wouldn't be able to cover $400 in an emergency without resorting to borrowing or selling something. You must have a buffer so that you aren't pushed into a serious financial crisis when faced with an emergency. Make every effort to be in the 68%. More

4. Start Investing

Now that you have begun to save money, paid down your debts, and begun to set aside money for an emergency, hopefully you have money left over. Invest only at this stage. If you are borrowing money to invest, stop. Invest only your own money that you can afford to lose. And start today. There is no 'perfect' time to begin: yesterday was better than today and today is better than tomorrow. Beware of people telling you that you can time the market and buy when it's at a low and sell when it's at a high. Your emotions will stop you from doing either. More

5. Avoid Individual Stocks

Unless you are extremely lucky or happen to be one of those two nonagenarians from Nebraska, it is extremely unlikely that you will be able to consistently pick winners and losers among the thousands of stocks out there. There is an entire industry that publishes webpages and websites, writes books, holds webinars and seminars all dedicated to convince you that you can learn to pick winners and losers and, for a fee of course, they will let you into the secret. And whether you make any money or not down the road, this industry is making money today - off of you paying for the book or the seminar or the newsletter. Be very, very skeptical. More

6. Buy Index Funds

As exciting as the prospect of a great individual stock pick might be, resist the temptation. Put as close to 100% of your investable funds into a passively-managed low-cost index fund. Over the long term, index funds have been proven to match or beat all but the very hottest of individual stocks. And unless you've had great luck with picking winning lottery tickets, you will most likely not pick the Apple or Tesla of tomorrow. So don't hunt for needles, just buy the haystack. More

7. Invest Automatically

The best way to avoid dealing with the ups and downs of the market and the broader economy is to put your buying on auto pilot. This means that at some regular schedule, say monthly, you set up your brokerage account to take whatever amount you can afford to invest and buy the index fund. This liberates you from the decision overhead of having to doing something consciously, deliberately and explicitly on a regular basis. More

8. Be Patient

Investing is easy - it just takes seconds to buy stocks or mutual funds online. What's hard is to stay invested - that takes years. Even decades. Everyone has heard the story of a grain of rice for the first square on the chess board, two grains for the second, four for the third and so on. This is really a story about mathematics and the extreme difficulty we as humans have in understanding compounding and exponential growth. But you can turn this to your advantage. More

9. Plan For Retirement

If you're young, say, under 30, retirement can seem ridiculously far away. Still, it's a good idea to plan for it. Do your best to max out your 401(k) retirement plan that most employers offer. Most decent employers will also match some fraction of your contribution. This match is really like giving you a phantom raise. The beauty of a 401(k) is that you get to put away money before taxes (another thief of wealth) claw at it and further, grow in your retirement account completely tax-free until you start withdrawing decades later - when you will likely be in a lower tax bracket. IRAs are another tax-advantaged vehicle to put away money for retirement. More

10. Save For College

If you have - or plan to have - kids, it's a good idea to save for college. You can, of course, put money away in a savings bank account but a 529 plan is way better. A 529 plan is similar to a 401(k) except that contributions to a 529 are post-tax. However, your money grows tax-free and can be withdrawn without penalty as long as it is being used for educational purposes. Starting a 529 when your kid is born and letting it compound tax-free for 18 years, when she's ready to start college is a great bargain. More

11. Give Back

Hopefully you now are on the path to financial freedom. Consider giving back to causes you find meaningful. You could write your favorite non-profit a check but there is a better way to do it. Start a Donor Advised Fund - or a DAF. A DAF is a charitable vehicle into which you can donate a lumpsum of money today and claim the deduction on your tax return in the very same tax year but take your own time to figure out who to and how much. All the while your DAF is also compounding and growing tax-free in an index fund. More people should know about DAFs and start them. More