Aaah. Financial freedom. That's a topic lots of people are talking about, and many people chase.

To talk about financial freedom, we first must define what it means. Of course, it means different things to different people. For some, it means being debt free. Others define it as having enough savings, investments, and other income sources to leave the W2 jobs. It doesn't mean they will leave the job. It simply means the freedom to do so.

It's enticing and it's elusive. The pursuit of financial freedom is frustrating to many.

Enticing – it's enticing because achieving financial freedom brings options. If we have multiple sources of income, and sufficient savings and investments to replace our employment income, we don't feel chained to our W2 jobs. Knowing we can walk away whenever we want to make the days at work much better.

Elusive – it's elusive because many of us don't know how to start side hustles that create passive income sources to supplement and, eventually, replace our W2 income. We know how others do it – rental properties, blogs, Selling on eBay, and other work from home jobs. We don't feel comfortable or knowledgeable enough to start any of these things.

Frustrating – the lack of knowledge and the fear of stepping outside of our comfort zone can make the pursuit of financial freedom frustrating. It doesn't have to be complicated. It may not involve side hustles, real estate investing or any of the other things that might feel uncomfortable. I've said many times that the concepts to get to financial freedom are simple. Executing them is hard for many.

Real-life struggles

For many of us, the struggles of daily life often make us feel like there's no hope for the future. We feel stuck in our jobs. Maybe we feel trapped by mortgages, car payments, or credit card debt.

Others have the opposite experience. Many love their jobs or careers. Most are confident in their future. They have little or no debt, plenty of savings, and look forward to what lies ahead.

What's the difference? How can people in the land of opportunity have such different experiences?

Some of you are thinking right now – “here we go again with another speech telling us to pull ourselves up, think positive, we control our destiny, blah, blah, blah.”

A lot of you are probably calling BS on those statements. No matter how hard you work, or how hard you try to get ahead, you always seem to be stuck in the same place.

I get it.

Financial freedom foundational principles

There are three principles common to everyone I know who has achieved financial freedom or early retirement. These are not new. I didn't invent them, they've been around forever. They make some people mad. Not because they disagree with them. In my view, it's because they haven't been able to execute them. Therein lies the problem.

Here are the principles:

Spend less than you make Save and invest the difference Minimize (or avoid) debt

Starting with these three basic principles, you can achieve financial freedom. Will it be easy? Of course not? Will it happen overnight? Maybe, but probably not. Will there be setbacks? Of course. Life is full of those.

I can promise you this. If you follow these three principles, I'm confident you can achieve financial freedom.

Let's dig deeper into each principle.

#1 Spend less than you make

Spending less than you make is a foundational principle of managing your personal finances. It may not apply to you. You'd be surprised how many people live beyond their means. Overspending is the #1 problem with creating wealth.

Remember when we first went to college (in fact even before)? We were bombarded with credit card offers? I mean, they didn't come to our parents, they came to us with our name and address. That's one heck of a temptation for an 18 or 19-year-old kid getting ready to leave home and be on his/her own. It's like the get out of jail free card. It's no accident credit card companies send these out at the end of high school or when entering college.

They want to establish the use of credit early and often. The sooner they can get us started, the more spending we will do. Do you know what else they card companies know? Once started, credit card spending is hard to break.

We live in an immediate gratification world. It seems like it's harder and harder to put off purchasing the item we think is a must-have. C So, how do you avoid spending more than you make?

Here's a book that you may find helpful – The Total Money Makeover.

Manage expenses with a budget

I am amazed at the number of families at all income levels that don't have a budget. It's the one foundational principle in controlling spending. The more detailed the budget, the better. J. Money, who is on my list of the top 25 personal finance blogs, created a website dedicated to this topic. It's called Budgets are Sexy. Don't let the catchy name fool you. This is a serious website packed full of great tools to help you start or improve your budget.

Grant Sabatier, who runs the blog Millennial Money wrote a book on the topic of financial freedom. It's a step by step guide on how he became a millionaire in five years. Like any book, some will apply to you and some won't.

He has a great chapter which I reviewed on how to create a budget that works. His premise is that most budgets focus too much on the details and not enough on the big three spending items – housing, transportation, and food. Cutting back on these three, which make up over 60% of most budgets, goes a long way to getting control over spending.

For those who are more detailed, here are some things to include in your budget.

Household income

Include all sources – salaries, bonuses, gifts, investment income, etc.

Regular monthly bills

Count mortgage or rent, utilities, cell phones, cable, internet, child care, etc. Savings must be a part of your regular budget. I'm not talking about contributions to your retirement plans. I'm talking about putting aside money in a cash account (see Strategy #2 below). If savings aren't part of your regular monthly budget, it will be hard to save. You can always find something else to buy.

