What does financial freedom mean to you? Most people have a vague notion of wanting to get there, but it’s tricky to define. It means different things to different people.
Generally, it’s about having choices in life. Choices of how to spend your time and your money. Invariably, it requires the accumulation of wealth and for that to happen, you need to place value in yourself first.
What stories have you heard about making big money, fast? Investing in property, trading stocks or cryptocurrency? What about owning a hugely profitable business or climbing the corporate ladder? These things work for a tiny minority, but for most of us, a simpler – and safer – strategy is needed.
You need to make a conscious decision to happily ignore get-rich-quick schemes and hopes of winning the lottery. Nearly anyone with a reasonably stable income can work towards financial freedom, and achieve it. It just requires a bit of self-discipline and a lot of patience.
The following 3 steps will help create wealth, but also develop your own self-worth. If you choose to take action today, you’ll be on your way.
Step 1: Pay Yourself First
This is a mindset, which at first, might seem a little counter intuitive. But it’s a fundamental imperative to creating financial security and building wealth. Think of it as the ‘golden rule of personal finance’.
The concept is simple enough. You routinely save money before anyone else has the chance to get their hands on it. That means allocating some of your income before paying bills, mortgages, groceries, holidays and ideally, even tax.
Now, you might think “surely paying the bills is more important than saving up for the future”. Well, it is important to pay your bills, but you need to consider your future self too.
The ‘Pay As You Earn’ tax system works really well and it makes sure that central governments get the funds they need to pay for public services. HMRC is ‘paid first’ before your net pay even arrives in your bank account. The same concept can work really well for you too.
To begin with, it doesn’t matter so much what amount you choose to save. In fact, even deciding where you put the money is of secondary importance. It’s creating a new mindset and habit that is key. Once your decision is made, use ‘Pay Yourself First’ money to build up cash savings, investments or maybe reduce debt more quickly.
How do you save currently? Do you pay everyone else first? Such as the taxman, the mortgage lender, the credit cards, the supermarkets, the utility companies? Then you see what’s left over at the end of the month? Often, there will be little, or nothing left. Our brains are just not hard-wired for restraint. You’re fighting a losing battle against your subconscious spending.
Make the decision that your future self is the most important recipient of your earnings. You need to value your self-worth above anything else and re-direct some of your income for your financial freedom.
Step 2: Automate Your Savings
This next step is really important. We all know how hard it is to embed new, good habits. It’s not easy to sustain long term behaviours such as eating better, drinking less, exercising more etc.
So even if you decide to Pay Yourself First, there’s a risk that you’ll do it for a month or two, then fall by the wayside. Again, I’m afraid it’s just our subconscious behaviours coming through.
The great thing is, you can automate this particular good behaviour and remove the trouble of thinking about it.
Set up a standing order with your bank. Log in to your online banking and do it now. It doesn’t matter how small the payment is to begin with – just set it up. Then you will have created a new, automated, good habit.
Alternatively, Pay Yourself First directly into a workplace pension scheme through your employer. If you’re already doing this, ask your employer to increase your contributions. Doing this means even the taxman won’t get a share of your money before you do.
Step 3: Level Up
If you’ve taken those first two steps, congratulations. Whatever amount you begin with, you’ve just increased your chances of achieving financial freedom.
You might worry about how affordable it will be. That’s fine. Ideally, the amount you decide to save should feel slightly uncomfortable to begin with. But your spending will soon adjust and you’ll get used to it. Within a few months, you’ll barely even notice.
The next step is to ‘level up’ your automatic payments. If you get a pay rise, nudge your savings upwards a bit. If you manage to repay some debt, increase your savings by the amount you were repaying towards that debt. Regular increases in the amount you save can have a massive impact over the long term.
Over time, you can think more about where the money goes. So once your savings habit is up and running, you can think more about finding a better home for your money. Savings accounts, stocks and shares ISAs, pension plans all have their pros and cons. But the main thing first of all, is to develop the behaviour of saving on an automatic basis.
If you’ve never heard of this ‘Pay Yourself First’ concept before, you can read more in my article about it here. Or just Google it! It’s not new and it’s definitely not my idea – it’s just that most people don’t do it.
If you’d really like to get stuck into the detail, read “The Automatic Millionnaire” by American finance author David Bach.
There’s no magic way to wealth and even if there were, many would struggle to hold on to their new-found riches. You don’t need to research too deeply to find stories of lottery winners that end up penniless after a few years.
Follow these three, simple steps and over time, watch your debts decrease, and your wealth grow. It’s your financial behaviours that have the biggest impact on your future financial security, so put yourself first and start today.
If it all sounds a bit too “easier said than done” you might benefit from financial coaching. Having a trusted accountability partner can work wonders at getting things done. Why not book a free initial chat to find out more, or subscribe to my weekly newsletter for more thoughts about money and lifestyle.