The first 2 essential steps
toward financial freedom

Get started on the right path and reach financial freedom by following these recommendations

January 28, 2022

It’s natural for some to believe they’ll never even be able to step on the path toward financial freedom. Fortunately, however, everyone can get started on the path and reach financial freedom if they take the proper steps.

What are the first steps Montrealers should take?

For many, the first step toward financial freedom is to understand their unique financial situations. The second step is to use their finances to improve their credit scores.

The first step on the path toward financial freedom is to understand your unique financial situation.

1^st Step: Understand Your Unique Financial Situation

Situation 1

Let’s say you recently graduated from university and are still living in the city. You’re freelancing, serving coffee, or working an entry-level job. You share an apartment with roommates. On nice days you commute on your bike; on not-so-nice days, you rely on public transit. A significant portion of your monthly pay cheque goes to rent. And you’re struggling to make payments on your student debt.

One day, in the future, you might achieve financial freedom. For now, however, you have no choice but to focus on more pressing financial concerns.

That’s your unique financial situation. Your personal path toward financial freedom starts with doing what you need to do to pay off your student debt.

‘The second step on the path toward financial freedom is to use your finances to improve your credit scores.’

Situation 2

Let’s say you’re in your forties, have two kids and one dog, and live beside Westmount Park. You pay mortgage fees, utility and insurance bills, veterinary bills, credit card debt, and more. And on top of all that, you’re trying to save for retirement while putting away money for your children’s post-secondary education.

One day, in the future, you might achieve financial freedom. For now, however, you’ve got a lot of bills and debts to pay.

That’s your unique financial situation. Therefore, the first step on your personal path toward financial freedom is to pay all your bills and debts on time.

2^nd Step: Improve Your Credit Score

To pay off student loans, debts, and bills, it helps to have good credit. Therefore, the 2^nd step on the path toward financial freedom is to improve your credit.

Here are some tips to improve your credit score.

Tip 1: Know the basics

• You should be able to access your credit score through your bank.
• In Canada, you can get a free credit report through Canada’s two credit reporting agencies: Equifax and TransUnion.
  • Note that a credit report neither affects nor includes your credit score.
• To find out your credit rating, look through your credit report. Credit ratings are indicated by the letter R followed by a number.
  • R1 is best, as it means you pay as agreed within 30 days of billing. R9 is the worst, as it means you have bad debt, have claimed bankruptcy, or have moved without changing your address. R0 means your credit has been approved but not yet used and is therefore too new to rate.
• Next, access your score through credit bureaus.

Tip 2: Build your credit

• Make sure to keep an eye on your credit report and monitor it for any mistakes.
• Monitor your payments and pay your bills on time.
  • When you can’t pay in full, make at least the minimum payment.
  • When you can’t pay at all, contact the lender immediately.

• Avoid exceeding your credit limit.
• Aim for less than 30% of your credit utilization.
  • To do so, use the credit utilization ratio.
• Know that using debit cards will do little to help your credit.
• Use more than one kind of credit, such as lines of credit and auto loans.
• Manage problem debt by considering a debt consolidation loan or debt consolidation program.
• If you can’t obtain an unsecured credit card, use a secured credit card, as these can help improve your credit score.

Just Like That, You’re on Your Way

After understanding your unique financial situation and doing what you can to improve your credit score, you may find yourself well on your way to financial freedom.

Feature image: Frantisek Duris via Unsplash