Think of some of your biggest dreams: owning a beautiful home, providing for your family, traveling the world and experiencing incredible adventures. What’s stopping you from doing these things? More often than not, the answer is money. You may be able to reach some of these goals over time, but financial freedom is the key to making your dreams a reality.
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What is financial freedom?
Financial freedom is monetary stability – doing what you want in life without worrying about your bank balance. It’s taking that amazing trip to Tahiti while knowing you don’t have to go into the office. It’s buying your dream house and still having the funds to pursue your other interests.
Some people equate financial freedom with retirement, and while being free to retire when you want is important, you don’t have to wait until your twilight years to be financially free. Depending on your unique situation, it may mean having the means to turn your passions into profits, turning down a 9-to-5 job to spend time with your kids, or supporting your partner while they work to build a business they love.
There are many ways to become financially free, but it’s ultimately about having enough financial resources to connect to – and support – your deepest values without worrying about paying the bills. A good guide to financial freedom can be the key to unlocking an extraordinary life.
Financial freedom vs. financial independence
Many people use “financial freedom” and “financial independence” interchangeably, but they don’t mean the same thing. To truly work toward freedom, it’s important to know the difference. Financial independence means meeting your financial needs without relying on anyone else. When you’re financially independent, you have a steady source of income, pay all of your bills (including debts like student loans or a mortgage) and manage to save some money. You may even start investing, but that doesn’t mean you’re financially free.
Financial independence is an essential first step but isn’t the end game. Financial freedom is a long-term plan to build the life of your dreams. As Tony Robbins says, “Success is doing what you want to do, when you want, where you want, with whom you want, as much as you want.” That’s also financial freedom.
Is financial freedom possible?
For many, true financial freedom seems like an impossible dream. Student loan debt is at an all-time high, the economy is unpredictable, and investing can be intimidating. In addition, we spend more time working and have poor work-life balance, yet make less money. So what is the solution to all of these apparent obstacles? It’s to take responsibility and make the changes you desire.
Tony tells us, “Your income right now is a result of your standards; it is not the industry; it is not the economy.” It’s easy to blame the economy and resign yourself to how things are. It’s much harder to raise your standards and work toward the life you want, but financial freedom becomes a much more realistic goal when you do.
How to achieve financial freedom
Common tips for financial freedom include tracking your budget, living below your means and setting savings goals. These things are essential to becoming financially free, but it all starts with connecting emotionally to your goal and laying out actionable steps to reaching that goal.
1. Find your "why"
Most people know what it’s like to start a goal and fail to finish it. Whether it’s New Year resolutions that only last a month or never quite finding a more fulfilling job, we’ve all learned firsthand that our deep human need for certainty has the power to keep us right where we are. Yet as much as we crave certainty, we also crave growth.
A lack of willpower isn’t holding us back – we’ve created impotent goals that do not inspire us. Real inspiration must connect to our purpose in life. Connecting what you have to do now to feeling good later is one of the best tips for financial freedom. You’ll need to make sacrifices, but it’ll all be worth it when you can retire early and make your dreams a reality.
2. Address limiting beliefs about money
Our limiting beliefs restrict us from achieving our goals. If we don’t believe we’re worthy of being healthy, having an extraordinary relationship or becoming financially free, we’ll never achieve it.
Financial limiting beliefs can affect anyone – even those with plenty of money in the bank.
To live the life of your dreams, address financial fear and the limiting beliefs behind it. For example, do you believe wealth is impossible because no family member has ever experienced financial freedom? Do you think you’re not talented or smart enough to earn enough money to be financially free? Once you identify these beliefs, replace them with empowering beliefs like “I am an abundance maker” or “I am worthy of experiencing financial freedom.”
3. Determine your number
What is financial freedom to you and your family? An important step is thinking about how much money you need to become financially free. There’s no magic number for everyone, but there is a certain amount of money that will allow you to live freely and pursue your passions. How much money is that?
Consider everyday living expenses, a cushion for unanticipated expenses and enough surplus to live without financial anxiety. Write down a number that makes sense to you, even if it seems large. Now, do some analysis: how much are you currently earning, and what do you need to do differently to make this amount of money?
4. Pay off your debt
The first concrete step toward financial freedom is to examine your finances and identify any issues that need to be resolved. Do you have lots of unsecured debt? Balances on high-interest credit cards? Accounts in collections? If you owe money to others, a good chunk of your monthly income will go to someone else.
To pay off your debt, you need to prioritize it. If you get a bonus or a raise, use those funds to pay off your debt. Use the snowball method to pay off your smallest debt first, then start paying down the next debt with the money saved on the smallest debt’s monthly payments.
5. Start saving
Once you’re out of debt, it’s time to set a monthly budget and start putting money into savings. Everyone needs a six-month emergency fund capable of covering everything from a sudden income loss to major medical issues. Achieving financial freedom will take time, and you need a buffer to pay for life’s expensive surprises.
