It wasn’t so long ago that the words “financial freedom” seemed like a distant dream. After all, I was drowning in student loans, which meant I lived paycheck to paycheck. Because of this, I was constantly worried about money. And I hate to admit it, but I may even have missed a payment.
Obviously, I’m not the only one. Based on a Payroll.org survey from 2023, 78% of Americans live paycheck to paycheck, up 6% from last year. That means more than three-quarters of Americans struggle to save or invest after paying for their monthly expenses.
In the same way, a Forbes Advisor survey in 2023 found that nearly 70% reported living paycheck to paycheck (40%) or making less than they need to cover their standard expenses (29%).
However, my rock bottom was when I got a collection notice. I was overwhelmed with shame and fear. Eventually, I realized that I couldn’t continue living this way. I had to take control of my finances to build a future for myself and my family.
This was not an easy journey. However, even if you start from scratch, you can save $100,000 in five years. To succeed, you must be committed, disciplined, and strategic. I’ll explain how I did it in actionable steps.
1. Face the music.
My first step was to face my financial situation head-on. I began by listing all my debts, which looked like this:
- Student loans: $45,000
- Credit card debt: $10,000
- Personal loan: $5,000
Following that, I tracked my expenses over the course of a month. This was a wake-up call for me. When I saw the numbers, I realized I was spending more than I realized — especially on unnecessary things like my daily coffee run and impulsive online shopping.
2. Discover your “Why.”
There is more to awareness than just numbers. Most people need a compelling “why” to get excited about personal finance. To many of us, the idea of spreadsheets, budgets, investments, and insurance sounds boring.
What’s more, you will be more committed during challenging times if you identify your deeper motivations for saving: financial security, traveling the world, or retiring early.
In the words of Simon Sinkek, “When we know WHY we do what we do, everything falls into place. When we don’t, we have to push things into place.”
3. Trim the fat — creating an effective budget.
The purpose of a budget is not to deprive yourself; it is to allocate your resources consciously. Various budgeting methods exist, including 50/30/20 (50% needs, 30% wants, 20% savings) and zero-based budgeting (allocating every dollar).
What’s the key? You should find a system that resonates with you and be realistic about it. Remember that the word “budget” is not a four-letter word, and you don’t want to think of it that way. The last thing you want to do is to set yourself up for failure by making a plan that is too rigid. Instead, to save more money, you need to be intentional with your spending.
To help you create a realistic budget, here are some additional tips:
- Categorize your expenses. Ensure your budget accounts for essential items such as housing, food, transportation, and utilities.
- Factor in non-monthly expenses. Remember yearly or quarterly expenses, such as subscriptions and insurance.
- Leave room for fun. To avoid feeling deprived, allot a reasonable amount for entertainment and hobbies.
4. Establish SMART goals.
As soon as I established my financial reality and created a budget, I established SMART goals:
- Specific
- Measurable
- Attainable
- Relevant
- Time-bound
My goal? To save $100,000 in five years. Yes, this seemed ambitious. Nevertheless, a solid plan made it possible.
5. Set yourself up for success with automatic savings.
What is your next move? Please take this seriously — Automate your savings!
Basically, this means setting up automatic transfers from your checking account to your savings account on payday. By setting it and forgetting it, you avoid the temptation to spend that money and ensure consistent progress toward your goal.
Among the things you can automate are:
- Bill payments. You’ll avoid late fees if you set up automatic payments.
- Savings transfers. Regularly transfer funds between your checking account and your savings account.
- Debt payments. Keep up with your debt payments each month by setting up automatic payments.
6. Prioritize needs over wants by embracing the power of “no.”
When it comes to saving money, learning to say “no” is a crucial skill. Sometimes, saying “no” to yourself, a friend, your spouse, or your kids is pretty hard. It doesn’t mean you have to be a social recluse, but it does mean you have to be mindful about what you spend your money on.
To make this easier, ask yourself questions like:
- “Do I really need this item — or do I just want it?”
- “Are there cheaper alternatives, or can I borrow something instead of buying it?”
Overall, prioritizing needs over wants frees up significant savings resources. Also, it is helpful to think up what to say ahead of time.
7. Go frugally (without feeling deprived).
You don’t have to give up everything you enjoy to live frugally. As an example, here are some strategies I used:
- Cook at home. It’s expensive to eat out. At home, I learned how to cook simple, affordable meals.
- Embrace free entertainment. Explore parks, attend free admission days at museums, and attend local events to have fun for free. Also, take advantage of your local library. And, there are even plenty of free streaming services.
- Shop smart. Instead of buying new items, compare prices, take advantage of coupons and discounts, and consider buying used or borrowing items.
