Financial freedom is a state where you have enough savings and investments to live the life of your dreams without having to rely on a job.
Middle-class households often teach their children to live below their means. Although their intention is noble, it may promote a fearful relationship with money, which makes one doubt their financial prospects. Today’s youth prefer to be free of obligations and believe in living in the moment. We take our vacation goals as seriously as we take our retirement plans. We are consistently striving to be in a place where we can do both without facing any financial constraints. This state is called being financially free.
What is financial freedom?
Financial freedom is all about working towards achieving a level of financial stability where you can pursue the life you want without having to worry about your finances. It’s not the same as wanting to be rich; it’s about having enough residual income to cover your expenses while you spend your time doing what you enjoy. Essentially, Financial freedom is about having enough income or savings so that you don’t have to rely on your pay check to meet your expenses.
How to achieve financial freedom
1. Become debt-free
Debt can lead to stress and anxiety that can get in the way of your dreams and goals. By paying off debt sooner, you free up more of your income for saving, investing, or spending on things that truly matter to you. The improved cash flow allows you to have more control over your finances. It can also give you a sense of accomplishment that will give you the confidence to plan for your other goals.
2. Start Investing
Investing is integral to achieving financial freedom because it has the potential to grow your wealth over time. Unlike savings accounts, investing can generate returns that outpace inflation. This can help you reach your financial goals faster, whether it is building a retirement corpus, planning a dream vacation, or living a comfortable life. Investing can also help you create passive income streams through options like dividend-paying stocks, which reduces your dependency on your salary. However, investing comes with risks, so you must research thoroughly and consider a long-term investment horizon.
3. Prepare for uncertainties
Financial emergencies can knock on your door when you are least prepared to deal with them. That’s why having funds set aside for emergencies is an important aspect of a financial plan. It prevents your financial plan from derailing and keeps you aligned with your goals. Having an emergency fund also gives you peace of mind, so you can recover faster from any unforeseen setbacks.
4. Track your credit score
Your creditworthiness can be a major part of your financial success. A good credit score (700 & above) opens doors to better credit opportunities. It makes it easier for you to avail of loans and credit cards at favourable terms, such as lower interest rates on loans and credit cards. This can save you significant money over time and make credit more accessible when needed.
5. Start a passive income stream
Earning passive income is the best way to kick-start your journey towards financial freedom. It provides a stable cash flow even when you’re not actively working. It helps cover basic expenses and provides a safety net during financial emergencies. By creating multiple passive income streams, you can diversify your income sources and reduce your vulnerability to economic downturns or job loss. Some common methods of earning passive income are investing in dividend-paying stocks, real estate rental properties, peer-to-peer lending, and running a side business.
What is FIRE?
FIRE (Financial Independence, Retire Early) investing is a lifestyle movement and a financial strategy aimed at achieving early retirement and financial freedom. The core idea behind FIRE is to save and invest aggressively and accumulate enough wealth to support your desired lifestyle without having to depend on your job. People pursuing FIRE often invest their money strategically to generate passive income that covers their expenses.
How to use FIRE to achieve Financial Freedom
a) High Savings Rate:
People practicing FIRE aim to save a large portion of their income, often 50% or more. This is achieved through frugal living, budgeting, and prioritizing savings over unnecessary expenses.
The saved money is then invested in various assets, such as stocks, bonds, real estate, and other income-generating vehicles. The goal is to grow wealth over time through compounding returns.
c) Early Retirement:
By maintaining a high savings rate and achieving substantial investment growth, individuals following the FIRE method aim to reach a point where their investment income covers their living expenses. This allows them to retire early, often in their 30’s or 40’s.
d) Withdrawal Strategy:
Upon early retirement, individuals typically adopt a sustainable withdrawal rate to ensure their investment portfolio continues to support their lifestyle without running out of money. The commonly recommended withdrawal rate is around 3-4% of the portfolio’s value annually.
The FIRE approach encourages flexibility in lifestyle choices and encourages individuals to pursue meaningful, fulfilling activities during early retirement, which may include passion projects, entrepreneurial pursuits, etc.
Frequently Asked Questions
1. What does financial freedom mean?
Financial freedom is a state where a person has income savings and investments to cover their expenses, so they don’t have to live pay check to pay check. It also gives you the time and money to pursue things you are passionate about.
2. How much money do you need to become financially independent?
The amount of money needed for financial freedom can vary greatly depending on individual circumstances, lifestyle choices, and financial goals. You must take into account factors such as your debt and obligations, inflation, expenses, healthcare, etc.
3. What is the difference between financial stability and financial freedom?
Financial stability is about achieving a solid foundation of financial security and resilience to handle unexpected challenges, while financial freedom involves reaching a point where you have the means to live life on your own terms without the need for traditional employment.
4. How can you achieve financial freedom?
To achieve financial freedom, you should start saving and investing aggressively, build passive streams of income, and set aside funds for any kind of emergency, among other things.