Is it possible to gain financial freedom while earning an average salary? According to the Office for National Statistics, the median annual pay for full-time employees in the UK was £31,461 for the tax year ending 5 April 2020.
And that feels about right to me. I know many people with annual earnings somewhere near that figure from several walks of life. And I believe it is possible to achieve financial freedom while earning a salary close to the average.
People sometimes talk about ‘the millionaire next door’. And up and down the land, unassuming people live in ordinary homes but with £1m or more in non-property assets. And usually, they’ve built up their wealth over time by sticking to a plan and taking some simple actions. Here are the five steps I’d take to gain financial freedom while earning an average salary.
My 5 steps to financial freedom
The first step is to spend less than I earn each month. Sometimes it may seem difficult to do that with the rising cost of living. But it’s a prize worth having and will unlock the gate on a path towards financial freedom.
Live below your means is an old idea, for sure. But it’s an important one. Even saving a modest amount of, say, £50 every month will be a good start and set me on my journey. And step two of my plan is to work towards erasing my debts. Achieving the elimination of debts and never borrowing again will help me accelerate my monthly savings.
Debts work against financial freedom because of all the ongoing interest I’d have to pay. So, if I can’t afford to pay for something now, I won’t buy it now. That kind of mindset goes hand in hand with achieving financial freedom.
Step three is to make the money saved every month work as hard as possible. Sticking it in a cash-savings account or a cash ISA is a poor choice because interest rates are so low. I’d benefit from the tax advantages by putting my monthly savings in a Stocks and Shares ISA.
And that leads to step four, which is to invest within that ISA wrapper. My investments of choice would be shares and share funds. Over long periods of time, the returns from the stock market, in general, have beaten all other major asset classes. And it’s easy to put monthly sums into investments such as index tracker funds, investment trusts and even the shares of individual companies.
Step 5 – where the magic happens
The fifth and final step in my plan is to compound my gains from investing. So, I’d reinvest all the dividend income and plough back capital gained from any shares or funds I sell. The wonderful thing about the process of compounding gains is that the growth in my account overall will accelerate over time. And that’s the final key to achieving financial freedom while earning an average salary.