Defining Financial Freedom
The term “financial freedom” is quite abstract. For some people, financial freedom means that their income exceeds their expenses, leaving them with some spare cash at the end of month. For others, it means being debt free. Yet others consider themselves financially free if they have enough capital to be able to live off interests and dividends for the rest of their lives without working. Financial freedom is all of this, and more.
There is no singular aspect that defines financial freedom. Rather, it is a state in which you have gained control over your finances to the extent that you never have to worry about basic necessities even if you don’t work for the rest of your life. In other words, you have enough money to meet your financial obligations without assistance from anybody, not even your employer.
There is no specific amount of money or assets that can quantify financial freedom. For a person with no family and/or other responsibilities, having $10,00,000 in the bank might mean financial freedom while for a father of 4 young children with a mortgage to pay, even $50,00,000 might not be sufficient. The exact number depends on the age, needs, situation, responsibilities, risk tolerance and several other factors specific to each individual.
We are all in different positions with respect to our financial situation. If you are already in a good position, our hearty congratulations to you. Following the steps we outline in this e-book is only going to make the road ahead smoother. Just start where you are and work your way upwards. If you are in a bad shape financially, you are still the best person to begin sorting out your situation. After all, who knows all your problems and has your best interests at heart more than yourself?
Step 1: Have a Financial Plan
The first and arguably the most important part of achieving financial freedom is to plan for it. Having a clear financial plan with well-defined goals and targets is the best way to kick start your journey. In order to create a financial plan, you need to have a clear awareness of what exactly you are trying to achieve. Ask yourself questions like “what does financial freedom mean to me?”, “what are my plans after I achieve financial freedom?”, “what assets and debts do I currently have?”, “what is the gap that I need to bridge?”
Once you have the answers to these questions, planning becomes much easier.
You need to calculate the amount of money you need to achieve financial freedom considering factors like your age, annual income, fixed and floating expenses, current assets and debts, current super balance, estimated costs of living, your situation in life, your plans to continue working and your life expectancy.
You need to take into account any future plans that might require lump sum payments such as children’s educational expenses, travel plans, emergency funds, home renovations and any major planned purchases. You can also use an online calculator to obtain a rough estimate of how much money you need to save, and then do a super projection to check how long your super would last.
All this will give you an idea of where you stand currently, and what you need to do reach your goals.
Understand the Difference Between Income and Wealth
Most people believe that the fastest way to achieve their financial goals is to have a high-paying job. Of course, it is easier to save more and accumulate assets faster if you have a good income. But earning does not always translate into savings, and income does not always translate into wealth. The best way to achieve financial freedom is to focus on increasing your wealth, not your income.
Wealth is essentially your net worth (assets – liabilities) that generates a regular income, capital gains and dividends without you having to work for it. A simple measure of your wealth is the length of time you can continue to meet your financial obligations without assistance. In other words, if you had to stop working tomorrow, for how long would you be able to maintain your current standard of living without any compromise?
Clichéd as it might sound, the only way to increase your wealth is to ensure that your expenses are lower than your income. No matter how big or small your income is, if your expenses are greater than your income, financial freedom will control to allude you. Unplanned and uncontrolled spending can be the undoing of even the richest, which explains why actors making millions of dollars per movie sometimes go bankrupt.
To continue learning about investing in residential propert simply download the full version in the ebook below.
A Wealth of Information
Select from our collection of free financial education eBooks
Before we proceed to tell you what you can and must do to achieve financial freedom, let us first tell you what you shouldn’t be doing. You should certainly not be buying one of those uber-expensive guides that promise to teach you the “secret” of “getting rich very quickly without working”. At best, the author is charging exorbitant prices for common sense advice that is already available for free. At worst, he or she may be a scammer trying to lure you into shady schemes or deals. Rest assured, short of winning the lottery or joining the mafia, there is very little you can do to get rich overnight without working.
In this ebook you will discover:
- To borrow or not to borrow
- Make long term investments
- Formulate a budget
- Renegotiate your mortgage
- Explore investment options for your retirement
- Maintain an emergency fund
- Be proactive with your health