How to gain financial freedom? People who desire to retire earlier always ask about it. From a very young age, most people are trained to complete education and get a job. After getting a good job, the idea is to save money for retirement.
The basic idea is that we must take the same linear path from school till death. You’re expected to spend most of your day at work. Climb up the professional ladder. Get a hike. Buy your own house and a bigger one. To buy more stuff which wasn’t essential to start with. Meaning, you only get the time to relax, explore and spend some family time after retirement.
You may name it the time-money paradox. Majority Americans barter most of the time for money. Then they spend most of their salary on unwanted material things. As expenditure snowballs, many want a bigger paycheck. Now, this demands more responsibility and more extended hours at work. This means lesser time to enjoy the extra income. It’s a vicious cycle which continues endlessly.
Have You Ever Felt a Strange Sense of Relief? That’s What It Feels like to Have Financial Freedom
Being able to pay for a car repair without tension is only a part of the picture. It’s also more than merely paying off for emergencies without stress. In sum, it’s about knowing that you don’t have to be tense about retirement. Why? Because you’ve worked with your financial planner to save and invest smartly for years. It’s the choice to leave your job to do things you love even if that means getting lesser pay.
If you’re financially free means, you can take life decisions without having any stress about the financial effect because you’re ready. You take charge of your finances rather than being under their control.
The road to financial liberty isn’t a become-rich-quickly strategy. Plus, financial freedom doesn’t imply that you’re not responsible anymore for handling your money smartly. It’s the opposite. Having total charge of your money is the result of time, hard work and sacrifice. And all this hard work is worth it.
All set to learn how to become financially free? Begin by defining what financial liberty looks like for you.
What Is the Meaning of Financial Freedom for You?
Financial freedom must be personal. Dream big and be particular about your goals.
What does financial freedom seem like for you? Perhaps it looks something like this:
- Liberty to pick a career you’re passionate about without having to worry for money
- Freedom to go on a foreign trip every year without it affecting your budget
- Independence to pay for a new ski boat
- Liberty to buy that dress without waiting for the sale
- Freedom to attend to the needs of others with complete generosity
- Independence to take retirement ten years early
When you’ve financial freedom, you’ve choices.
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What Is Financial Freedom?
Being financially free means you can live your desired lifestyle without a regular salary. In simple terms, financial freedom is today’s definition of retirement.
Rather than defining financial independence as a single point in time, let’s break it into four phases:
Phase 1: No Freedom
Everyone starts their journey by depending on the monthly pay-check. During this phase, a job and steady income are needed to pay bills. Without ongoing checks, your savings deplete entirely. Plus, you can even risk defaulting on the monthly expenditure.
Phase 2: Temporary Freedom
To move to the temporary phase of financial independence, you should spend less than your earnings. Plus, it is also critical to build a pool of savings. Else, you’ll be compelled to work indefinitely as your lifestyle depends on your job-income. As you start saving some part of your income, you may also invest in a diversified portfolio. This will help you produce a steady income stream. Or, you may begin your own business side-by-side to create another income stream.
Your freedom increases with your savings. Ultimately, you’ll have sufficient savings to be at ease when changing jobs, traveling, starting a business, etc. To sum up, you can do anything you like which wasn’t possible earlier because of your full-time job. These could be significant life changes, but they’re temporary. Your freedom is also brief until your income exceeds all the expenses.
Phase 3: Permanent Freedom
During this phase, your non-job income is higher than your overall expenses. Hence, you don’t need a regular pay-check to sustain. You possibly have a steady side business or a good investment portfolio giving you a steady income.
Yes, a side business is a hard-earned income. You’re trading your time still with money. But, the idea is that your side business is your passion. It’s something you love doing. Something you think is meaningful or fulfilling for you.
Fulfillment is the whole point of writing this article. Financial liberty doesn’t mean that you take early retirement for a life of leisure. It’s about having independence and autonomy in your daily routine. This way you can design a better life, but spending your energy, time and money in a meaningful way. If this means starting your own business, then go ahead. Doing fulfilling work while earning money is what we define as a win-win situation.
