People have varied interpretations of “financial freedom meaning.” For some, it means making purchases without worrying about timing or cost. Others see it as freedom from bill payments and unexpected expenses. To many, it’s about debt-free, while for others, it’s the wealth to retire comfortably.
While these views have validity, they are incomplete. Financial freedom is a common aspiration, often underrated. This article can provide guidance on achieving it.
What is Financial Freedom?
Financial independence refers to the freedom of living your desired lifestyle without relying solely on work for income. It means having enough wealth to meet your needs and feel financially secure, including having funds for emergencies and future needs, without relying on debt.
Those who achieve financial independence retire early with smart planning. Once attained, financial independence allows you to live the retirement lifestyle you desire, providing freedom from financial worries. Successful implementation of this concept involves making money work for you rather than solely working for money.
How to get Financial Freedom?
- Know your current financial position: Begin your journey to financial freedom by assessing your financial status. Determine your debts, savings, monthly expenses, and income, which will form your financial statement.
- Put your goals on paper: Why do you need money? It might be for paying off student loans, starting a business, traveling, planning weddings, saving for retirement, or other reasons. Without clear goals, money lacks direction. Take a piece of paper and jot down your top five goals for the next 1, 5, 10, and 20 years. When setting these goals, ensure they are SMART: specific, measurable, achievable, realistic, and time-bound. For instance, saving Rs.2 crore by 2050 for retirement is a SMART goal because it defines your aim.
- Monitor your expenses: To achieve financial freedom, it’s crucial to monitor your spending. You can track expenses using a notebook, Excel spreadsheet, or a money tracker app that categorizes expenses (like travel, shopping, and dining out). This tracking fosters accountability and uncovers unnecessary impulse purchases that hinder financial freedom. Impulse buying reflects a loss of control, a roadblock to financial goals. Therefore, it’s essential to understand your current spending habits.
- Pay yourself first: “Paying Yourself First” means setting aside money for savings or investments before covering other expenses like bills, rent, or discretionary spending. This practice has led many closer to financial freedom by encouraging alternatives to reduce costs. For instance, if remaining funds aren’t sufficient, it prompts adjustments in lifestyle or taking on extra work. By prioritizing self-payment, you consistently invest in your financial future.
- Clearing Debts: Clearing a significant debt frees up future cash flow, strengthens your credit score, and, most importantly, relieves a significant burden. There are two simple strategies for debt repayment.
- The snowball method (which aims to pay off the smallest debt first, then move to larger ones).
- The avalanche method (that prioritizes debts with the highest interest rates, gradually tackling lower-interest ones).
Though both methods are effective, the choice depends on your financial situation.
- Keep advancing your career: To progress financially, focus on advancing your career or business while maintaining stable spending. Enhancing your skills and value to employers can swiftly boost your income. If you are self-employed, implement growth strategies to elevate your business. Take the initiative to accelerate your career growth and move toward financial freedom by increasing your income.
- Additional sources of income: Achieving financial freedom requires more resources than the one coming out of your 9 to 5 job. It’s advised to seek multiple income streams, ideally around five. You can create this extra source of income actively or passively. Active income involves trading time for money, like freelance work or driving for a ride-sharing service. This approach is quick to start but limited by the hours in a day (24 hours). Passive income involves working once and earning repeatedly, such as selling e-books, affiliate marketing, or stock investing. Explore these options and take small steps towards a second income that suits you best.
- Investing: The next step towards financial freedom is investing, which focuses on future goals. Start by investing early and as much as possible to benefit from compounding. Increase investments annually by a higher percentage than your income growth. Aim for an asset allocation of 50-60% in equities promptly. A general rule is maintaining a 60-40 split between equity and non-equity assets, adjusting based on risk tolerance. You can also automate investments using SIPs to eliminate market timing concerns. Review your portfolio yearly and rebalance as needed.
- Be prepared for emergencies: Prepare for life’s uncertainties by addressing unforeseen expenses, which can hinder financial freedom. To safeguard against these, take two key steps:
- Build a contingency fund: Set aside savings to cover unexpected costs. Aim to save three to six months’ worth of expenses beyond your regular savings to avoid tapping into investments during emergencies.
- Get medical insurance: Obtain health insurance to prevent medical bills from depleting your investments, ensuring uninterrupted progress toward financial freedom.
Conclusion:
The nine steps outlined vary in complexity; some tasks may feel natural, while others require more effort. However, financial freedom is gradual and demands planning, discipline, and consistency. Remember, every step leads toward financial independence, no matter how small. Start today! The more steps you accomplish, the quicker your journey to financial freedom will be.
Decide based on what works best for you. Consult a SEBI-registered stock market advisor to know about the long-term stocks to buy, make them your personal finance guide, and get complete knowledge on improving your finances to achieve financial freedom.
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FAQs
What does financial freedom mean?
Financial freedom means having sufficient savings and investments to live without job dependency. It's having enough passive income to cover expenses while enjoying personal pursuits. It means having adequate income or savings to cover the costs independently of a paycheck.
How do you become financially free?
The process of attaining financial freedom can be summarized into the following simple steps-
Establish a budget for your financial journey.
Build your credit score for credibility with lenders.
Invest safely and for high returns.
Develop passive income sources.How much money is needed for financial freedom?
There isn’t a specific number that is suited for all. However, you can calculate your financial freedom number using a popular formula- [Annual expenditures x 25 = Freedom Number]
The goal is to achieve a net worth of at least 20 times your average gross income.
I’m Archana R. Chettiar, an experienced content creator with
an affinity for writing on personal finance and other financial content. I
love to write on equity investing, retirement, managing money, and more.