Financial freedom is something that must be “won,” very literally because it doesn’t come naturally. For some people, financial independence means different things. It can entail being debt-free for some people and having enough cash flow for others.
Some people define financial freedom as having enough money each month to cover their expenses and having an emergency account that is completely funded. Some people might prefer to take retirement early and take long trips. The concept of “financial freedom” has many meanings to different people.
Although some of these interpretations are accurate, none of them are complete solutions.
Financial freedom is a state in which a person has enough money on hand to cover expenses and can achieve financial goals on their own, independent of others.
For most people, achieving financial freedom is an important goal. Financial independence typically refers to having enough cash on hand, savings, and investments to support the lifestyles that we want for our family and ourselves.
It entails building up our savings so we can retire or pursue our ideal careers without being compelled by having to make a certain amount of money each year. Financial independence entails having our money work for us instead of working for money.
People can attain financial freedom in many different ways. The FIRE movement is based on being frugal and encouraging individuals to maximize their rate of savings by exploring ways to improve their income or reduce their spending.
The goal is to set aside 50 to 75 percent of your salary as savings, which will be utilized to build up assets and produce adequate passive income to cover retirement expenditures. Your path to becoming financially free will go more quickly the more steps you can complete.
Steps to take to achieve financial freedom:
If your income is dependent on the future, you cannot claim financial freedom. The desire to become financially free will stay a dream without a plan.
We are hindered from achieving our most important financial goals by rising debt, financial emergencies, increased consumer spending, and many other issues. Everybody faces these difficulties, but by adopting the next seven steps, you may put yourself on the right path to financial well-being.
01. Pay First To Yourself.
Gaining the desired financial freedom requires taking care of yourself first.
Putting a specific sum of money into savings or investing account before paying any other bills, rent, discretionary expenses, etc., is “paying yourself first.”
Paying yourself first has been one simple step that has brought many people very closer to financial freedom. This works because it drives us to look at other options to keep your costs down.
First, you should pay yourself a fixed amount of, let’s say, $1,000 each pay period, and then you should pay your debts with the leftover. And if you don’t have enough money to pay those payments, you will have to find a second job to cover the expenses.
Talking of paying yourself first even when you have so many other financial responsibilities may sound absurd. Even while it’s important to pay all of your expenses on time, you can’t always ignore planning for the future.
Paying yourself first is paying yourself before engaging in any other spending. In other words, your long-term financial security is your top priority. In either case, paying yourself first ensures that you are consistently setting money aside so that you can invest in your future finances and self-improvement.
02. Recognize your current situation.
To achieve financial independence, you need to know where you’re starting from. It can be stressful to think about how much money you need, how much debt you have, and how much money you don’t have in savings. But this is a significant step.
List all of your debts, including debts you have incurred on your credit cards, your mortgage, student loans, and any other loans you may have taken out. Include any sum that you may have borrowed from your friends or family members over the years.
Also Make a list of all your savings, including your investments, retirement plans, corporate retirement matching programs, stocks, and savings accounts. The regular payments you get, such as your earnings or salary from a side job will also be added.
Knowing your financial situation will enable you to take steps to meet your financial objectives.
03. Outline Your Objectives.
Why do you require cash? Do you desire permanent debt relief? Do you long to leave the 9 to 5 grind? Is there a place you’ve always wanted to go? For a wedding, a retirement, or a family, do you need to lay money down?
These are the goals you wish to achieve as soon as you earn enough money. Therefore, money is just a tool to help you reach your financial objectives. However, until you put your goals on paper, your money will be wasted, and you won’t know how to use it wisely. So put down your top five goals for the upcoming 1, 5, 10, 20, and 30 years on a piece of paper.
Financial freedom is much easier to accomplish when you are clear about your goals.
04. Maintain a spending log.
Monitoring your spending is an important step on the path to financial freedom. Setting away money for emergencies as well as retirement savings can seem overwhelming if you’re already living paycheck to paycheck. You must first comprehend how much you spend to determine just how much you can save.
By tracking your expenses over a month, you can help you get a better sense of your spending, from large expenses to the few dollars you spend on coffee each morning. Data collection and categorization for spending can be made simple by using a free app. You can also find hidden costs with these apps.
This expense tracking, which increases accountability, is a crucial step toward financial freedom. Additionally, it reveals a lot of unnecessary purchases you made just because you felt like it. An impulsive purchase, if anything, symbolizes losing control and stands as an obstacle in the way of your path to financial independence. Therefore, you must maintain control by precisely keeping track of your spending.
05. Clear Your Debt.
In multiple ways, paying off a large debt promotes financial freedom. You do, after all, have more potential future cash flow. Your credit standing is excellent. Most significantly, finalizing a loan removes a tremendous burden from your shoulders. Some experts would advise you that investing your money in equities is a better choice than clearing your debt. Maybe if you’re a great stock picker, that’s true. But, if you’ve never invested in equities, you risk acquiring extra debt.
Debt repayment is of two main categories. The first is the snowball approach, in which the smallest debt is paid off first. In other words, cross off one item from your list before moving on to the larger bills. The avalanche technique is the second way to pay off debt, in which you pay off the obligation with the highest rate of interest first before moving on to the debts with lower interest rates.
Both of these approaches are effective. So if you’re drowning in debt, you’ll need to choose the one that suits you the best. Paying off debt, however, must be acknowledged as one of the most crucial steps toward achieving financial freedom.
06. Develop other revenue sources.
A 9 to 5 work might not be enough for most people who want to achieve financial freedom. In other words, finding a job may not be your only option for generating revenue. Some financial gurus advise finding up to five different sources of income; consequently. If you have a 9 to 5 job, congrats! You have one source of money. You now need to name four more!
Various source of income is possible. The first strategy is active income, in which you exchange your time for cash. The alternative method of generating additional revenue is to do it passively, which involves doing the work only once and having the money stream in automatically thereafter. So decide which one you suit better and start making those small moves in the direction of earning a second income.
You must sacrifice some sweat, blood, and tears if you’re serious about achieving financial freedom.
07. Invest.
The final advice for achieving financial freedom is important. Investing is the most forward-looking action you can take to achieve financial freedom. It is a prevalent misunderstanding that you need a high income to be financially free, but that’s not always the case.
Some high-income households may be heavily indebted, guaranteeing they will never become financially free. Other wealthy families might earn modest incomes in the meanwhile. Many people become rich because they regularly save and invest money throughout their lives, rather than accumulating wealth as a result of their income or an inheritance.
The first step is to invest as soon as you can and as much as you can, making use of compounding to your advantage. Next, raise your investments annually by a proportion more than your income growth.
Achieving 50-60% of asset allocation in equities as soon as you can is another crucial step. Maintain a 60-40 split in equity and non-equity investments or assets as a basic rule. Feel free to adjust that ratio as per your level of risk tolerance.
Conclusion:
These seven steps are broken down into varying levels of complexity, so you might find that some of them come easily to you whereas others take a lot more effort. For instance, many people find it much simpler to keep track of their expenditures, reduce spending, and invest than, say, to discover a new source of income.
You’ll get one step closer to reaching the financial freedom which you deserve by following the tips in this article. Examine your finances, create other sources of income, reduce your debt, and even before you know it, you’ll be debt-free.