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how to become financially free

How To Become Financially Free In 5 Years

As more people are wanting to improve their financial health (my wife and I included), there is a ton of information online to go through.

With so much information available, who is to say what is the best method on how to become financially free? 

Remember that each financial journey is going to depend on several factors such as your current income, debt, and, of course, mindset.

In my opinion,5 years is a good time frame for most people but it may take you more or less time depending on your current financial affairs.

These are my 5 steps to help you gain financial freedom in 5 years!

Step 1 – Create a Budget

Creating a monthly budget

The first and most important step to gain financial freedom is to create a budget. It is alarming that many people I talk to have no clue where all of their money goes. They live paycheck to paycheck, and in some cases, run out of money before their next payday.

This leads to using credit cards, or worse, getting a payday loan (with crazy high-interest rates). They end up digging themselves deeper into debt and more financial trouble.

To begin your budget, you can start by creating a spreadsheet (you can download a free Google or Excel sheet that we use below).

Google Sheets Budget Template

Excel Budget Template

If you don’t want to use a spreadsheet, you can do it the old fashioned way with paper and pen. On one column, put all of your monthly income and total it at the bottom.

On the next column, going into your bank account statement and add all of your monthly expenses. If your expenses are more than your income, then Houston we have a problem.

Once you know how much money is going in and going out, you can create a game plan for improvement. This is so important when trying to become financially free.

Here is an example of our monthly budget:

IncomeExpenses
Nick 1$2,000.00Rent$2,700.00
Nick 2$2,000.00Retirement$600.00
Helena 1$1,969.00Groceries$520.00
Helena 2$1,969.00Travel funds$500.00
Car Payment$450.00
Savings$400.00
Fed Taxes$940.00
Eating Out$440.00
Business$200.00
Spending Fund$200.00
Car Fund$200.00
Fuel$140.00
T-Mobile$136.00
Helena Spending$75.00
Nick Spending$75.00
SDGE$85.00
Amazon$60.00
Grooming/Toiletries$70.00
Streaming$50.00
Coffee$50.00
COX$35.00
Total Income$7,938.00Total Expenses$7,926.00
Example Budget

Each budget is going to be tailor made to your situation but this can help you get the ball rolling. There are going to be some months where you don’t always go exactly to plan.

However, if you can be 90-95% successful with following a plan, you’ll be able to pay off debt, save and invest, and also enjoy life. After all, what’s the point of working and making money if you’re not enjoying yourself?

Step 2 – Pay off High-Interest Debt

Pay off credit cards

The next step to financial freedom is paying off high-interest debt. High interest to me is anything above 8-10% APR.

This is your credit card debt and student loan debt, although it could also apply to a high interest auto loan, personal loans, or payday loans. Debt is, in my opinion, one of the most powerful motivators to help one achieve financial freedom.

Speaking from personal experience, when we eliminated out credit card debt, it was like a weight was lifted from our shoulders. It’s that important.

Step 3 – Save for an Emergency Fund

a family saving for an emergancy

Once you have your credit card debt paid off, you’ll now have extra money you can put into an emergency fund. A good start is $1,000, but I would work towards a goal of 3-6 months of expenses saved 

One thing that 2020 and the COVID pandemic taught me is that too many people don’t have an emergency fund.

If you lose your job and can’t survive more than a few weeks without an income, that should be a big wake up call.

I recommend setting up a free online savings account through SoFi Bank. They have one of the highest interest rates and is where we keep my emergency fund.

Create a free high yield savings account with a SoFi bank here. If you sign up for a checking and savings account using my referral link, you’ll get $50-$300 when you sign up for direct deposit.

Step 4 – Invest Extra Money

documents and money on a desk dedicated to investments

Having a nice emergency fund in a high yield savings account is good, but I am willing to bet that no one ever got rich that way.

Most savings accounts barely keep up with inflation so to grow your money, you need to look at other more profitable options.

Here are a few investments that have been proven to be profitable:

Investing Disclaimer

Remember that every investment will always have some risk. These are investments that have worked for me but you are personally responsible for any profits or losses you acquire.

Stock Market

Invest to build wealth

The stock market is always going to be my go-to option for investing. With that said, it is crazy to think that 45% of Americans do not invest in the stock market, according to Forbes. (3)

Stock Market Investing is easier than ever with new apps coming to the market to help beginner’s start building wealth.

Here are the two ways that we invest in the Stock Market:

IRA/Retirement

middle aged couple planning for their retirement looking at a laptop

IRA or Individual retirement accounts are usually through an employer (although they are also for self employed).

Check if your employer does contribution matching. If they do, it is essentially free money that you are getting. Your employer’s HR department should have more information on how to get started.

The benefits to these accounts are that they can lower your overall taxable income, which helps pay less tax for the year. You can’t touch the money until retirement (without penalty), but would you rather put that money toward taxes or your retirement?

We use Fidelity for our IRA and Roth accounts. In our cases, My wife Helena and I can contribute $12,000 per year to our accounts ($7,000 per account)

What I like most about Fidelity is that I can choose funds that are conservative or aggressive. 

Currently, we have a mix of both types of funds. 

