Financial freedom means having enough savings, investments, and cash on hand to afford the lifestyle you want for yourself and your family.
According to the CoreData or Financial Mindfulness Financial Stress Survey that was conducted by over 1000 people in Australia, over 30% of them reported feeling financial stress. This was present across socio-economic groups and is not limited to any specific income or social group.
When you have financial freedom, you can retire or pursue the career you want without being driven by survival. Financial freedom means freedom from hunger and fear. Money plays a huge role in our lives.
However, you are free when it no longer becomes the dominating influence on your goals and activities. So, learning all the steps that will lead you to financial freedom is paramount to success and happiness.
The main elements of financial freedom
These elements will help you understand the different types of financial freedom.
Sustain yourself without needing to work
An automatic income comes from either interest on savings, passive income, or a business. Which keeps on generating income even when you stop working. This is one of the hardest financial freedom goals to achieve.
You are not obliged to achieve 100% financial freedom to enjoy the benefits. You can opt to focus on any of the elements you choose to.
Have a high income & low expenses
Avoiding excess spending on credit cards and investing in the future is one of the most important elements. When your expenses exceed your income, you cannot be financially free. Rather strive to actively save, by putting away a certain percentage from your money monthly.
Your survival threshold
A survival threshold can be described as the minimum amount you need to enjoy a comfortable life. While other people may require less than $10,000, some will need $70,000.
A low survival threshold simply means that you could be perfectly content with a bare minimum of material conveniences. In other words, you are willing to sacrifice luxury to make bigger changes.
Steps to financial freedom
Financial freedom is personal. You should dream big and get specific about your goals.
#1) Learn ways to manage money
When you do not have plans for your money, you will not achieve anything. You can manage your money by separating your banking accounts and budgeting. You can use a banking app to create extra bank accounts that will allow you to save for different purposes.
An account that you will use to pay for the essentials of life, an account you will use to buy luxuries, a savings account for big purchases, and an emergency account—among others.
#2) Clean your finances
After you have learned how to manage money, you will realize that you have made huge mistakes in the past. Hence, you need to clean up your finances. Pay off all your debts such as credit cards, student loans, or car loans.
Having debts means that someone else owns your income. So, for you to reach your goal, you need your full income at your disposal, not bits and pieces that are left over after paying credit card bills and student loan payments.
#3) Make smart career choices
The most important wealth building tool is your income. So, when you choose a career, you need one that will support your goals. It can have a big impact on your long-term success.
What should keep in mind when you choose a career:
- Where do you see yourself in 10 years? your job should make sense and match your overall goals.
- Check if there is good income earning potential. Although you will not earn your dream salary right away, make sure there is an opportunity for your income to increase as your experience increases.
- The job benefits should support your goals of financial freedom. Your ability to build wealth can dramatically affect retirement savings and health insurance options.
#4) Have a short-term saving strategy
If your goal is financial freedom, you should have a buffer for the unexpected life events that happen to all of us, like car repairs, broken appliances, and medical deductibles. Stay away from using credit cards and taking loans. Have an emergency fund and a plan to cover big purchases.
#5) Learn about investment options
Now that you can manage your money and you have your short-term saving strategy in place, you are ready to partner with a financial advisor who can help you make the most of long-term investment options. And the sooner you start investing, the more time your money will grow.
How to get started with a simple investment option:
- Retirement Savings: Work with your financial advisor to take advantage of the tax-favoured retirement accounts that are available to you at work. Decide how much you should invest in your retirement fund. 15% might be enough.
- College savings: You can start investing in an Education Savings Account (ESA) to save for your kid’s college education.
The money you invest in ESA grows tax-free, which means you will not pay taxes on it when it is used to cover college expenses. Saving toward your child’s education helps them avoid student debt, and you are setting them up for financial freedom too.
- Real estate investments: Your home should not hold you back from achieving financial freedom. Hence, it is important to make wise decisions about the kind of home you purchase and how you choose to finance it. Buy a home that is a good investment, as it will continue to grow in value as the years go by.
- Taxable investments: Once your home is paid for, you can contribute more than 15% of your income to investments. However, before you take on taxable investing, make sure you are taking advantage of all the tax-favoured accounts.
Choose a simple investment approach and work with your financial advisor to choose growth stock mutual funds with a long history of above-average performance.
#6) Be dedicated to your journey to financial independence
Keep up with your fund performance so that you get the most out of your investments. Make use of a financial advisor to help you navigate your investment options and, brave the ups and downs of the stock market.
A financial advisor will help you with the following:
- Make wise decisions about your investment strategy.
- Regularly balance your funds so you minimize your risk.
- Have a realistic plan for what financial independence looks like for you.
- Set up a withdrawal plan for your specific situation.
You have financial freedom on your doorstep
Financial freedom is more than creating emergency funds. It is all about living a stress-free life, without breaking a sweat.
Follow these steps and you will reach your destination in no time. It is not as easy as it looks. It requires time, hard work, and dedication.