When you hear the term “financial freedom”, what do you think of? Being debt-free? Having a big savings account, retirement plan, or wealthy investment portfolio? Most of us probably just want to be out from under our bills or get our car paid off. The fact is, financial freedom means different things to different people, but at its core, the meaning is universal. The keyword is freedom.
These 2019 Consumer Debt Statistics show us a sobering picture of America today, and that picture tells us that most Americans are in some form of debt. Americans owe 26% of their income to the national consumer debt, and it’s only growing as the years go by. That being said, let’s take a closer look at why financial freedom is so important to the individual.
Debt to Income Ratio
Do you know what your debt to income ratio is? Plenty of people have no idea what the phrase even means, let alone what their personal DTIR is. DTIR is a measurement of your monthly debts/bills versus your income. How much are you bringing in, and how much goes out at the end of every month to handle expenses and debt? When your debt outweighs your income, you’ve got yourself a problem.
The financial freedom formula that most people follow involves reducing their debt as much as possible so that you have far more money coming in than you’re sending out. This allows for things like investments, retirement and savings accounts, and the ability to make major financial purchases without having to worry too much about the impact on your finances.
If you have too much debt, a large portion of your income goes toward paying down that debt, and you can never get ahead like that. Unpaid credit cards, defaulted loans, etc., impact not only your financial security, but also your credit score. Without good credit, you can’t get access to good interest rates or even good credit cards.
The Savings Account
According to this article published by The New York Times, nearly two-thirds of Americans don’t have enough money in savings, if any at all, to cover sudden expenses, changes to their income, or extreme situations. If you were hit by a car tomorrow and had to miss ten weeks of work to recover, could you pay your monthly expenses from your savings account?
The problem with saving money is that you can only start saving once you’ve reduced your debt to income ratio enough to have money leftover. The best strategy? Learn to control your spending and keep your debt low. Focus on good debt, like mortgages, instead of bad debt, like unsecured credit cards. Credit card debt is a serious problem for many Americans, and it’s all too easy to fall into the debt trap with one of these cards; the catch is that you need them to build your credit.
The Freedom to Choose
So, why is financial freedom so important, anyway? Besides the obvious of reducing your stress and giving you a buffer should anything happen, financial freedom matters because of the second word in the term: freedom.
When you’re financially secure, you have the freedom to choose how to spend your money, and you’re not retrained by debts and outstanding balances. You’ll feel better about making large purchases knowing you can actually afford what you’re buying, and your household finances won’t constantly be under threat.
No one should have to spend all of their days wondering whether or not they’ve got enough money in the bank. How can you possibly live a fulfilling life that way? You can’t make any purchases without moving things around, you’re constantly sending out large portions of your income to debtors, and you’re stuck in a situation where you don’t have access to credit to build your future.
This can affect you when you need to purchase a home, a vehicle, or even something as simple as an appliance for your home. All of the things that make life easier and more comfortable are at risk when your financial situation isn’t secure, and that shouldn’t be acceptable to anyone.
Where to Start
So you want to obtain financial freedom, do you? The best place to start is looking closely at your finances and figuring out your debt to income ratio.
Once you know how much is going out and coming in, you can start working on reducing your debt (especially unsecured debt like credit cards) and finding a happy balance between spending and saving. Next, focus on creating an emergency fund.
Most experts suggest that you should have at least 3-6 months’ worth of expenses saved up in case of an emergency, but even having just $1,000 in your savings can make a huge difference during an emergency.