4 Simple Steps to Financial Freedom in Midlife

Getting our finances under control to achieve financial freedom in midlife is crucial. It’s true that we have plenty of productive years ahead. as long as we take good care of ourselves but this doesn’t mean that we shouldn’t be prudent.

Nowadays, we have access to a wealth of knowledge on well-being and expanding our health-span: the healthy years of our lives.

To be able to enjoy life, however, you need to have financial freedom. You need to ensure that you will not be dependent at any time in the future.

One can go to extraordinary levels of sophistication and analysis on finances. Yet, those four simple steps can get you well on your way to financial independence.

Spend Less Than Your Make

First things first! There is no way to get your head above the water if you keep spending more than you make.

DAH!!! I know, you know, we all know!

But, how come most of us have managed to live above our means – at least for a period of our life?

Before you start with any financial goals, you first have to make sure you spend less than the income you generate.

A good place to start is the small everyday “luxuries.”

Do you need that fancy latte every morning?

What about the afternoon snack or sodas from the vending machine at work?

Do you need to buy plastic bottled water at the gym or can filtered water from home do the job?

A few minor tweaks to your daily consumption add up and generate significant savings. On top of that, you are doing an excellent service to your health and the environment.

So, take a good look at your daily spending habits and start saving. I am sure you will discover even more saving opportunities than the ones above.

Get out of Debt ASAP!!!

Once you have a positive balance between income and spending, getting rid of debt is crucial.

You want to work to live well today and in the future and not to pay interest to the banks.

Personal debt can be bank loans, student loans, and the most common one, credit card debt.

Here are simple steps to get out of debt fast:

Renegotiate interest and payment terms on all your credit cards and loans
Choose the one with the lowest balance and pay as much as possible above the Monthly Minimum until paid off. That is Minimum Monthly Payment + as much as possible
Repeat the process with the next lowest balance debt. This time, paying the Monthly Minimum, plus the total monthly amount you were paying for the first one. That is second lowest debt Minimum Monthly Payment + Full monthly amount paiments of the first debt
Repeat above step with all remaining debts

You can find more details on this method in the Rich Dad post, by Robert Kiyosaki.

Two alternatives to the above process:

Start paying the debt with the highest interest, instead of the lowest balance. I still prefer the lowest balances first, as it gives you quicker wins by eliminating some debts early on.
Explore options to refinance all different kinds of debts to one new, low-interest loan. Then make sure you still make payments above the monthly minimum to pay off as fast as possible.

Pay Yourself First

Having gotten out of debt, the next step is to build a safety net. Having enough cash in hand for an emergency (medical, job loss, etc.)

Financial advisors suggest a safety net of three, six, or more monthly income amount in cash. Since everybody’s life circumstances are different, you have to set your own goal.

The way to achieve that, and the next important step for financial freedom, is to pay yourself first!

It is remarkable how most of us choose to pay ourselves last. We usually first pay the landlord, the banks, the internet provider, the government and so on.

Aren’t we important enough to get paid too? Why do we pay ourselves last?

I am not suggesting of course, not to pay your rent or your bills.

The idea is to ensure that you pay a certain percentage of your monthly income to yourself first. 10%, 15%, 20% or more, depending on your life circumstances.

A balanced approach to this is best. Too much and you make it hard for yourself and can take the joy out of your life. Too little and you are making very slow progress.

But how do you pay yourself?

Well, the simplest way is to open a savings account and make monthly transfers to it.

An essential element of this step is to make it AUTOMATIC! Which means, to set up an automatic transfer with your bank each month to your savings account.

Do not underestimate the importance of automation. No matter how disciplined you may be, life happens, and we are all human. If you don’t automate the process, it is very likely you will stick to the monthly transfers for a few months and then let go.

If you want to go deeper into this idea, I recommend reading “THE AUTOMATIC MILLIONAIRE” by David Bach!

Invest in Your Financial Freedom

Now that you have, a positive income/spent balance, eliminated debt and built your safety net, breathe!

It’s a great place to be!

It’s time to deal with “luxury” problems towards financial freedom.

No matter how you approach it, though, investing is very complex, and for most of us, intimidating.

Finding a good investment consultant is a smart thing to do.

But, getting some basic financial education yourself is crucial for the following reasons:

You understand your consultant’s advice, and you can evaluate it
You know where your money is
Knowing what you are doing helps you sleep at night
You are aware of the risks involved for each investment
Your financial future is your responsibility at the end

It is also essential to know that:

There is no 100% safe place to keep your money (this includes banks, bonds, under the mattress, etc.)
100% guaranteed investments do not exist

There are only various levels of risk, like everything else in life.

Knowing that, a simple investment approach is diversifying the risks.

Which means, spreading your investments between different risk levels. High return / high risk, low return / low risk and everything in between.

One popular investment option is stocks. Unless you are a financial guru, Index Funds are a good option.

Index Funds are low cost, low maintenance, and lower risk since they follow the entire or large parts of the market. On top of that, they historically over-perform the returns of most managed funds.

A good rule of thumb, in the past, has been to hold a percentage of stocks equal to 100 minus your age. The rest would comprise of high-grade bonds and other lower-risk assets.

In recent years though, due to lower returns from the presumably lower risk options, a bolder approach is being suggested, holding a percentage of stocks equal to 110 or even 120 minus your age.

You have to decide according to your risk tolerance and aspired returns.

Whichever ratios you decide for your portfolio, make sure you rebalance frequently. It will allow you to maintain or adjust your risk levels and maximize returns.

On risk, another concept to keep in mind comes from one of my favorite writers and a brilliant mind, Nicholas Nassim Taleb.

The idea is simple and makes so much sense to me. The longer an entity has been around, the highest the probability to survive longer in time.

So, being critical and mindful of the risk of every new shiny investment opportunity is only wise.