Credit card debt

Many people put all of their monthly bills on a credit card and then pay that off every month. That gives them cash back or points that provide some free money for the privilege. However, it's risky. If you can't pay them off monthly, don't put anything on them.

Credit card debt should not be part of a monthly budget unless the amount is to pay it off each month. Carrying credit card debt as part of the budget means you're spending more than you make. That violates this first principle.

Entertainment

Take this seriously. You'd be surprised how much you spend eating out. If you work, lunch out each day adds up. In the business of life, we often eat dinner out 2 or 3 times a week. If this goes on a card, it often gets lost. True confessions – My wife, Cathy and I, got busy over ten days and realized (after the fact) that we were eating out. When we totaled the dining out bills for the 10-days, it was close to $250.00! That's crazy.

If we weren't paying attention to our budget, it might still be happening. It shocked us back into reality – quickly!

Other expenses

Include groceries, clothing, school supplies for kids, dining out, personal hygiene items, etc. It's important to include every dollar you spend. Watch out for the everpresent online shopping bill. We all spend a lot more time than we should shopping online.

Don't get me wrong. I love online shopping. Cathy and I buy a lot of what we use online. However, you have to be very careful. It can get out of hand. Track it, so you don't get surprised when you get the credit card bill.

Budgeting apps and tools

Fortunately, with the advancement in technology, there are many online tools to help you budget. Here are a few I'd recommend you consider.

Mint.com

Cathy and I currently use Mint.com. Like most anything we use, there are things I like about it and things I don't like. Connecting all of our accounts was very easy. There's a user-friendly interface to walk you through it.

Once connected, Mint.com lists all of your transactions in an overview that includes all accounts. The side menu lists each account individually. Click on one, and it pulls up just that account's transactions. For each account, you can categorize the transactions to track the totals. Add credit cards, personal loans, mortgages, and any other account you own.

There is a limited bill pay service as well. We don't like it and use our bank's service. You can set up your budget by category and the spending from your accounts gets matched to that budget. Alerts tell you when you are over your budget for a particular type (or in total). Each week you will get a summary by category to see how you're doing.

You can also track investments in Mint.com.

Personal Capital

Personal Capital is one of the most comprehensive (and free) tools on the market. The technology behind Personal Capital is far superior to most others. It is a total financial planning tool.

You can connect all of your investment accounts, including your current and former employer 401(k) plans. The budgeting tool is tied to the total picture. It includes cash and liabilities to calculate a total net worth. It's a favorite tool of the personal finance blogging community.

It's a favorite tool for most personal finance bloggers. Most promote it on their blogs with affiliate links. When you click on the Personal Capital links here, you're clicking on my affiliate link as well. If you're a DIY person and want a way to track your net worth, investments, and even expenses, this free app is as good as it gets.

Keep in mind, Personal Capital is a registered investment advisory firm. That means they employ people who want to manage your money for you. When you open your free account with them, you will be emailed, called (or both) by one of their representatives. Some are pretty aggressive. Most are courteous and helpful. You are under no obligation to have them manage your money or to work with them.

I wanted to give you fair warning of what to expect. It's a great app and will serve you well.

You Need a Budget (YNAB)

YNAB will cost you $6.99 a month or $83.99 if paid annually (not sure whey the 1 cent discount). They offer a 34-day free trial with a no-risk money back guarantee if you're not satisfied.

Accountability

This budget program accounts for every dollar you spend. Their method is to give every dollar a job. That means that every dollar that comes into YNAB has to be assigned to something. They are adamant in holding you to keep your dollars to their assigned task. Many people don't like this aspect of YNAB.

However, if you are someone who pays cash for a lot of things, not realizing how it adds up, this tool will help you get rid of that habit quickly. YNAB is serious about holding you accountable for your spending. That makes it much harder to spend more than what you've budgeted. As a result, some find this tool too challenging to use.

The reason – they can't stick to their plan.

Again, though, if you are one who has issues with overspending, you owe it to yourself to check out YNAB.

#2 Save and invest the difference

Assuming you spend less than you make, you will have additional money to save and invest. Of course, you should start with an emergency fund. Why? Because that fund keeps you from having to put unexpected expenses on a credit card, that will kill a budget quicker than anything.

How much you should keep in an emergency fund is a much-debated question. The answer depends on your personal preference. For the more conservative among us, it might one full year of monthly expenses. For others, it might be up to 3 years of expenses.

