Understanding how to become financially independent is a goal many people aspire to achieve. Working for the rest of your life just to pay the bills becomes exhausting, and the desire to have financial freedom lingers in the back of all our minds.
If financial freedom seems out of reach at the moment, read on. We’ll help put you on the right path to making this goal a reality.
What Is Financial Freedom?
First and foremost, what is financial freedom? There are a few acceptable definitions/opinions of financial freedom.
Generally speaking, financial freedom is viewed as having enough money saved or generating enough income through interest, to pay for one’s living expenses without needing to be employed. Money earned on interest can be from a variety of sources.
Common options include income from rental properties or dividends from a stock portfolio. This money is also referred to as passive income, or income that is generated without working.
How Does Financial Freedom Work?
Financial freedom is a simple concept, but a complex reality. Achieving this level of financial independence doesn’t come without deliberate effort and hard work.
Once achieved, and it’s certainly possible to do, it works however you want it to! When you reach financial freedom, you can live life on your own terms.
You are no longer required to work for a company to earn a paycheck that sustains your quality of life. If you happen to continue to work, you are doing it at your own will and not out of necessity.
If you want to spend more time with family, exploring nature, or playing golf, you can do so. You can step away from working at any time and not feel any negative financial pressure.
Financial Freedom Does Not Mean You Need to Be Rich
Despite popular belief, financial freedom is not about being rich or earning some exorbitant amount of money. There are plenty of people who earn a great deal of money and do not have financial freedom.
If you earn just as much money as you need to maintain your quality of life, you’ll never be financially free. You must be able to earn enough money so you can save, but that doesn’t mean you need to double your salary.
Sure, you may need to earn more money so you can save more, but you can also look at everything you’re currently spending money on and aim to reduce your expenses. Any reduction in your existing spending can be immediately rolled into a savings or investing plan, and that will help you achieve financial independence!
5 Steps to Achieve Financial Freedom
If you are wondering how to become financially independent, it can be done through these 5 simple steps. These steps are easy to understand, but harder to execute.
Do not get discouraged! Financial freedom is a journey, and does not happen overnight. It takes time, effort, and energy to achieve, but when you peel back the layers, it’s made possible through these 5 steps.
The first step one needs to take to achieve financial independence is to plan properly. One must be fully aware of how much money they need to sustain their quality of life.
You must not just look at how much money you need to sustain the current year, but you’ll have to adjust for inflation if you’re looking years in the future. It may seem counterintuitive, but you may need to plan to work more in the present day so you can enjoy financial freedom at a later date in the future.
Once you’ve established your plan, budgeting is the second step one must take. Adhering to a budget is important for successful businesses, and it needs to be important for your personal finances.
One must establish a budget and stick to it. Of course, unexpected expenses may come up throughout the year, and they must be paid.
These expenses include; home repairs, car repairs, or medical bills. Do your best to budget for the unexpected. Set a bit of money aside each month for such expenses.
Be sure to still live life in the present day. Budgeting doesn’t mean you can’t spend money on dining out, entertainment, or clothes. It just means you are allowing yourself to spend a specific amount of money on each category per month.
Budgeting is one of the most important steps to master in order to become financially independent.
Saving at least 20% of your income is a great rule of thumb to follow if you’re on the quest for financial independence. This percentage may seem challenging at first, but it’s definitely possible.
Some adjustments may need to be made to your budgets, but once you gain momentum, this becomes increasingly easier and significantly more exciting. Financial independence starts with every transaction you make.
Many people are impulse buyers, or buy items they may not need. This behavior needs to be controlled to make this worthwhile goal a reality. Paying yourself first (saving money) should be treated like a bill – and you should pay that ‘bill’ each and every month.
The more money you have earning interest, the more money you can use to become financially independent. Common investing options include purchasing real estate to produce rental income, or investing your money in the stock market.
The world of investing can be intimidating if you are not familiar with it, but certified financial advisors are a great resource you could use to help you make the best investment decisions.
One should look to avoid debt wherever possible! This is challenging as there are many ways one could fall into debt.
It’s easy to swipe a credit card or finance a car. But these choices come with high interest rates, and the more interest you’re paying a lender, the less money you’ll have left over to pay yourself.
Avoiding debt comes with compromise. Sacrifice a little bit of today for a better tomorrow. Instead of purchasing a brand new car, buy one that’s a few years old.
The depreciation in vehicles is tremendous, and you may be able to drive off the car lot debt free if you decide to buy one that’s 5 or 6 years old.
Start Now, Start Early
The sooner you start working on achieving financial independence, the sooner the goal will become a reality. Even if you are currently in a rough financial situation, you can start these 5 steps to help get yourself more financially sound.
Major life expenses such as paying for college and purchasing a home will influence how quickly you can achieve financial independence. Think about these life decisions carefully.
Working with a financial advisor is a great way to help you achieve your financial goals. Financial advisors will offer an unbiased review of your spending habits, and can help you identify which investments are aligned with your goals.
Seeking professional advice often pays for itself and may be the best first step towards becoming financially independent.