How to Create True Financial Freedom

Track every expense you make in a financial ledger of some kind. This ledger can be as simple as a piece of lined paper, or as sophisticated as dedicated money management software on your computer.

Review your expenses for personal value to you. For example, most of us don't get a lot of personal value out of paying ATM fees or credit card interest; we'd rather not spend the money. We do, however, tend to value spending time with our loved ones, and what otherwise might look like a frivolous entertainment expense would therefore have more value.

Eliminate or minimize the low-value expenses and find creative, low-cost alternatives for the high value ones. To use dining out as an example, perhaps you want to spend quality time with your spouse, or perhaps you just want a break from chores and clean-up. These values could be fulfilled by visiting a lower-cost counter-service restaurant. Following this step will allow you to reduce your expenses without feeling deprived.

Calculate your job-related expenses, the expenses you expect to disappear when you quit your job. In "Your Money Or Your Life," authors Joe Dominguez and Vicki Robin recommend that you consider expenses for everything from daycare and commute expenses to convenience foods, yoga classes and stress-related medical bills as work-related.

Knowing how little you get to keep after all job-related expenses might also give you a different perspective about purchasing that latte.

Track all of the money you receive, whether earned, given to you or found in your sofa cushions, in your financial ledger.

Compare your income from all sources to your expenses each month. Inevitably, you will encounter months with unusual one-time expenses and see that your income was less than your expenses for that month.

Ensure that your income from all sources is greater than your expenses on an average annual basis. Bear in mind that a dollar saved is worth more than a dollar earned, since you give up a portion of the earned dollar to taxes, whereas the saved dollar can earn interest or dividends. One way to give yourself an immediate raise without increasing your income is to change your tax withholding and give up your annual tax refund.

Create a monthly or annual spending plan, also known as a budget, based on the your expected income and expenses, but only after you have thoroughly evaluated your expenses and compared them to your values. If you create your spending plan too soon, you will be tempted to skip the work of creatively reducing your current expenses.

Pay off all debt not backed by an asset (also known as unsecured debt), such as your credit cards or student loans, using the positive difference between your earned income and your expenses.

Fund a tax-advantaged retirement account to the maximum allowed each year. If you have a job that offers a 401(k), take advantage of your company's matching funds immediately, even before you pay off unsecured debt. This step might require additional expertise or education to choose your investments well.

Fund an emergency savings account equal to at least three months' worth of expenses or more. The emergency fund will allow you to cover unusual, one-time expenses, and it will provide you with a cash cushion in the event of job loss so you don't go back into debt.

Pay off all remaining debt, including your cars and your mortgage if you want to be able to quit your job. Although financial experts offer compelling arguments for keeping your mortgage through its term, the additional monthly expense will require you to have greater assets to cover it.

Invest funds outside tax-advantaged retirement accounts. This step can begin at the same time as Step 4. How and where you invest these funds is up to you, depending on your knowledge and personal preference. Real estate, rental property, stock investments or income-producing businesses are all valid choices, although stock investments tend to be the most liquid. To minimize your investment expenses and maximize your potential returns, educate yourself with books and mentors.

Subtract your work-related expenses from your annual expenses and divide by 3 percent. This will tell you the required size of your nest egg.

Based on past market performance, financial experts have determined that you could have safely withdrawn up to 4 percent of your investments every year (assuming that at least half of your investments are in stocks, and assuming your draw-down period was 30 years or less) without using up your whole nest egg. However, the younger you are when you begin drawing on these assets the lower your withdrawal percentage should be, since you might need your assets to cover more than 30 years. In addition, past performance is no guarantee of future returns, and market returns might be lower going forward.

If you have chosen income-producing investments such as rental property or a business, you might prefer to wait until the annual income received fully covers your annual expenses, since it's more difficult to liquidate a portion of a real estate holding or business.

Build your nest egg to the amount determined by the calculation in Step 6.

Quit your job and enjoy a life of financial security and freedom from having to go to a job.