How to achieve financial freedom in five years

For many of us, the words ‘financial’ and ‘freedom’ rarely get used in the same breath, while the words ‘money’ and ‘worries’ seem to be BFFs! But what if we told you it’s possible — and maybe not as hard as you might think — to achieve financial freedom within five years? Loqbox has 10 steps to help you get there!

Financial freedom isn’t something that is reserved for the super rich. Anyone with an income, some patience, and the right tools can achieve it. Unfortunately, too many people think that it isn’t within their reach. We’ll look at the meaning of financial freedom, why it’s important and how you can set goals and start your own journey.

What is financial freedom?

Financial freedom means having control of your finances and living the lifestyle you want without being trapped in a career that you don’t. It’s about building savings that can protect you (and your family) from life’s unforeseen events and protecting yourself for retirement. 

If you’ve been wondering how you can have financial freedom, know that it means something unique to you, based on your own circumstances —it could be achieving a single goal or changing your entire lifestyle. Either way, these steps will help you get going.

Why is financial freedom important?

Financial freedom is important because it affects your overall wellbeing and happiness. We all know money can be a source of stress and anxiety, but we don’t always think of it in terms of financial wellbeing. 

The pressure that money puts on you is real. It can affect your mental and physical health. Taking control of your finances will release some of that strain. You can learn more about financial wellbeing here.

How to achieve financial freedom in 10 steps

Let’s take a look at 10 steps you can take to attain financial freedom. Maybe you want to achieve financial freedom before you turn 30, or build a nest egg for your retirement. Perhaps you want to improve your lifestyle for you and your family. Read on for great tips on how to become financially free! 

1. Take stock of your financial situation

The first thing you need to do is take a step back and get a clear view of the bigger picture when it comes to your finances. You’re not going to be able to move forward until you know what you’re working with. 

• Lay out your finances so that you can see how much debt you currently have
  This could include a mortgage, credit cards, loans, and car finance.
  
  
• Then take a look at what money you have saved or invested
  Do you have savings accounts, stocks or shares, or retirement plans?
  
  
• Now lay out your income
  Remember to include incomes from anybody who will be sharing your journey to financial freedom. It all counts! 

Seeing these numbers in black and white can be scary. Getting a bird’s-eye view of your total debt compared to your income and your savings is a daunting thing to do. It’s probably why we often put it off! 

But whatever the damage, financial freedom is still possible. Once you’ve got the numbers, you can start to make sense of the next steps!

2. Set your goals

OK, so now you’ve done the scary bit, it’s time to start planning. What and who are you trying to achieve financial freedom for? Do you want to be debt-free, travel, start a family, or have a comfortable retirement? 

Set your life goals and try to view them in financial terms. Ask yourself what does that look like? Then set your savings target based on those goals.

Remember — you deserve financial freedom as much as anybody else. So don’t sell yourself short when it comes to your goals. Of course, not everything will be possible, but aiming at something you really want that’s within reach will keep you motivated. And that’s a huge part of achieving success!

3. Make a budget

Now you know what your finances look like, and you’ve got a goal to aim at, it’s time to start putting a plan together. Budgets can feel overwhelming but there are actually some super simple ways to create one.

The 50/20/30 rule is a widely used budgeting plan that separates your finances into three simple sections. The numbers represent percentage chunks of your income.

• 50% for what you need, like your rent, mortgage, essential food, and bills. 
• 20% to pay off debts or put towards your savings goals, and
• 30% for whatever you want, like days out, clothes, or other leisure activities. 

So, if your monthly income after tax is £2,000, you would have £1,000 for essentials, £600 for lifestyle and entertainment, and £400 for your financial freedom goal.

After a year, you’ll have accumulated £4,800 towards your financial freedom! Of course, if you earn more or less, that will change the numbers, but the rule will work with any income. Realistically, at least 20% of your income is how much money you’ll need to reach financial freedom.

4. Live below your means

It might seem obvious, but spend less! When you break your income into the 50-20-30 budget rule, you may find that you’re actually spending more than 30% on the things you want, for example.

In that case, take a look at your expenditure and be honest with yourself. Is there a gym membership you never use, or do you have one too many streaming services? Consider putting that money towards your financial goals instead.

If you want to achieve financial freedom it’s likely that you will have to make some sacrifices. But you might also find that giving your finances a spring clean actually liberates you from things you don’t really need or had even forgotten that you were paying for! 

A great way to spend less is to pay yourself first. This means when your money comes in (after you’ve paid your essential bills and outgoings, of course), you put the amount that you’ve set for your financial freedom goals into savings or debt payments before anything else. Invest in yourself before you treat yourself.

