As a new year begins, we encourage you to take a step back from the busyness of life and plan for your long-term financial freedom. Stop hoping for the best while constantly reacting to the circumstances around you. Instead, choose to be proactive and take control of your financial future. We recommend a path to help you get on track. Ideally, start the journey with a spouse or significant other, an accountability partner or a certified financial planner who acts as a fiduciary.

Behavior Matters

The primary driver of financial freedom is consistent, intentional behavior. Without those habits, you cannot achieve true freedom. It’s about more than how much money you earn. Many people who win a lottery end up broke and miserable in a matter of years. Why? Poor behavior.

Here are the five behaviors critical to financial freedom. How are you doing with each?

1. LIVE WITHIN YOUR MEANS

Do you know what running your life costs each month? Do you know the specific number, and is it based on data? If you don’t know the amount, you cannot plan with intention. Plus, the risk of lifestyle creep, or spending more as you earn more, can cause anxiety as you will have little to show over time. Online tools like Intuit’s Mint (mint.com) can help you easily track and categorize your spending. Review the numbers monthly and then work to eliminate unnecessary spending.

2. SAVE SYSTEMATICALLY

You must save each time you get paid. To retire with dignity, stash at least 15% of your gross earnings into a retirement plan. We are big fans of funding the Roth (after-tax) option in a retirement plan, especially if you are under age 50. If you cannot reach a 15% threshold now, commit to increasing your contributions by 2% each January. You’ll likely never miss that money in daily life.

After funding your retirement plan, establish an emergency fund by setting aside at least three to six months’ worth of living expenses in a high-yield savings account. Then, plan for larger purchases by diverting money into savings (if the expense will occur within two years) or into diversified stocks and bonds (for mid- and long-term needs).

3. AVOID DEBT

Frankly, if you can’t pay cash for a purchase, you typically can’t afford it. Therefore, develop the discipline to deny yourself the short-term gratification of impulse purchases, especially if you need to borrow for them. Please don’t use a credit card if you can’t pay the monthly balance. Instead, save for more considerable expenses. Credit card debt is a hole that is very difficult to climb out of.

4. GIVE GENEROUSLY

We have witnessed firsthand with our clients and friends that those who give generously tend to live more peaceful, satisfied, joyful lives. How much to donate and to whom is a personal decision. We believe we’re all called upon to share our time, talent and treasures with others. We’ve never met someone who regretted giving generously or who missed the money.

5. SET LONG-TERM GOALS

The broader your perspective, the better your short-term decision making. Setting long-term goals is critical to financial freedom. It’s also essential to align your goals with those of your spouse or significant other and to review and update them consistently. Taking short-term steps helps you achieve longer-term goals.

QUICK REFERENCE

Take these basic steps toward financial freedom.

• Track your spending: Truly understand your lifestyle expenses and eliminate unnecessary outlays.
• Be selective with allocations: Identify how much money you can set aside for retirement, short-term emergency savings and charitable giving. Direct the amounts automatically and live on the remainder.
• Reduce debt: If you have consumer debt, stop using credit cards — now! We love the snowball approach: Aggressively pay off the smallest credit balance and make minimum payments on the other balances. When the smallest balance is paid in full, put the typical installment toward the next highest balance. Continue the routine until you’re debt-free. Then, direct previously debt-dedicated cash into savings or investments.
• Measure your progress: If you don’t keep score, you can’t develop the habits necessary for long-term success. You shouldn’t need more than 15 minutes a month to see where you are financially. Remember, progress is never perfect. You’ll sometimes think you failed to make the desired progress. Focus on adjustments during the next month.
• Quantify and prioritize goals: Estimate the cost of your specific goals in the years ahead (retirement, college funding, travel, a new car, a new home?). They will compete for the capital you earn. Remember to factor in inflation and prioritize each goal by “needs, wants and wishes.” Make sure you are on track to achieve the most crucial and urgent goals first.

CALL A PROFESSIONAL

Developing a comprehensive financial life plan on your own can be difficult. However, starting a relationship with other professionals, typically CPAs, estate or business planning attorneys, or a certified financial planner who serves as a fiduciary, can help you achieve financial freedom in a coordinated fashion. Learn more at letsmakeaplan.org.