The first step to really getting out of debt, getting a strong handle on your finances, and laying a solid foundation to achieve financial freedom is to build an emergency savings fund. Most people understand that credit cards are very dangerous.  When we live beyond our limit by using credit cards, we are limiting how well we can live in the future.  At some point in time our reckless spending habits will come back to bite us.  However, the fact is that no matter where you are at on your financial journey—whether you are just getting out of college or whether you have been in the workplace for 20 years—it is never too late to take the first step toward financial freedom.

If you do not currently budget your finances each month, take 1 month and track every expense you make.  At the end of the month sit down and honestly evaluate where you are spending all of your money. A budget is the most crucial step in building your financial freedom. It will be your yard stick to measure from where you are to where you want to be.  You may be amazed at how much money you spend each month on frivolous things.  Cutting back on these needless expenditures is the most effective and simple way to build your savings and pay off debt.

Let’s first break down why an emergency savings fund is so important and why it is an important step to achieve financial freedom.  As stated, we know that indebtedness is not healthy.  In fact, it is poison to our financial well-being.  When unexpected expenses occur in our lives, and we do not have an emergency savings fund in place, how do we pay for them?  Well, we have to use credit cards or some other form of loan, which increases our debt.  This puts us another step behind in our journey toward achieving true financial freedom.  Thus, building an emergency savings fund is essential to our financial well-being.

So, how many Americans actually achieved financial freedom and have an emergency fund in place?  In 2009, Metlife conducted a survey they entitled, “The American Dream.”  In the survey they found that 50% of Americans have less than one month’s expenses saved and 28% had less than two weeks’ expenses saved.  An even more staggering statistic is this—29% of Americans that earn more than $100,000 per year have less than one month of savings.  These numbers are staggering!  Unfortunately, the consumerism in America has reached a place of such excess, that things which were considered complete luxuries 20 years ago are seen as essential today.  From these statistics, we can see that the problem that most people face is not that they do not earn enough money to build an emergency savings fund; instead, they are simply spending too much of it.

Now let’s break down the practical steps of how achieve financial freedom by building an emergency savings fund.  First of all, you need to determine how much you want to save in the fund.  Many financial experts, such as Dave Ramsey, suggest you save $1,000 in an emergency savings fund.  This will allow you to pay for unexpected expenses without having to use a credit card.  You are proactively protecting yourself and your finances.  Once you have saved $1,000 in an emergency fund, your next step is largely dependent on your personal financial position. 

The next step after creating an emergency fund is to pay off debt that you have. If you have a large amount of debt—credit cards, department store credit, car loans, etc—you should direct all of your savings toward paying off your debt.  The idea is simple to achieve financial freedom.  Minimal risk and conservative investment plans often offer 1%-10% return on your investment, while credit cards often charge 10% or more for an existing balance. You will receive more value for your money by concentrating on eliminating debt before any investment plans.  Choose one of your debts to focus on, and pay the minimum payment on the others. Take the rest of your savings put it all towards paying off the debt you've chosen to focus down. Once that card has been paid off, you will have more money per month to put towards the next debt that you choose to focus down. This is the most rewarding and effective way to pay off your debt. Additionally it is important step to achieve financial freedom and to build an emergency fund.

Once you have built a solid foundation of savings and decreased your debts significantly, it is time to begin saving for retirement. There are many ways to save for retirement, and most jobs offer 401k plans where they match a certain amount of what you invest. Other investment vehicles, such as treasury bills, bonds, and exchange traded funds should be researched and discussed with a financial advisor before pursuing.

Regardless of when you begin, saving for retirement is essential and should be approached with the same diligence and discipline you used to pay any other bill each month, save for an emergency fund, and paid off your debt.  You should have a predetermined amount each month that you put into a retirement account.  Risky, speculative investments should probably be avoided in retirement planning.  Instead focus on building long-term capital growth with limited risk. These are important steps to achieve financial freedom and build an emergency fund. It is always hard to take the first step, once you do it the rest of the journey unfolds itself.

About the Author: Chris Marchalleck is a market analyst for forex traders, an online resource for the foreign exchange market and currency trading.

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