Financial freedom means various things to many people. Moreover, it can mean the ability to buy anything anytime to some. It could also mean the freedom from the stress on how to pay bills or meet sudden expenses. Needless to say that it could also mean a debt-free life or being financially stable enough to retire. While these are what most people believe, it is not totally true.
We discuss what Financial Freedom is and how best can you achieve it in this article. Let's begin!
What Is Financial Freedom?
It may sound and appear surprising to you, but financial freedom is all about control. Yes, you read that right! It is about you having command over your finances. In simpler terms, it means that you have complete authority over how you want to live your life. Also, it means that you have a backup income to help you pay your bills or meet sudden expenses.
Moreover, such freedom is not only about being rich. It signifies that your present and future are secured financially. We hereby thus list 8 situations, to help you understand the context of such freedom.
| S.No. | Situation | Action | ||
| 1 | Not exhausting your Paycheck | You have an emergency fund to meet any crisis. | ||
| 2 | Adequate money to quit your job | Your savings can thus help you plan a sabbatical or a big vacation. | ||
| 3 | Financially stable and saving too | You are thus enjoying spending on the stuff you like as well as saving. | ||
| 4 | Not constrained by Time | You have left the rat race and doing things that interest you, and you are not broke. | ||
| 5 | Enough for simple retirement | You cut down your lifestyle to retire early. | ||
| 6 | Enough for a good retirement | You have enough assets and passive income streams. | ||
| 7 | Enough for a great retirement | You are traveling the world and spending time with friends. | ||
| 8 | Surplus money to ever spend | Your wealth lives longer than you i.e you cannot spend it in this lifetime. |
Explained
As you can see, the first level is thus interesting. Here you are not living from paycheck to paycheck. Moreover, the working poor is not its sole victim.
It can also happen with a super-rich person, where he spends everything he earns. Thus living under tight financial conditions.
You can subsequently see that financial freedom is all about financial control.
Level 4 is also worth mentioning. Not constrained by Time. Moreover, it is something many people dream of. It suggests that your cash flows are aligned in a way that you can quit your job to pursue your dreams but it will not leave you broke.
Level 5, popularly expressed as FIRE. It stands for Financial Independence, Retire Early and is also a concept getting famous in the West with individuals in 20s and 30s.
It subsequently requires the followers to either increase their income or reduce their expenses.
The idea of FIRE is thus to save 50 to 75% of your income, using it to gather assets and also creating a passive income source for retirement days.
You can thus pick up your level of freedom. We hereby simplify it down to 9 actionable steps for you to take. The more steps you achieve, the quicker will be your freedom.
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9 Steps to Achieve Financial Freedom
1. Know Your Current Situation: This is thus the very first sign of your journey to financial freedom. It consists of knowing how much debt you owe, your net savings, monthly incomes, etc.
In brief, you will thus need to know your financial statement as in your income, expenses, assets, liabilities, etc. Having thus done do, you move to step 2.
2. Note Your Goals: So why does one need money? Perhaps, it could be to pay off the education loan, to start any business, to travel, to marry your children, etc.
As and when the money comes, they can accomplish these goals. Thus, money is simply a means to an end. Unless you have clear goals, having surplus money will be of no use.
Write down your top 5 goals that you wish to accomplish in the next 1, 5, 10, or 20 years. A written goal will always motivate you to pursue it.
Following the SMART goals theory can help you a great deal. SMART stands for specific, measurable, achievable, realistic, and time-bound.
3. Monitor Your Expenses: Thirdly, you should be tracking your expenses. You can do this by making a note of all your spending or simply using an excel spreadsheet.
It is thus an important step toward achieving your financial freedom. You get to know if you are making unnecessary purchases. Keep tracking your spending.
4. Fund Yourself First: Sounds selfish? It isn't so. You should set aside funds for your savings or investment before you pay the bills, foot other expenses, etc.
This principle has helped a lot of people achieve financial freedom. It thus forces us to find options to limit our expenses.
Continued...
Let's assume, that what remains after setting aside for the above is not enough for you. In this case, you will be forced to shore up extra income.
You may consider cutting your expenses or pick up a side hustle. Either way, you are paying yourself first and securing your financial future.
5. Check Your Spending: The saying goes, a penny saved is a penny earned. But this formula is not totally right as Rs 1 saved is not always equal to Rs 1 earned. For the reason being, if your invest Rs 1, you will end up getting much more.
Moreover, this does not mean that you compromise on your lifestyle or live like a monk. It simply means that you adopt a smart spending behavior, like avoiding impulsive buying. You can auto-debit your fees on credit cards to do away with fines.
6. Clear Your Debts: Nothing sounds better than getting that debt off your shoulders. Moreover, it improves your credit ratings. Also, you have more cash flow to work with in the future.
Two methods are popular among people to clear their debts.
The Snowball method asks you to clear your smallest debt first and move on to others while the Avalanche method requires you to clear the debt with the highest interest rate first.
7. Keep Your Career Going: With an increase in income, while keeping your spending stable or reducing it, you are sure to get financial freedom quickly.
So keep adding new skills and improving your career prospects.
8. Develop Other Income Sources: Most people will not be satisfied with a 9 to 5 job to get financial freedom.
Thus, you need to think beyond it. Also, many experts suggest five income sources to achieve it.
The active method includes trading your time for money, wherein you get 24 hours to put in work to earn.
On the other hand, the passive method helps you earn in an automated manner without much effort.
You can either do affiliate marketing, create designs on Fiverr, etc. Choose the one which suits you the best.
9. Investing: Finally, the most forward-looking option to achieve financial freedom in investing.
You can thus invest as much as you can, besides as early as possible to benefit from the power of compounding.
Typically, as a rule of thumb, invest in equity to non-equity in 60-40 ratio respectively. This will help you grow your wealth sooner.
However, you can choose to invest as per your risk tolerance. You should check your portfolio once a year and rebalance it if needed.
Conclusion
The above 9 steps will definitely help you achieve financial freedom. Moreover, some of the steps will come to you naturally while others may need some work.
For example, tracking expense, investing may be easier to do while building other sources of income might be tough.
Nonetheless, the more steps you can achieve, the closer you will be to achieve financial freedom. Investify can help you in your journey and leverage your time like none other. Secure your future with us. Happy investing!
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