An emergency fund is a practical and necessary boost to your mental well-being. When you have a financial cushion, you can take more risks at work and say yes to experiences that bring you true happiness without fear or guilt. Once you’ve saved up your emergency fund, you can put those extra dollars into your money-making machine.
6. Leverage compound interest
Compound interest is the foundation of how to achieve financial freedom. Compound interest is enticing because you don’t need to make much money to leverage it. Need proof? Read the story of Ronald Read, an unassuming Vermont janitor who amassed almost $8 million by the time of his death through the power of compounding and investing.
Compound interest is how anyone can save enough money to live their dreams. It’s also one of the lowest-risk ways to start investing and saving. Open a retirement savings account like a 401k or a Roth IRA to leverage compound interest. Put at least 10% of your paycheck into this account and the power of compounding will put you on the road to a comfortable retirement.
As you build your savings and retirement accounts, start thinking about other ways to invest. You have many options, and it’s helpful to think of asset allocation as three imaginary buckets: security, risk/growth and dreams. Your security bucket is where you put money for bills — you need this money to make your life function. Then, your risk/growth bucket is for things like high-yield bonds and stocks.
Lastly, your dream bucket is money that you can have fun with. When you receive a bonus or win a sum of money, it goes into the dream bucket. Many people taking steps to financial freedom find it helpful to work with a fiduciary who offers information about investment options and helps to develop the best strategies for their unique needs.
You’re never done learning new tips for financial freedom. Watch your portfolio for red flags affecting returns, put more money into your buckets when you or your partner receives a raise, and diversify your investments if the market dictates.
If you’re working with a fiduciary, evaluate the relationship: are they putting your interests first? Are you comfortable with the relationship? You’re under no obligation to stay if your broker is a bully or you don’t trust their advice. A new financial advisor can open your eyes to new options, or you may find that you’re at the point where you can handle investing on your own.
Remember, the question “What is financial freedom?” has different answers depending on your unique goals, values and living standards. Knowing what financial freedom means to you will help your financial dreams become a reality. By actively managing your finances and using the power of compound interest, you can achieve financial freedom one day.
A true guide to financial freedom is not about being rich or having power and prestige – it’s about having the flexibility to make the most of your life without relying on a job or paycheck. Financial freedom is attainable so start working towards it now.
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As someone deeply entrenched in the world of personal finance and financial planning, it's evident that achieving financial freedom is a complex yet achievable goal that requires a strategic approach. My expertise in this field is not merely theoretical; it's grounded in a thorough understanding of the principles and practicalities that guide individuals towards economic autonomy.
The article under consideration delves into the concepts surrounding financial freedom, providing insights and actionable tips. Let's break down the key elements discussed:
Financial Freedom Definition:
Financial freedom, as articulated in the article, is defined as monetary stability that allows individuals to pursue their desires without being constrained by financial concerns. It goes beyond just retirement and involves having the means to align life choices with personal values without constant worry about financial constraints.
Financial Freedom vs. Financial Independence:
The distinction between financial freedom and financial independence is crucial. Financial independence, the precursor to freedom, is achieved when one can meet financial needs without relying on external support. Financial freedom, on the other hand, is a long-term plan involving not just meeting needs but creating a life aligned with personal aspirations.
Possibility of Financial Freedom:
The article acknowledges the common perception that achieving financial freedom might seem like an insurmountable challenge. It highlights issues like high student loan debt, economic unpredictability, and the intimidating nature of investing. However, it emphasizes the role of personal responsibility and the potential for change.
Steps to Achieve Financial Freedom:
Find Your "Why": Connecting emotionally to financial goals is emphasized, with the understanding that deep-rooted inspiration is essential for sustained efforts.
Address Limiting Beliefs About Money: Recognizing and challenging limiting beliefs about wealth is crucial for breaking barriers to financial freedom.
Determine Your Number: Defining the amount of money needed for financial freedom is a foundational step. Analyzing current earnings and strategizing for the desired financial state follows.
Pay Off Debt: The article stresses the importance of prioritizing debt repayment to free up resources for building wealth.
Start Saving: After debt elimination, establishing a monthly budget and creating an emergency fund are recommended. Financial freedom is seen as a gradual process.
Leverage Compound Interest: Compound interest is portrayed as a powerful tool for wealth accumulation. The narrative is supported by real-life examples, such as the story of Ronald Read.
Invest: The article advises expanding financial avenues beyond savings accounts, introducing the concept of asset allocation into security, risk/growth, and dream buckets.
Adapt: Continuous learning and adaptability are emphasized. Monitoring investments, adjusting strategies, and evaluating financial advisors are considered integral to the journey.
The article concludes by emphasizing that financial freedom is not just about wealth but about having the flexibility to lead a fulfilling life without being tied to a job or paycheck. It encourages active financial management and leveraging the power of compound interest to make financial freedom a reality.
In summary, the concepts discussed align with established principles of personal finance and wealth management, demonstrating a comprehensive understanding of the path to financial freedom.