Personal Finance and Investing Blog

Step 1 – Create a Budget

The first thing you need to do in order to become financially free is to sit down and create a budget. Without a budget you will not be able to figure out areas that you can cut back on and how big of a gap you truly have between your income and your expenses.
List the sources of income that you receive monthly… they are most likely a paycheck, but could be interest, dividends, passive income.
Now list all of your expenses, don’t forget to include annual things like vehicle registration.

Once you have them all listed out, calculate the difference between your income and your expenses… hopefully you should have a positive number left, this is the amount you should have to work with to get yourself out of debt – you can also see if there are any things listed here that you can cut back on to increase the “gap” that you can use, the larger the gap, the faster you can get your debt paid off.

Step 2 – Save up $1000.00

Now that you have an amount figured out that you can work with, the next thing is to save as much of that gap as possible until you have a small emergency fund of $1000.00. This amount will allow you to cover most emergencies that may pop up while you are in the process of paying off your debts. We do not want to have to add more debt when something happens (I did mean to say when because we all know something always happens).

Step 3 – Payoff Your Debts (Debt Snowball Style)

Now we have a budget and a small $1000.00 emergency fund. The next thing in the process towards financial freedom is to start paying off your debts. Order your debts by the amount owed, from smallest to largest. Also write down the minimum payments for each debt and the date they are due.

Now what you are going to do is pay the minimum on all of your debts, except for the smallest one, scrap together as much of extra monthly money that you can spare and start paying off that smallest debt. Once that debt is paid off, roll that money into paying off the next debt on the list. For example if you had 2 debts one that was $1000 and one that was $2000, if you were paying $100 on the first debt and the minimum payment of $10 on the larger debt, after you finish paying off the first debt, you would start making payments of $110 to the debt that is left. Keep this up until all of your debts on your list are paid off! (Note these debts listed should not include your mortgage, if you have one)

Step 4 – Increase your Income; Reduce your Expenses

Throughout this process you always need to be looking for ways to increase your income and reduce your expenses. If you are a smoker, quit smoking, a pack a day smoker can free up $150 a month, other things that you can cut include that Starbucks and lunch you buy every day. Every additional dollar you free up is a dollar you can put towards your debt!

Step 5 – Build up your Emergency Fund

The final step now that you have paid off all of your debt is to increase your emergency fund. An emergency fund is a vital tool in remaining debt free. That way if an engine goes out in a vehicle or a refrigerator stops working, you don’t have to take on debt to take care of the problem. The normal recommendation for an emergency fund is 3 – 6 months expenses. So take all of those expenses you wrote down earlier (minus the debts you no longer have) and save up somewhere between 3 – 6 months, based on what feels most comfortable to you. This fund is to be used in emergencies only, that means in case you get laid off or you have a major repair that needs to be made to your vehicle, NOT a vacation!

Those are the 5 simple steps to get you on the path towards financial freedom! Now you are debt free and as long as you continue to follow the principles that you have learned while on this journey, then you have a great start towards a financially free life!

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