Financial freedom is an interesting concept. The concept is wide, complex yet simple if it can be divided into small steps. Before we understand the steps to reach financial freedom, we need to understand “what is financial freedom?”
What is Financial Freedom?
Financial freedom indicates a state or a situation that allows a person to earn enough passive income that can help him to sustain his or her standard of life, afford all the day to day requirements, he/she wishes to and without any requirement to work.
This can be elaborated that when a person
> develops enough wealth
> set of assets providing passive income
> develop resources generating regular cashflows
And, creating sufficient regular cashflows to make a life where money is not a constraint or restricting force.
Financial freedom is one of the main goal of financial wellness. This gives a feeling of security and satisfaction with respect to one’s current as well as future state of assets, cashflows and money situation.
Jason Vitug in his book “Happy Money Happy Life” calls “Happy Money” i.e. money that enables you to “live financially free”. Free here indicates freedom to make life decision that are solely determined or measured on the scale of money. Living financially free is considered as an ultimate goal of life.
Financial freedom allows you to recognize the areas of your life that require your attention so that you don’t sacrifice life goals, and live your life debt free, financially secure, have sound retirement, or be financially independent.
Financial wellness is closely tied with financial freedom and indicates your ability to meet current and future financial needs. In other words, financial freedom is having adequate quantum of ‘happy money’.
Happy money requires a good understanding of personal finance, debt payments, saving routines, money management, investment options, etc for a financially secure life.
One point that needs to be kept in mind here is that it’s not only about living well today but also about building better tomorrow.
Financial freedom can mean different things to different people. But generally, it means that reaching a point of financial comfort where the worry to pay bills is less.
Two dimensions that operate against each other and need to be balanced to indicate financially freedom are cash flows as passive incomes from investments, and annual expenses.
8 Tips you must know
There are 8 tips that can help you to pave your way to achieve financial freedom
- Set your goals: Setting up goals is the first step to achieve any objective. Similarly, in order to achieve financial freedom, you must define your goals. Goals should be defined from short term as well as long term perspectives. Goals help a person to stay focused and stick to the plan.
You must be specific for your goals like what are the big purchases that I want to make?, What long term/short term milestones like wedding, children college fees, retirement etc do I need to pay for?, what monthly budget do I wish to achieve?
2. Develop a habit of saving purposefully: You must develop a habit of saving. Savings are the cushion for income disruptions, gives you freedom to take risk and take shifts in your profession, reduce your financial stress in future.
The truth is that financial freedom is built on a strong savings rate. A good saving rate is a hope of achieving your goals faster.
One interesting fact about savings is that you can always control your saving rate, whereas you can’t control the performance of your investments. Thus, Savings are said to be controllable.
3. Invest with purpose: Saving alone won’t work wonders, if it is not coupled with investment. In order to create wealth, you must let your money grow over time. And, this is possible only if you are investing with a purpose and achieve some growth rate in your investments.
For having a sound investment, you should plan, budget, improve your financial literacy , understand the link between savings and borrowings. Making informed short term investing decisions can help you to improve your long term financial stability.
4. Cultivate an Emergency Fund: Developing an emergency fund means keeping few savings aside. Such savings which would not be touched or used to achieve any short or long term objective. Such fund should remain in liquid form at all times and without any intent to earn any further income or investment in other assets.
5. Buy Insurance : Buying an insurance helps you to buy peace of mind and safety net against sudden huge cash outlays. Health insurance is a line of defense that would save you from the burden of expensive hospitalization or medical bills in your old days. Retirement is the stage in the journey of life when expenses keep on rising but the income streams does not rise accordingly. Insurance can save you during the blue moon during that time period.
6. Manage your debt : Debt is an interesting concept. It can help you to acquire assets that involve huge cash outlays whereas on the other hand, it can place financial burden, build stress. However, getting rid of debt creates a strong foundation for your future’s financial freedom. You must keep an eye on your credit scores, good credit scores and cheaper debt.
7. Build passive income cash streams : You must use a part of your income, or skill set to create self sustaining assets that can provide you with passive cash streams. For instance, investing in property that can generate rental income for you
8. Seek professional help: As we understand the complex world of financial instruments, it is good practice to seek professional advice to understand the investment schedules, interest rate shifts, tax implications etc. A trusted expert can help you to kick start your journey towards financial freedom and achieve your long term as well as short term financial goals.