Phase 4: Luxurious Freedom
This final phase is a notion rarely discussed or attained. Though we define permanent liberty as the point when your salary is higher than expenses, it’s a shallow definition. Plus, it’s replete with essential assumptions. E.g., you need $1,500 per month to lead a barebones lifestyle, and you can safely take out $1500-$1600/month. Do you think you’ve technically gained financial freedom?
Let’s say that a budget of $2000 per month will give a higher sense of satisfaction. Maybe the extra $500 could be used for travel, hobbies, and entertainment. All of this makes you happier. But $2000 a month is beyond what your portfolio can support. This means you’re going in the wrong direction
The trade-off in this situation is clear. You can keep working extra years to create a more magnificent savings pool. This may give you additional income and flexibility for the rest of your life. Or, you can quit your job as early as possible and wish that a small portfolio will give enough money. It’s all about striking the correct balance provided your situation.
When you’ve sufficient extra income you can spend freely, this is what is luxurious freedom. This is the point where your income is higher than your expenses by a decent margin. Hence, it allows you to increase or lessen the spending as per the desired lifestyle. You may name it financial freedom.
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Do You Want Financial Independence?
Ask the following questions to yourself. Also, ask your partner if you’ve one.
- Does your existing lifestyle make you happy?
- Do you have a meaningful balance between work and personal life?
- Have you found purpose and enjoyment in your job and daily life?
These questions could be difficult to answer. But they give a lot of information about your want for financial liberty. From our experience, we can divide the responses into three groups.
Group 1: Work Is Meaningful
Some people have a purpose in their jobs and don’t want to stop working. That’s respectable and fine. You can keep working and be financially independent. The two aren’t mutually exclusive.
Even if you don’t want to stop working, we do believe that financial freedom is necessary. At least, saving enough to get to the temporary state can give you peace of mind. There’s also a chance that your job may be eliminated, or situations may change. Financial freedom can partially remedy these concerns.
Group 2: Work Is Meh, but Important
Some people are relatively indifferent regarding work. If you belong to this group, you possibly don’t love your work. Though it’s not your raging passion, you can tolerate it as it pays your bills. There are both good and bad days. But, the overall trend can be described as necessary and neutral.
Here, your desired level of financial liberty must have an inverse relation with your disdain for work. You must toil harder to grow your savings and attain financial freedom if you’re becoming increasingly unhappy with work. This is because financial freedom will enable you to switch jobs or quit it altogether.
Group 3: Work Is Terrible, Boring and Soul Devastating
If you belong to this category, you must put financial freedom as your top-most priority. Do you detest your job? Then you must be ready to make sacrifices to find a way out. This may include cutting unwanted expenses, doing a side job or even moving to a place with low cost-of-living. You should save a lot so that you can switch jobs as fast as possible.
By paying attention to financial liberty, your perspectives can change. You may go from toiling through 40-years of unwanted employment to crafting the life you want. And you may find liberty faster if you invest energy, money and time toward it.
The point is that time is the most valuable asset — not money. If your time at a job makes you unhappy, save sufficient money to leave and get a new job. Life is very short to spend your days miserably.
Are You Chasing Financial Freedom?
Given the different stages, plus the various opinions on work, where do you belong?
Is financial liberty a persistent desire? Or, you want to continue working and spend your salary freely?
For Vanessa and I, financial liberty is our primary goal. Both long-term and financial. We appreciate the freedom and flexibility which comes with the enormous savings pool. And, we would prefer other consumption than living on a monthly check. Though we haven’t reached permanent freedom, we’re doing well. We’ve no debts on us. Plus, we’ve gathered sufficient assets to buy an extended period of freedom. And this is all that we want at this point.
The media usually shows financial liberty as an impossible task. Plus, one which needs years of savings and investments. This is true to some extent. But, it’s better to focus on each milestone you achieve in the process. E.g., most can discharge non-mortgage debt and gather enough savings to get a new career. These are significant achievements during the journey to financial freedom. They must be celebrated.
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How to Start Your Journey to Financial Independence?
Step 1: Learn Money Management
You’ll be stuck if you don’t make a plan for your money. You’ll be wondering where your salary went at the month end. That’s not what we call financial freedom. This is the recipe for financial catastrophe. If you’re unmarried, find an accountability partner.