Fidelity also has great customer service if you need assistance choosing the right type of account for your needs.

You can sign up for a free account with Fidelity here

Individual Stock Purchases

Looking at the stock market going up and down

Once we maximize our contribution limit, we put any additional income into individual stock purchases. I like to buy stock in companies that pay dividends (profits that the companies make that is paid to shareholders)

According to US News, Companies like Coca-Cola have been paying out Dividends for over 50 years! So if you invested $10,000 in Coca Cola, you’d get a dividend payment of $340 per quarter. Not bad!

For individual stock purchases outside of your normal 401K with your employer, SoFi Invest is a great option. If you use my referral link, you’ll get $25 when you fund your account with at least $10. Who doesn’t like free money right?

Gold / Silver

gold and silver coins and bars

While it is trending to purchase bitcoin and other cryptocurrencies, I don’t have enough information to give my opinion on that. However, I am the type of person that likes to have something tangible. Gold and Silver investing is for the type of person who wants a solid investment and likes to have something of material value in their possession.

Gold and Silver have proven to increase in value decade over decade. Check out the graphs below

Gold Investing Growth

Silver Investing Growth

For those serious about building wealth with gold and silver investing, check out a company called Gold Broker. They can help you with the basics of gold and silver investing and will explain the benefits on precious metal investments, especially in times of high inflation and possible recession.

Real Estate

real estate rental properties for passive income

Real Estate Investing has been a proven way to build wealth for decades and does that in two ways. First, house values have historically risen in value on average decade after decade, even through recessions, according to Investopedia.

The second way that real estate can build wealth is through rental properties. 

In fact, Actor/Politician Arnold Schwarzenegger became a multi-millionaire through real estate investing into rentals many years before he became the highest paid actor in Hollywood.

He bought apartment buildings in Santa Monica in the 1970s (while it was very cheap!), rented them out while he lived in one of the units, and sold them a few years later for a profit. He then took that profit and invested in larger buildings. Wash, rinse, repeat.

“I made my first million in real estate, not in movies.” – Arnold Schwarzenegger

You could do the same thing with a single unit or even a duplex. Depending on the deal you get, your tenant could potentially pay for your entire mortgage. 

Or if you have enough savings to buy the entire unit, you’ll automatically get a cash flowing property right off the bat.

You do have to consider property taxes, repairs, and other expenses that might occur, but if you find the right properly, you’ll still make a profit in your investment.

It is a good idea to find a real estate agent in your area to help you during this process.

Step 5 – Avoid “Keeping Up With The Joneses”

Rich man and woman living the luxurious lifestyle

This is an all too common thing when people start improving their finances. 

If you’re not familiar with the term, keeping up with the Jones means that you’re trying to have a nice car, a big house, or other expensive items that you can’t really afford.

In many cases, you have to get yourself in debt just so you can show off your new lifestyle. This can also happen when a person’s income goes up. The logic usually is, since I am making more, I can spend more. You may have heard of the term “lifestyle creep”.

I’m guilty of it too. I learned it from my parents who were not very good with their finances. When they came into some extra money, they blew it on a BMW convertible that immediately decreased in value.

When I started making decent money in my 20s, I didn’t think about how to build wealth. All I thought about was how I could get a nice BMW to drive (just like my parents before me). I didn’t consider what would happen if the car broke down (and it did on more than one occasion).  

All I thought about was, could I afford the monthly payment? When something did break down, I had to put it on a credit card or borrow from a relative.

The truth of the matter was, I couldn’t actually afford the cars I was buying.I was living paycheck to paycheck and didn’t even have any money in savings.

After losing my job in 2014, getting my car repossessed, and having to move back in with my mom, I hit a low point in my life.

Sometimes you need to be kicked down by life in order to build yourself back up. In hindsight, it was the best thing to happen to me at the time.

This led me to realize that the material items I desired so much were not as valuable as I thought and could be taken away quickly. 

They really were not making me happy. In fact, I was more stressed than ever about having a $600 car payment, credit card bills, and just not having enough money to pay for rent.

Everything started to turn around after that low point. I eventually got a better job, learned how to start managing my money correctly. 

I started investing, paid off all my credit card debt, and got a credit score of over 730 in less than 4 years. I eventually got a few different nice cars that I could afford (2 Ford Mustangs).

Now drive a still very nice and affordable 2018 Volkswagen Golf GTI.

White 2018 Volkswagen Golf GTI S with a blue background

I made sure I got a full factory warranty, to pay the car off in less than 4 years with a payment and interest rate I could afford. Now I don’t worry about repairs, or it depreciating. If something breaks, it’s covered.

I also started calculating the total cost of the vehicle (car price, loan interest, maintenance, repairs, insurance, registration, and fuel).

So the lesson I have learned is, you can have things that you want and enjoy them. But don’t live beyond your means.

It was a hard lesson to learn, but once I did, it greatly improved my quality of life.

As my wealth continues to grow, I am making sure to take care of all my responsibilities first (bills, investing, savings, family).

You don’t have to follow the same path as me, but hopefully this article serves as inspiration to help you move in the direction of financial freedom.

Thanks for reading,

Nick Hazleton