Most financial planners and online advice outlets say to keep 6-months of monthly expenses in a liquid cash account. So, if your monthly costs are $6,000, you would hold $36,000 ($6,000 X 6 months) in a liquid savings account. If your bills are $10,000/mo, you'd want $60,000 in savings, and so on. For a one-year emergency fund, the $6,000 monthly expense means $120,000 cash saved.

Where to hold the fund

Liquid (readily available) savings does not mean stocks, bonds, mutual funds, or ETFs. Liquid, in the case of emergency funds, means zero risks of loss. An FDIC insured bank money market, or savings account qualifies. There are online banks that pay much higher rates on these accounts than brick and mortar banks. They don't have the overhead and operating expenses of owning, leasing, and maintaining real estate.

Here are three options to consider. I get no compensation from these companies. The links non-affiliate links. The three represent some of the most popular online banks.

Ally Bank

Barclay's Bank

CIT Bank

You might also check out the bankrate.com list of Bankrate's Best Banks for additional options.

#3 Minimize debt

Another symptom of the immediate gratification world we live in is the massive amount of credit card debt American households hold. A recent study from Nerd Wallet estimates that Americans collective held over $931 billion in credit card debt in 2017. That's a 7% increase from the previous year. (taken from – 2017 American Household Credit Card Debt Study)

Check out this chart from the article showing debt held by U.S. consumers:

These numbers are stunning! Each household holds almost $16.000 in credit card debt. This is one of the most expensive kinds of borrowing you can do. Questioners asked survey participants for the reasons why they spend money on these cards. 41% openly admitted they spent more than they could afford on “unnecessary purchases.” And 33% said they spent money on credit cards to pay for “necessities not covered by household income.”

This is textbook living beyond your means. Hopefully, this isn't your story. Credit card debt is a trap.

Here are three steps you can take to take back control.

Step 1 – Stop the bleeding

What do I mean? Stop using credit cards! If you don't have the discipline to stop on your own, cut up your credit cards! Other than payday loans, high-risk auto loan financing, and pawn shop lending, credit card debt is the worst kind of borrowing. Why?

Credit cards don't have a payment term. They are what's called a revolving line of credit. You can borrow up to your maximum credit limit. It's very tempting. Card companies make it very easy for you to overspend. The annual interest rate (some of the highest rates) is divided by twelve and multiplied by your balance each month. That interest gets added to the calculated balance at the end of the billing period.

Let's say you have $10,000 in credit card debt and your annual interest is 22% (not abnormal). Your monthly interest charged on the unpaid balance for that rate is 1.83%. If you're making the minimum payment on your card, you're not reducing your balance. That's exactly what the card company wants you to do.

So on that $10,000 balance that isn't going down, you're paying $180 a month in interest, which adds up to $2,160 a year, which totals $21,600 over ten years! That adds a lot to the cost of whatever it is you bought with that card that you couldn't live without or wait to buy it with cash!

IT'S NOT WORTH IT!

Step 2 – Cut expenses

Once you've stopped the credit card spending, it's time to take a hard look at your expenses. There are always places to cut. Start with the low hanging fruit (easiest things) first.

Often, that means the cable and cell phone services. Verizon, Comcast, and other vendors offer incentives to get you to sign up for a two-year agreement. They bundle cable, internet, and phone services into the package. These bills can run well over $200 a month.

If you can't seem to find savings on your own and don't use a budgeting program, sign up for one of the ones mentioned above. If you want to track every dollar, go with You Need A Budget. Remember, rule #1 is to give every dollar a job. I promise if you take the time to set this up and discipline yourself to follow the rules, you will find numerous ways to save money.

Step 3 – Consider consolidating with a peer to peer lender

I hesitated to include this section. I need to put a big disclaimer and caution here before proceeding. Borrowing from one source to pay off another source is generally a very bad idea. If you have high credit card debt, it's always better to learn the discipline to stop spending on credit cards, find savings in your budget, and apply those savings toward reducing the debt. These are prerequisites that you must implement before even considering a P2P (peer to peer) loan.

If you've signed on with some of these tools and still find yourself unable to make a dent in the debt, it may be time to consider a peer to peer lender.

An absolute prerequisite – You must have stopped using your credit cards!

This is an ABSOLUTE MUST before reaching out to a P2P lender. If you're still using your cards, do not take this step.

What is a peer to peer lending?

Peer to peer lending is a type of crowdsourcing or crowdfunding. This method of lending involves two groups of people – investors and borrowers. Investors offer to put up their own money to loan to qualified borrowers who are seeking loans. Each lender has criteria for both investors and borrowers.