Creating wealth is not possible if you live pay-check to pay-check. Put a name on each dollar before the month starts. Then track where you spend all through the month. If you’re consistently under-or-over spending in some areas, you can adjust that sum in every category.
Budgeting is crucial to bring your money on the correct track. But it’s role is not over there. Even when you attain financial freedom, you’ll still have a different budget each month. Irrespective of how much money you’ve, you should have a plan.
You won’t achieve financial freedom by luck or accident. Budgeting is the paving stone to creating wealth on purpose.
Step 2: Tidy Up Your Money
Once you learn money management, you might feel you’ve made some blunders in the past. That’s fine But, if you wish to be financially free, you must clean this mess. Do this before you can begin creating wealth.
This means if you’ve any debt, it’s time to pay them off.
Why do you ask? Because when you owe money, your salary is going to someone else’s account. Hence, if you want to be free financially, you must’ve your total income with you. Not in bits and pieces which remain after paying your credit card bills and other debts.
Paying your debts will help you set the groundwork to create long-lasting wealth. But, make sure you’ve at least $1,000 with you before handling your debt. You don’t want any unseen expense to interrupt your progress!
Many people feel as if they got a hike when they begin budgeting. They see it as good news. But divert all that extra amount toward the tiniest debt until it’s no more. Then let the snowball rolling. Though paying off your liabilities is hard-work. But nothing can beat the feeling you get by keeping all the money you earn every month.
Once you don’t have any debt, stick there for a while. For good. Having debts weakens your ability to create wealth. It puts your money plan at risk. Stay away from debt.
Step 3: Be Wise About The Career You Choose
Your income is the most significant tool for wealth creation. Hence, when it boils down to picking a career, there’re many things at stake. There’s no reason why you should stick to a dead-end job. Especially when it makes your life miserable. Getting a job you like which also supports your financial goals will help you enjoy the process.
So, what should you be looking for? Below are some things to remember:
- Where do you see yourself in 10 years? Begin with the finale in mind. Does your present job match with the long-term goal?
- Is there the potential for income-earning? You may not be earning your dream figures from the start. That’s okay. But ensure there’s a scope for your income to grow as your value grows.
- Are you able to grow? Is there an opportunity for you to progress both professionally and personally?
- Do you like your work? Don’t waste time on a job you detest. Find something you feel strongly about. Something that allows you to make use of your skills and gifts.
- Are the benefits supporting your financial goals? Your options for health insurance and retirement savings can have a dramatic impact on your wealth-creation.
- Your career choice can strongly affect your long-term monetary plan. So, don’t take it lightly.
Step 4: Strategize Your Short-Term Savings
What if you had to withdraw money from your 401(k) when you’ve to replace your AC? Imagine if you had to take a credit card to buy groceries in the event of losing a job? How would you go ahead if you keep borrowing money? Yeah, you wouldn’t.
If you aim for financial freedom, you need a cushion for the unseen life events. These situations come in everyone’s life. You may have to repair the car that just met an accident or fix broken appliances. That’s why you must have enough in your emergency fund. So much so that you can cover 3-6 months of expenses without borrowing money.
When you’ve enough money to cover the unseen events, you get a peace of mind. And, this is a crucial part of your financial plan. Once you get your fully funded savings account, you’ll start feeling greater flexibility in the budget. Then you’ll be able to say yes to splurging on shopping without any guilt.
As you aren’t borrowing money, you should also have a savings plan for huge purchases which aren’t urgencies. E.g., let’s take a summer vacation. It’s simple. Make a list of items in your budget. Then divide the amount by the months you need to save. You don’t have any debt anymore. This means you can splurge on your vacation rather than a bill following you back home.
With a planned emergency fund plus a strategy to cover huge buys, you can start investing. Your financial groundwork has been laid.
Step 5: Know the Investment Options You Have
Now that you’ve planned your short-term savings too, you’re ready to find a financial advisor. A partner who’ll help you reap the most from your long-term investment choices. The good news is when you invest early, there’s more time for your money to grow. This is the power of compound interest. Below is how to begin:
Work with your advisor on how to take benefit of tax-deferred retirement accounts. This includes your 403(b) or 401(k). How much should you be investing for retirement? Aim for 15% of your salary. And if the employer is matching your contribution to 401(k), take it. Who says no to free money after all?
