NEW YORK (CNN/Money) – Only you can define what will make you feel financially free.
For some people, it's knowing "they will not run out of money before they run out of breath," said certified financial planner Jon Duncan. For others, it's having enough money to support themselves doing what they love, even if it's not profitable.
For still others, it's having enough net worth to withstand any unexpected event. And for some folks it may just mean having no debt.
So in honor of Independence Day, if you've ever dreamed of being financially free, here's a quick five-step guide to help you in your quest:
Find the bull's-eye. Chances are you'll never achieve financial freedom unless you first define it and then become tunnel-visioned pursuing it.
| TOOLS TO HELP ON ROAD TO FINANCIAL FREEDOM
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That means first figuring out what your financial priorities are – and, just as important, what they're not. Clarifying your desire can make it easier to curb spending on those things that are non-essential to your goal. In other words, exercise your right to flip the bird at Madison Avenue and all others who wish to seduce you into buying what you don't really want, even if you look good in it.
Blow a kiss to reality. Another trick to help you resist temptation is to realize just how much you'll need to save to support your dream.
You may think a million dollars will do the trick. Maybe it will, maybe it won't. It all depends on your expectations. The person who's truly financially free is the person whose expectations are aligned with his or her bottom line. And therein lies a cautionary tale.
Certified financial planner Judi Martindale had clients, a couple in their 40s, who inherited a million dollars. The husband, the sole breadwinner, earned $40,000 a year, and the couple wanted their nest egg to generate $20,000 a year in income – hardly unreasonable, even given the couples' low tolerance for risk in their investments.
But they also had their hearts set on a $500,000 house and because of their low income, they would have had to put down $350,000 in cash to secure the home.
Coupled with the fact that Martindale's clients had almost no retirement savings and not enough life insurance, all of a sudden their $1 million isn't nearly enough to support their dream as they envisioned it.
Learn to spell "flexible." Martindale's clients could achieve more of their dream if they were willing to bend a bit in what they were willing to do to achieve it.
They could choose a less expensive home, for instance, or get a somewhat comparable house in a less expensive area. Or the wife could go back to work.
Likewise, as you map out your financial dream, consider what you might be willing to do to get what you want. Maybe it means working a second job for awhile, staying in your starter home longer than planned, or moving to a lower-cost area.
Or, as some of certified financial planner Ginita Wall's clients have done, supplement your income doing what you love. Here's just a sampling of what her clients chose based on their desires: repair golf clubs, design dry flower arrangements, work for a different national park every summer, rent out your house during the summer while you travel to visit friends and family, work at the racetrack for six weeks in the summer.
Such activities can subsidize your vacations or let more of your nest egg continue to compound undisturbed.
Remember, modesty is a virtue. Living below your means is a time-honored way to accrue financial security.
Wall, an adviser to the GE Financial Learning Center, reminds clients to automate their savings so they don't risk spending what they should be saving. As for money not earmarked for savings, "you can spend the rest with impunity and let guilt take a holiday," she said.
Duncan has clients, a couple in their 50s, who managed to retire early. They never earned more than $100,000 a year but they managed to accrue a few million dollars by socking away as much as possible during their earning years and living a low-key life, spending no more than $50,000 a year.
They still don't spend more than that, although they could afford to, Duncan said. But their biggest fear is running out of money, so they prefer to play it safe.
Wake up and smell the discounts. Take advantage of today's low-rate environment to minimize what you pay on your debts. Students loan rates are at all-time lows, and you can save thousands of dollars over time by consolidating. As you can if you refinance your home or get a low-rate credit card if you're carrying a balance.
But for goodness' sakes, don't keep running up that balance. Now's as good a day as any to resolve not to buy what you can't pay for in cash, except for the really big ticket items like your home or a college education.
If you need further encouragement not to canoodle with ATMs of banks not your own or to avoid dining out more frequently than you change undergarments, consider the following examples from the GE Financial Learning Center.
If you can go out to dinner and the movies one less time a week (saving $38), use only your bank's ATM every week (saving $1.50) and forfeit that 75-cent cup of coffee every day in favor of your own home brew, after 30 years you'll have an additional $244,236, assuming an 8 percent compounded annual return.
That should help subsidize a few financial fantasies, anyway.
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