5. Pay off debts first

The majority of us will have high interest debt at some point in our adult lives, and when those times arrive, it’s the interest that adds up.

The interest that you pay on debts will most likely be far higher than the interest that you earn on your savings. So clear your debts first! It can be tempting to start collecting money and watching your savings grow. But if you’re making minimum payments towards debts every month you won’t be saving as efficiently.

You can approach your debts in two different ways, known as the Snowball or Avalanche methods. The difference is mainly what direction you tackle your debts from.

• The Snowball method means starting with paying off your smallest debts first, and building up to your larger ones regardless of the interest rate
  (It’s good for the psychological motivation of achieving your goals)
   
• The Avalanche approach tackles the debts with the highest interest rate first
  (Even if they are your largest debts to pay off — this will save you the most money in the long run)

You will be the best person to work out which method is best for you, but basically the snowball is good for building motivation to tackle more daunting debts, while the avalanche will remove the debts that hold the greatest anxiety to mentally free you up to approach the rest. Either way, getting your debts cleared not only clears your mind to focus on financial freedom, but it makes financial sense too!

If you want to save the most money, we believe the Avalanche method is the best method.

6. Automate your savings

Set up Direct Debits or standing orders to make payments towards your financial freedom goals automatically. You might start your journey towards financial freedom feeling super motivated, but it is easy for life to get in the way and for temptation to rear its ugly head!

So, set your automatic payments to come out on pay day. Shift the money towards your financial freedom goals before you even get a chance to spend it on anything else.

That way you’re much more likely to stick to your plan. You’ll forget that it’s ticking over in the background and before you know it your savings will be looking much healthier!

7. Improve your financial literacy

Financial literacy is about being able to make good decisions when it comes to using financial products. It affects people of all ages and backgrounds and it isn’t to do with how clever you are. Unfortunately, not many of us are taught financial literacy at school, so you may wonder how else can you learn it.

You can read more about how to achieve financial literacy here. There are lots of products out there that you can use to benefit your finances, but it’s just as easy to fall into traps with them too. So start reading up!

Take a look at Loqbox Coach to help you build your financial know-how. Spend some time understanding finance, it isn’t always as complicated (or boring!) as you might think.

8. Grow your credit score

A great way to both improve your financial literacy and build towards your financial freedom is to check your credit score and start to build it up. Your credit score is calculated by the top three credit reference agencies (CRAs) in the UK: Experian, Equifax and TransUnion. You can read about the different CRAs and what they do here.

You can also take a peek at your credit score with each of the different CRAs for free and without impacting on it using these links:

‍ClearScore (uses Equifax data)*

Credit Club (uses Experian data)

Intuit Credit Karma (uses TransUnion data)

*For complete transparency, if you sign up for ClearScore using this link, they give us a small commission.

So why does your credit score help your financial freedom goals? Well, when you have a better credit score you can also get better deals for mortgages, credit cards and loans. That means that you could be paying less in interest and saving yourself £1,000s over time. Not only that, but when you get started with Loqbox you can actually work towards your goals while using a proven way of growing your credit score.

You can build your credit score just by paying your £2.50 a week Loqbox membership.  And with Loqbox's savings tool, all you have to do is set your savings goal and we will report your payments to all three Credit Reference Agencies to help boost your credit score! 

Improvements to your credit score are not guaranteed.

9. Insure all your hard work

Once you’ve paid off any debts and built up your savings, it’s time to protect all your effort. 

If an emergency popped up, would you want all your money to go back to square one? That’s a firm no, right?

You can protect yourself from suddenly going into debt again — or not needing to spend your long saved emergency fund, your holiday savings, or that house deposit money — by getting insurance cover.

• Content (and/buildings) insurance for your valuables
• Income protection insurance in case you ever became ill, had an accident or faced redundancy
• Life insurance, to protect your loved ones in the event of the worst happening
  

10. Start investing

Depending on what financial freedom looks like for you, clearing debts and growing your savings might not be enough. In that case investing could be the key! 

Investing can be risky, so work out if your goals can be achieved without it first. But if you want to take an early retirement, for example, you might need to find ways to give your money a real boost.

You can invest your money in any number of places, including property, fine wines, antiques and cryptocurrencies. But it’s important to say that investing can come with risk. It is possible to end up with less money that you started with. So take reliable advice and only invest what you can reasonably afford to lose. 

For less risky investment options, you could choose to put your savings into high-interest savings accounts. This means you won’t be able to touch the money but your savings will grow automatically, over time.