Unlike a brick and mortar bank or finance company, P2P lenders put together small amounts of money from individual investors to fund the loans. Each lender (investor) can look at the criteria for each of the borrowers they're considering loaning to. Each borrower looks at the rates and payment terms before deciding to apply.

When a loan gets approved and funded, many small investors provide the money for the loan. They, in turn, get paid the promised interest rate less a fee charged by the lending institution. This fee varies by lender.

How P2P lending works

The entire process gets done online. Like any lender, P2P lenders have minimum credit score and approval criteria to apply. Often (not always), the criteria are more lenient than traditional banking and finance. The reason – the risk is spread across multiple investors rather than being born by one financial institution.

Investors get matched with borrowers based on the criteria of each. Some investors are willing to take on riskier borrowers (those with lower credit scores or higher loan amounts) than others. Like traditional lenders, riskier borrowers get charged higher interest rates for their loans. As such, investors get paid a higher interest rate for taking on higher risks.

Some P2P lenders offer a wide selection of loans to accommodate various types of borrowers. Most of the sites allow you to input your requested loan amount, your credit score, the purpose of the loan, and your location. After entering this information, you get an estimated rate, loan term, and payment estimate.

You can then decide whether to apply or not.

P2P lending pros

Fixed payment terms

Working with a P2P lender means switching from a revolving credit card account (interest charged on the monthly balance) to a fixed payment term. Unlike credit cards, every loan payment with a P2P lender includes principal and interest. Terms (loan repayment periods) can range from 18 months to as high as 60 months. A term of 36 months or less is most common. These loans put a finite time to get them paid off.

Often lower monthly payments

Monthly payments on consolidation loans are usually less than the total of the payments made on credit cards. The assumption is that you're paying more than minimum payments on your cards. Unlike credit cards, you can't add any more money to the loan. It's a fixed amount for a set period. So, if you're disciplined, you will eliminate this nasty debt from your balance sheet much quicker.

Rates are often lower

Rates on P2P loans have a wide range. They can go from a low of 5% to as high as 30% or more. Your credit score is the primary (not the only) determinant of your loan rate. The lower your credit score, the higher your interest rate. In most cases, you can lower your rate a good bit. You can find your estimated rate on most of these sites to see if it makes sense.

Even if your rate is just slightly lower, the fixed payment term can substantially lower your borrowing costs. Like with any decision about lending, be sure to calculate the charges, the risks, and the benefits of what you're trying to accomplish. And to restate my caution – do not do this if you can't stop the credit card spending.

You will dig a deeper hole than you can likely get out of.

P2P lending options

Here are three to consider:

Lending Club – Lending Club is one of the oldest and largest P2P lenders with over $33 billion borrowed by over 2 million people. The site contains links for investors and borrowers. You can choose from a personal, business, or auto loan. After making a choice, enter the requested loan amount to start the process.

Prosper – Prosper has a similar process for applying. You click either the borrower or investor tab at the top of the home page to start. Their terms are between three and five years. Clicking the “rate” button starts the process of starting your loan.

Sofi – Sofi is probably the strictest of the three lenders. They are also more comprehensive than other lenders. Known for student loan refinancing, on this How It Works page, they describe themselves as being selective. Sofi offers additional services like career coaching, complementary financial advice, and rate discounts for different types of loans. They offer student loan refinancing, mortgages, wealth management, and Sofi Money, an online banking product.

Comparison shopping is always a good idea. Consider starting by comparing these three lenders.

Final thoughts

Financial freedom is a worthy goal to pursue. It takes discipline and commitment. Like many things in personal finance, the concepts behind achieving financial freedom are not complicated. Having the discipline and commitment to execute them is difficult for many of us.

Most of the things in life we achieve we get through hard work and perseverance. Getting to the point where we have financial freedom is no different. There isn't a quick way to get to financial freedom. That is, of course, unless you are an heir to a wealthy estate. Short of that, hard work and perseverance are the ways to get there.

Outside of these three principles, find ways to increase your income at your W2 job. The more you make, the quicker you get there (assuming you follow the 3 principles). Start a side hustle in your spare time. Even if you think you don't have spare time, you can find ways to start side hustles that will work for you.

Let me leave you with a quote from Teddy Roosevelt. The modern day version of this quote is, “anything in life worth having is worth working for.” In the original quote, he says:

“Nothing in the world is worth having or worth doing unless it means effort, pain, difficulty… I have never in my life envied a human being who led an easy life. I have envied a great many people who led difficult lives and led them well.”― Theodore Roosevelt

This post contains some affiliate links. Please see my disclosure for more info.

Now it's your turn. Are you pursuing financial freedom? Are you already there? What, if anything would you add to the three principles?