Many people dream of financial freedom. Depending on their lifestyle and goals, their dreams may look quite different.
Reaching financial freedom happens when they achieve these dreams.
This article goes into different ideas of financial freedom and gives tips on being financially free.
Why Seek Financial Freedom?
Financial freedom represents your ideal life. You are able to do what you want without worrying about how money factors into those plans.
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With financial freedom, you can choose to travel or retire early. You may want to change careers or start a new business. Financial freedom makes these choices possible.
Financial freedom provides essential security in life. People who experience financial freedom have more options than before they were financially free.
These two reasons alone should encourage you to strive for financial freedom.
What Is Financial Freedom?
Financial freedom involves the following:
1. Living Comfortably
For people who live paycheck to paycheck, being able to live comfortably represents financial freedom.
Living comfortably means they are able to pay all of their monthly bills and expenses with enough left over to cover emergencies.
Getting financial freedom for people in this situation is quite difficult. They often need to find a better-paying job and have some amount of debt forgiveness.
For example, to obtain a better job, they may need to pay for education or training for new skills. They are probably already working well over 40 hours a week and have no extra income to pay for training.
If you are living paycheck to paycheck, look into government and private assistance to pay for training for a new job. Some jobs even allow you to enroll in training after you start work.
Look for fields that have a shortage of workers and future opportunities to continue to increase your pay.
For example, the medical and technology fields have a wide range of opportunities and are expected to grow over the next decade.
2. Living Debt Free
After achieving financial freedom through living comfortably, the next stage in financial freedom is likely living debt-free.
In this definition of financial freedom, all revolving and unsecured debts have been paid in full.
For example, people in this category pay their credit cards off in full every month. They do not have a car loan. And they probably even have no student loan debt.
Living debt-free represents having the income to fully support your lifestyle. This financial freedom allows for emergencies in addition to necessities.
3. Saving for the Future
Once all of your debt has been paid off, the next level of financial freedom is saving for the future. This is more than the three months of expenses you have saved.
When you save for the future, you have enough funds to live without income for a number of years. People typically try to save 25 or more years’ worth of expenses for retirement.
Although this sounds like a lot of money, keep in mind, you already live debt-free. You likely have no mortgage, car loans, or other debt.
Without these payments, your monthly expenses just include groceries, utilities, insurance, and fun money.
Financial freedom through savings for the future can vary widely. Some people are fine with five years of expenses.
Others want enough to leave an inheritance to their children, regardless of how long they live.
When working towards this level of financial freedom, be sure to have a clear set of goals that define when you have accomplished financial freedom.
4. Passive Income
For many, financial freedom in the form of passive income is a long-range goal. You earn passive income with little effort from yourself beyond setting up the income stream.
Achieving passive or residual income requires enough money to invest in potentially risky investments.
Financial independence on this level requires knowledge about investment options and confidence to take the risk.
For example, many people invest in mutual funds or real estate to create a passive income stream.
But mutual funds may not profit every year, and real estate takes a lot of effort to find the right property and property management company.
Related: Top Passive Income Apps that Help.
5. Independently Wealthy
The ultimate financial freedom is the ability to be independently wealthy. People who are independently wealthy do not have to work or otherwise worry about money in any way.
Independently wealthy people have enough money for generations of family members to live, as long as they continue good financial management techniques.
They usually have a team of financial advisors to ensure their continued wealth without working.
16 Powerful Tips to Help You Reach Financial Freedom
1. Pay Down Debts
Debts are a major barrier to financial freedom because they can grow into unmanageable amounts. Moreover, interest paid on debt is a complete loss.
There are many techniques to paying off debt. Some people pay the lowest balance first and then continue to pay off the next lowest debt.
Others pay off the highest interest debt first. Once that is paid, the monthly payment amount is then rolled into paying off the next highest interest rate amount.
There are apps that will tell you which method is best. For example, the Debt Payoff Planner is an easy app that lets you input all of your debts, including the total amount owed, monthly payments, and interest rates.
Other popular debt payoff apps and websites include:
- Debt Manager
Having a plan for paying down your debt will make financial freedom more attainable.
2. Increase Income
Another significant barrier to financial freedom is a limited income. Without sufficient income to cover monthly expenses, you cannot achieve financial freedom.
Increasing your income is especially hard when you are at a lower income level. Do not get discouraged, though.
It will take perseverance and time, but with dedication, you can increase your skills.
Take advantage of opportunities like turns in the job market that increase the need for skilled workers.
Employers are more willing to provide training when they need more skilled workers.
3. Save for Expenses
Once you have paid down debts and increased your income, you should save at least three months of expenses.
This means that, even if you lose your income, you pay all of your bills and other expenses for three months without going into debt.
Some prefer to have larger savings. People with less stable jobs tend to have six months or even a year of expenses saved.
Having a larger savings account provides more financial freedom for people who want to change careers.
A year’s worth of expenses allows for a year of training without going into debt.
Talking about savings, below are some helpful guide to saving money:
- Read this to know The 30 Day Rule to Save Money
- Read this to know How to Save $10,000 in 6 Months
- Read this to know How to Save $20,000 in a Year
- Read this to know How to Save $5000 in 6 Months
- Read this to know Best Tips for Saving $10,000 in a Year
- Read this to know Best Tips for Saving $3,000 in 3 Months
- Read this to know Best Tips for Saving $5,000 in a Year
4. Max Out Tax-Free Investments
Many employers provide retirement plans that are tax-free. Tax-free means that the amount you contribute to the plan is taken out of your salary before taxes.