8. Attack your debt.
As I saved, I also aggressively tackled my debt. However, in different situations, I used different strategies:
- Debt avalanche. No matter what the amount of debt was, I prioritized paying off those with the highest interest rates first.
- Snowball method. As soon as I paid off the smallest debts, regardless of interest rate, I gained momentum and felt the accomplishment of eliminating debts quickly.
You can also pay off debt by following these tips:
- Increase your income. Try side hustles or selling items you don’t need to earn extra money.
- Negotiate lower interest rates. Find out if your creditors are willing to lower your interest rates by contacting them.
- Pay more than the minimum. In addition to making minimum payments to avoid late fees and penalties, you should pay extra whenever possible to accelerate your debt repayment process.
- Consider debt consolidation. If you combine multiple debts into one loan with a lower interest rate, you can simplify your payments and potentially save money. Before consolidating, carefully consider the terms and fees.
- Avoid taking on new debt. You will only make your situation worse by doing this.
You may also want to consider hiring a certified credit counselor if you have a hard time managing your debt on your own. Their guidance and support can help you develop a debt repayment plan that works for you.
9. Increase your income (without burning out).
Maintaining your well-being while earning more money is definitely possible. The following strategies can help you earn more money without sacrificing your health or sanity:
Leveraging your existing skills and experience.
- Freelancing or consulting. Consider offering your services on Upwork or Fiverr if you have marketable skills. Alternatively, you can contact businesses directly.
- Negotiate a raise. Have a conversation with your employer about a raise if you are confident in your performance and value to the company. To strengthen your case, research salary benchmarks for your position and industry.
- Take on additional responsibilities. You may be able to get a promotion or raise if you volunteer to work on special projects or take on additional responsibilities.
Exploring new opportunities.
- Develop new skills. With online courses, workshops, or certifications, you can learn valuable skills that can lead to higher-paying jobs or freelance opportunities.
- Start a side hustle. You can turn your hobbies or talents into a side business. You might consider selling crafts online, tutoring, or doing freelance writing or editing. To avoid burnout, manage your time effectively.
- Sold unused belongings. Through yard sales and online platforms, I decluttered and sold unwanted items.
Explore passive income options.
- You can invest in index funds or stocks that pay dividends.
- Offer online courses and ebooks for sale.
- Take advantage of your spare space by renting it out.
10. Seek support and resources.
The importance of financial literacy cannot be overstated. I found the following resources helpful:
- Personal finance blogs and podcasts. For example, The Clark Howard Podcast, So Money with Farnoosh Torabi, or Planet Money gave me a lot of insight and inspiration.
- Free financial counseling. People can receive free financial counseling from many non-profit organizations such as the National Foundation for Credit Counseling
- Books on personal finance. For a better understanding of money management, I read books by experts such as Dave Ramsey and Suze Orman.
11. Take time to celebrate milestones and adapt along the way.
My motivation came from reaching milestones, big and small. My progress was not derailed by treating myself to a small reward whenever I saved a significant amount.
It’s important to remember that life doesn’t always go according to plan. A sudden expense may arise. Don’t be discouraged by setbacks, be flexible, and adjust your budget accordingly.
FAQs
Is it realistic to save $100k in 5 years?
Your income, expenses, and financial commitments determine your monthly budget. However, most people can achieve it if they put in a dedicated effort and set up a clear plan..
How much do I need to save per month to reach $100k in 5 years?
The answer depends on a number of factors, including any existing savings and the potential returns of investments. If we divide $100,000 by 60 (number of months in 5 years), we get $1,667 per month. Savings interest, however, would not be taken into account.
Where should I save my money?
- High-yield savings account. While it offers a slightly higher interest rate than a traditional savings account, it still offers a high level of liquidity.
- Retirement accounts (if eligible). Take advantage of tax-advantaged retirement accounts, like IRAs, which earn compound interest over time. These funds may only be accessible when you reach retirement age, though.
- Investments. Be aware of market fluctuations and the risk of loss when investing your savings in low-risk options, such as index funds. You should use this strategy only when you have long-term savings goals and you should seek professional guidance.
What are some additional tips for success?
- Set realistic goals. For motivation, break your $100k goal down into smaller, achievable milestones.
- Build an emergency fund. Save up to three months’ worth of living expenses in case something unexpected happens.
- Seek professional financial advice. Depending on your individual circumstances and risk tolerance, a financial advisor can help you develop a personalized plan.
Image Credit: Daniel Reche; Pexels
The post From Drowning in Debt to Financial Freedom: How I Saved $100k in 5 Years (Step-by-Step) appeared first on Due.
