November 23, 2023

Benefits of being financially free

We’ve all learned over the last several years that sometimes, despite doing everything right, events can happen that bring about a lot of uncertainty. The COVID-19 pandemic spotlighted that fact and, for so many, their work and financial lives were derailed.
For many of us, it’s changed the way we think about work and money and has sparked the idea that becoming financially free is more important than ever. Of course, financial freedom isn’t going to stop world events from happening, but it can offer more control over how we respond.
So, what are some benefits of financial freedom?
•Less stress, more freedom – when you no longer have to worry about day-to-day expenses or living pay check to pay check, you reduce anxiety about how to pay the bills.
•More control – financial freedom gives you the power to make financial decisions that align with your goals instead of worrying about unforeseen expenses.
•Improved relationship with money – lack of money can have a negative impact on how we view it, so the ability to let go of those feelings can improve our relationship with money and how we use it for our benefit.
•Focus on long-term financial goals – when we no longer have the burden of paying the bills, we can focus on what we want in the future and can think about the long-term versus our immediate needs.
•Freedom to make choices – although money won’t bring us happiness, it does give us the freedom to choose how we want to live our lives.
There’s no doubt that financial freedom can feel out of reach, especially if you’re living pay check to pay check and drowning in debt from student loans, a mortgage, and high-interest credit cards. But, in reality, it’s more within reach than most people think. We can all achieve financial freedom. We just need a plan.
The terms financial independence and financial freedom are often used interchangeably because they live under the same umbrella and, although they are similar, they’re not the same.
To clarify, financial independence means you don’t need to rely on your income to cover living expenses but have enough passive income or residual income that covers all required expenses, so you don’t have to rely on a job.
Financial freedom means that residual or passive income exceeds all your financial obligations and allows you the freedom to live the way you want without any financial constraints.
There are 3 primary levels of financial freedom:
1.Financial security – is when you bring in enough extra money from other sources that you can still pay all your monthly expenses if you were to lose your full-time job. To determine the amount, you’d need to be financially secure, you add up all your expenses and other necessities. That amount is what is considered your financial security number.
2.Financial independence – is when you have enough residual or passive income to pay your bills and enjoy some extras. To determine the amount, you’d need to be financially independent, you add up all your expenses, necessities, and all the nice things you enjoy. That amount is what’s considered your financial independence number.
3.Financial freedom – is having enough passive income to cover all expenses, the extras, and living the life you’ve always wanted without any concern for money. To get your financial freedom number, think about what you want your life to look like. This is when you’ll need to think big. Make a list and figure out what that life would cost. This step is essential because the number you come up with is what you’ll need in passive income to live the lifestyle you envision for your future.
The financial security, financial independence, and financial freedom numbers provide the road map and something to work toward. Once you achieve one milestone, you focus on the next one, and so on.
Learning how to be financially free means getting clear on your financial goals and making decisions that will move you toward them, and that may require you to think differently. You have to let go of the “trading time for money” rules that you’ve been taught and embrace the ideas of building assets, generating independent income, and creating residual and passive income.
What’s independent income?
Unlike having a job where your income is based solely on working for someone else, independent income is when you own a business, and others run the day-to-day operations, or you own rental property that generates rent. Or you could have some other sources of regular income, such as government benefits like Social Security, that pay you regularly without the need to trade hours for dollars.
Another piece of the financial freedom puzzle is having an abundance of assets that can support your financial needs. They can include investments in various securities, such as a 401(k), a diversified portfolio of stocks, bonds, and money market accounts, and other types of assets that provide long-term security and allow you to take advantage of compound interest.
When the income covers all your expenses, allows you to live the life you’ve always wanted, and provides money freedom, you’ve achieved financial freedom. It’s important to note that most people who enjoy financial freedom don’t rely on one method but use a combination of income-generating sources to reach their financial goals.
Passive income vs. active income vs. residual income
When we refer to income, we’re talking about money we receive by providing some type of goods or services to others or making an investment. That income can come in several forms, including:
•Active income
•Passive income
•Residual income
Increasing each of these income types can help to improve your average net worth and get you closer to reaching your financial goals.
•Active income – is income received for performing a job or providing a service. Examples include full- or part-time employment, where you either earn pay hourly, as a salary, in tips, or in commission. Self-employment is also a form of active income. Each requires you to trade hours for money.
•Passive income – is income earned with little or no ongoing effort. Individuals and businesses have discovered its power and aim to make it part of their income-producing activities. The benefits of passive income include increasing cash flow, financial security, a sense of control, and a better quality of life. Some examples of passive income include rental property that you don’t need to manage, peer-to-peer lending, a hands-off business, and dividends on stocks.
•Residual income – is the income left after all debts and expenses have been paid and can be used to help lenders to determine creditworthiness. For example, suppose an individual want to buy a home. The lender takes the borrower’s income and subtracts the mortgage payment, taxes and insurance, and other monthly debt payments to see what’s left. That amount is considered to be the borrower’s residual income.

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