The 7 Steps to Financial Freedom

How To Use These Steps

The following steps are the steps I’ve used, and continue to use for investing. Each time I have money available, I determine which step I’m at and put the money in the respected account. I’ve used this strategy to prepare for emergencies, pay off $150,000 of debt, and grow my net worth to a substantial figure by 28 years old. Although your situation may be different, I believe this is the best order for most people to invest their money.

Step 1: Building a Proper Emergency Fund

It’s always important to start with a solid foundation. Nothing is going to hurt you more than an emergency without any funds available to pay for it. You’ll either hurt your credit score, get stuck with a high rate short-term loan and/or be late on your bills. Let’s avoid all this. Let’s execute emergency funds correctly by putting at least 3 months worth of expenses in a high yield savings account.

Step 2: Get Your Employer Match (401k)

The next best investment you can make is with your employer sponsored retirement account if they provide an employer match. If that’s the case, always contribute the maximum amount that your employer will match. It’s free money. Automate your contributions with weekly paycheck deductions and send them straight into a target date fund.

Step 3: Pay Off All Debt (Except the House)

This is the step where you become debt-free (excluding a mortgage). This is the step where you no longer have to worry about debts and interest rates. This is the step where you can alleviate your financial stress, obtain financial security, and set yourself up for all new opportunities in life. I can tell you from experience that becoming debt-free was one of my biggest financial accomplishments. An accomplishment that has made me happier and healthier. So I challenge you to step up and eliminate all of your debt with this step.

Step 4: Max Out Your Roth IRA

If you want to set yourself up for a comfortable retirement, maxing out your Roth IRA will get you there. I’ve found it best to automate the process and keep it simple. Setup automatic $500 monthly transfers to go from your checking account to your Roth IRA. Then invest that full amount into a target date fund. Repeat this process each month until retirement and you’ll be set!

Step 5: Max Out Your HSA

HSA’s are the best way to pay for medical expenses now and in the future. They’re also just as beneficial when used as a traditional retirement vehicle. If your plan is eligible, I recommend you open a HSA with your employer. Setup direct deposits of $295 per month. Once you’ve saved enough to cover your deductible twice, invest everything else in a Real Estate ETF. Next thing you know, medical worries will be a thing of the past and a financially stable retirement will be your future.

Step 6: Max Out Your 401k

Maxing out your 401k may be the most difficult step due to the $19,500 contribution limit per year. But, with tax benefits it won’t feel as bad as it looks. And when you retire with a boatload of money, you’re never going to regret the little sacrifices you made early on in life, for the abundance of security and joy later. So start investing as early as you can. Try to max out your 401k through steady, automated contributions of $1,625 per month into a target date fund.

Step 7: Setup Your Rich Life

In step seven, I’ve outlined three ways to further invest your money after maxing out your tax advantaged accounts and paying off all debt. Depending on your risk tolerance, you can further your savings for upcoming purchases (low risk/reward), payoff your mortgage (medium risk/reward), open a brokerage account (high risk/reward), or start a business (highest risk/reward). The money saved in this step is also what allows you to retire early if desired. This money can get you to the age of retirement, where you can then utilize all the funds you’ve saved from the previous steps. So, by following the steps, the more money you’ve accumulated in step 7, the earlier you can achieve financial freedom.

Other Things to Consider

Investing In Yourself

Investing in yourself can have a greater return than almost any of these steps. If you believe getting a college degree, certification, or license can help you significantly increase your earning potential then it’s worth exploring. If paying to take extra classes or courses helps you gain or advance skills, then it’s worth exploring that too. I’d look to invest in yourself after step 3. Knowledge is power and it’s always worth investing in yourself if you believe it’ll increase your value or output. I’ve done this myself by getting a master’s degree which helped me increase my earning potential by 20% a year and pay back that initial investment in just 3.5 years.

Saving for Upcoming Purchases

These steps are intended to be like an investment ladder for money you don’t need within the next 5 years. Therefore, if you do need money within the next 5 years for a wedding, down payment, or vehicle, you will be better served by increasing your savings account and decreasing the amount of investments in the 7 steps above. Personally, I wouldn’t plan to spend very much money for a wedding, down payment, or vehicle until I’ve at least completed step 3 though. Debt interest eats away at your financial standing and it’s usually better to pay this off first, before deciding to save for large purchases.

Your Savings Rate

A lot of times you hear people saying you should save 10% of your income. But, from the trends I’m seeing, this appears to be significantly below what I’d be comfortable investing. Dave Ramsey, a popular financial expert, recommends investing 15%. I’ve heard YouTube star Graham Stephen recommend 25%. And a lot of the financial blogger’s I follow reach 40-60%. I recommend aiming for 20% minimum, and then increasing that amount as your income rises. This year, my savings rate was around 40%.

Final Thoughts

What to do with your money can be confusing and it shouldn’t be. That’s why I’ve outlined the 7 steps I’m using to achieve financial freedom. Build a proper emergency fund. Get your employer match. Pay off all debt (except the house). Max out your IRA, HSA and 401k. And then invest your after tax income on whatever is best for your situation. It’s straightforward and easy to follow. It’s what’s going to take you from a personal finance newb, to a secure rich life.

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