The result is that you pay income taxes on a smaller amount and therefore less in taxes.
There are other tax-free investments, as well. IRAs are another form of retirement account that may be tax-free up to a certain amount. Certain bonds are tax-free.
Taking advantage of every tax-free investment leads to financial freedom because it uses as much of your income as possible to invest.
5. Pay Off Your Full Balance on Credit Cards
Financial freedom can only happen if you have enough income to cover all of your obligations.
Using credit cards to cover some payments means you do not have the income to support your lifestyle.
Credit cards should be paid in full every month. This requires discipline and constant monitoring of your credit card balances.
Once you master the skill of never carrying a balance on your credit card, you will be one step closer to financial freedom.
6. Pay Off Your Vehicles
Car loans often carry interest. Given how cars depreciate, financial freedom is slowed down by owing on car loans.
Unless you manage to get a 0% interest car loan, this is likely a debt that is a high priority to pay off.
This is because it is usually one of the largest debts. Moreover, it tends to have higher interest rates.
7. Pay Off Your Personal Loans
People without financial freedom often end up with various personal loans. These could be to friends and relatives or even payday lending companies.
These loans must be paid to reach financial independence.
Much like the other loans, these often have high interest and monthly payments, so they should be prioritized in the journey to financial freedom.
8. Pay Off Your Student Loans
Once you get to paying off your student loans, you should have paid most other debt except for your mortgage.
Unless your student loans have over 6% interest, there is likely no need to pay them off before paying off other debts.
You should add up how much all of the payments were for other debts already paid off. This is the amount to add to your monthly student loan payments.
9. Pay Off Your Mortgage
Once you have paid off all of your debt other than your mortgage, you are well on your way to financial freedom. You should see vastly lower monthly payments.
Paying off your mortgage represents financial freedom because as long as you keep taxes and insurance paid, you will have housing. This is a major accomplishment for financial freedom.
10. Invest in Real Estate
After paying the majority of your debt, the next goal for financial freedom is to begin investing. A common first investment is in real estate.
This can be time-consuming, but if you gauge the market correctly, it is also profitable.
When evaluating the financial worthiness of a real estate investment, be sure to consider upkeep costs and rental management company fees if you choose to go that route.
11. Invest in Mutual Funds
Mutual funds are a way to invest in securities like stocks and bonds. There is a manager who is an expert at investing and who decides how to diversify the portfolio of investments.
Mutual funds provide for financial freedom because they generally earn a profit over the long run. They are safe but bring in additional income without little effort on your part.
12. Invest in REITs
Real estate investment trusts, or REITs, are good investments for people who do not know much about rental real estate investments but want to take advantage of the real estate market.
REITs provide financial freedom because they tend to offer high returns. This is a passive income that requires very little effort on your part.
13. Take Some Risks
Once you have paid off all debts and have sufficient passive income, consider taking some bigger risks. This could take your financial freedom to the ultimate level of being independently wealthy.
Look for investment opportunities like start-up companies in growing industries.
Getting in early with a start-up that grows into a multi-billion dollar business would lead to significant financial freedom.
14. Re-evaluate your Budget
As you progress through the different levels of financial freedom, continually reevaluate your budget. You may find that you can cut an expense previously necessary.
For example, if you have invested in building a home gym, it is unlikely you also need a gym membership.
Moreover, as you pay off debt, the income that used to go to those payments should be reallocated to another line item on the budget.
15. Re-evaluate your Investments
Markets are constantly changing. To maintain financial freedom, you should reevaluate your investments often.
Stay up-to-date with current financial news. Consider hiring an advisor to provide you with expert investment advice.
16. Become More Financially Literate
Even though you already know a lot about finance and consider yourself financially literate, it won’t hurt to keep learning.
The more you know, the better you will be financially!
Read this for many more tips on why and how to become financially literate!
Financial Freedom versus Independently Wealthy
Financial freedom is defined by the level of comfort you need.
Some people may find financial freedom just from having enough leftover income each month to save a little.
Independently wealthy, on the other hand, means you can pay all expenses without working. This is a much higher standard of financial freedom.
Financial Freedom for your Children
Many parents want to set their children up for financial freedom. They take comfort in knowing their children can provide for themselves.
To provide your children with financial freedom, begin teaching them how to handle finances from an early age.
Inspiring them to be passionate about having a budget and financial goals will support their financial freedom.
Financial Freedom Meaning FAQs
When Is It Too Late to Achieve Financial Freedom?
It is never too late to achieve financial freedom. Even when you are a senior citizen, you likely have income in the form of retirement funds and social security.
Ensuring that you live within your budget, even in retirement, leads to financial freedom.
What Are Some Budgeting Methods That Help Achieve Financial Freedom?
There are many budgeting methods to help you achieve financial freedom. For example:
- Zero-based budget: make sure every dollar of income is allocated to some payment.
- Envelope budget: allocate each category of expenditures to an envelope and put enough to cover them in their envelope at the beginning of the month.
- 50/30/20: allocate 50% of income to expenses, 30% to savings, and 20% for expenditures of your choice
No matter how you define financial freedom, many of the tips in this article will help you reach financial freedom.
Start small by ensuring your income covers all of your expenses. Then move on to paying off debt and investing to generate passive income.
If you get lucky enough, you may even achieve the top level of financial freedom: independent wealth.