If you also have Roth 401(k) at work with great mutual fund choices, excellent! You can invest a complete 15% in that. But, if you have a traditional 401(k), contribute to the match. Then invest what remains from your 15% in a Roth IRA. If there’s still part of your 15% remaining, return to 401(k).
Some may question why Roth is a good idea? See, when you contribute toward Roth IRA or Roth 401(k), the money invested grows tax-free. This means you’re free from paying taxes on it even when you withdraw it on retirement. That’s a huge benefit you should never miss out on.
Now you’re already investing 15% of your income in retirement accounts. What next? You may want to save for your children’s college fee. Here, it’s advisable to start by contributing to an Education Savings Account (ESA). The money you invest in an ESA also grows tax-free. This means there’s no need to pay tax on it when withdrawing it to pay for college. At present, you can invest $2,000 annually for each kid in an ESA. There are income limits. But, your financial advisor can help you understand if they impact you.
If you wish to save beyond an ESA, speak with your financial planner. He’ll tell you about a 529 plan. This plan also grows tax-free. But, learn which 529 plans to avoid. Stay away from pre-paid tuition plans and fixed investment choices.
The good thing about saving for a college education is that you’re preparing them for financial freedom. How? By avoiding their student debt.
Real Estate Investments
Your house must be part of your journey to financial independence. It shouldn’t be something that holds your back from getting there. That’s why it’s so crucial to make smart decisions about the type of house you buy. Plus, how you finance it. If your home is a wise investment, it’ll grow in value over the years.
Once you contribute 15% of your salary toward retirement account, you must use the extra to pay-off the house. Shoot at it with a vengeance. Paying-off the mortgage is a significant achievement in your road to financial freedom.
Don’t even think of owning a place for rent until your home is paid for. And still, you must invest in rental properties only when you can pay it in cash. Plus, when you’re ready to handle all the hassles that are part of the rental process.
When your apartment is paid for, you may invest over 15% of your money. But, before jumping to taxable investments, ensure you’re reaping full benefits of IRAs and 401(k).
If you’re willing to move to taxable accounts, go with a simple approach to investing. Work with your advisor to pick good stocks and mutual funds with above-average performance.
When you invest in taxable accounts, you pay tax on the sum invested. You also pay tax on qualified dividends and capital gains. But picking mutual funds with low turnover rate can help you lessen the tax burden.
Step 6: Don’t Be Passive in Your Road to Financial Freedom
Making the correct investment choices is the first step. But you ought to be in tune with your fund performance to get the most from your investments. Keeping your investments on autopilot mode isn’t a strategy to invest.
But, the idea to make investment decisions actively may seem overwhelming. If you feel this way, you aren’t alone. A Fidelity study claimed, 77% of DIY investors said they didn’t have the knowledge or time to be assured of their investment decisions.
You’ve toiled hard to put the correct foundation. Hence, don’t skip this critical step. You need the skills of an advisor to help you understand your investment options. Plus, you also need one to face the highs and lows of the stock market.
A financial planner may help you:
- Take wise decisions about your investments
- Regularly rebalance your funds to reduce your risk
- Make a realistic plan for what being financially free looks like for you
- Know the investment choices you have apart from the retirement accounts
- Create a withdrawal plan that suits your situation
From our other articles, you’ll get the links to financial advisors. You can contact them to help you reach your financial goals. Keep in mind that your journey to be financially free isn’t a sprint. It’s a marathon. A skilled financial planner is your ideal partner for this journey.
Financial freedom is more than merely covering unseen emergencies without breaking a sweat. The fun starts when you know you can fulfill the needs of others. Imagine how it’d feel to help a jobless person pay for his car repair. It’s not about you; it’s about leaving back a legacy.
If you live on your terms, later you can give and live on your terms. It’s worth the hard work and efforts it takes to reach there. You can do this!
Having read this How to Gain Financial Freedom, what do you think? Can this article provide any insight for you so that you can retire earlier? Please feel free to share your thought with us. We look forward to hearing from you.
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