What is Financial Freedom?

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What is Financial Freedom and the Road to Getting There

Attaining financial freedom is an objective for most individuals. Financial freedom usually means having enough savings, financial investments, and cash on hand to afford the kind of life we desire for ourselves and our families. It means growing savings that enable us to retire or pursue the career we want without being driven by earning a set salary each year. Financial freedom means our money is working for us rather than the other way around.

We are burdened with increasing debt, monetary emergencies, profligate spending, and other problems that hinder us from reaching our objectives. Such challenges confront everybody, but these twelve habits can put you on the ideal path to financial wellness.

When money makes money, you’re on your way to financial freedom!

When money makes money, you’re on your way to financial freedom!

Key Points

  • Set life objectives, both large and small, monetary and lifestyle; create a plan for accomplishing those objectives.

  • Budget your funds so that you can cover all your needs; stick to this plan; pay your credit cards in full, so you carry as little debt as possible, and watch your credit.

  • Get a financial consultant and start investing; remain current on tax laws; develop automated contributions through your company's retirement plan; set up an emergency fund.

  • Live below your means; be frugal when possible; and do not be afraid to ask for or negotiate for better offers.

  • Take care of your personal belongings, since maintenance is more affordable than replacement; but more notably, take care of yourself and remain healthy.

Independent Income or Abundant Assets

Financial freedom means you have enough financial resources to pay for your living expenses and allow you to afford many of your life goals without having to work or otherwise commit any of your time or efforts to generating money. These resources might include one or both of the following.

Independent Income

Independent income means you have a business, government benefits, or other sources of regular payments that do not require you to work (exchange your time for money). If you qualify, social security benefits arrive every month. If you have built a business to the point that you can pull back from day-to-day management, you can receive payments regardless of how much time you put in. If you own a rental property, you receive a rent payment once a month, although property management often requires property maintenance and runs the risk of renting to a tenant who misses one or more payments).

If you have enough independent income to pay for your living expenses and your wants, you are financially free.

Abundant Assets

Assets that help support financial freedom typically include investments in securities, cash in bank accounts, and property of value. To use an asset when building financial freedom, you first need to invest in those assets, usually large amounts of money over a long period of time. For example, most financial planners will tell you that contributing regularly to a 401(K) is critical for your long-term financial stability and security. This can be true for many people, so long as they start investing early (in their 20s, 30s, or even 40s). However, those who wait until their 50s or later to start investing will lack sufficient time to take advantage of the power of compound interest. Their contributions will typically not even double after taking inflation into consideration.

Using assets to build financial freedom can lead to potential problems. Think of it as a balancing act. Using this method to pay for your living expenses and wants, you need to sell an asset to have enough cash for your bills. Troubles can arise if you have problems selling an asset (real estate, for example) fast enough to make the cash available before your bill’s due date. People in such circumstances might be called “cash poor millionaires.” Their assets might be valued at over $1M, but they can’t access that value fast enough to use.

Another potentially bigger problem happens when you run out of assets to convert into cash before you die. Basically, if you go through all your assets too fast, you will be left with nothing to pay for your bills.

Most financially free households, use a combination of both of these methods. They may receive independent income from social security, from a business, or from dividend-paying securities they have invested in, but they also probably have accumulated enough assets in the stock market and the housing market to provide them financial security, knowing they have plenty to fall back on if necessary.

Life Goals

Jot down how much money (assets and income) you need to pay for the lifestyle you want. Include the year when you want to achieve your goals and whether or for how long you will need to pay for those goals. The more specific your objectives, the more likely you are to make them a reality. Then, count backward to your present age and establish financial mileposts at regular intervals. These might include certain dollar amounts saved or assets acquired.

Budget

Making a month-to-month household spending plan and adhering to it is an important method to guarantee all bills are paid while investments and independent income building are on track. Budgeting your money routinely clarifies your objectives and bolsters your willpower rather than letting yourself fall before the temptation to spend lavishly. Charge cards and high-interest consumer loans present hazards to your wealth-building.

Pay Your Dues and Debts

Student loans, mortgages, and similar loans usually have a much lower rate of interest than credit cards and retail store cards, making them less dangerous to your finances. With credit cards, you might end up amassing thousands of dollars of high-interest debts. Drowning in debt for years is the complete opposite of independence. Debt, after all, insinuates obligation and even bondage, both of which clearly counter the idea of financial freedom.

Save

Pay yourself first. That is a standard recommendation from financial experts. Register for your employer's retirement plan and make full usage of any matching contribution benefit. It is likewise an excellent idea to have an automated deposit from your employer into an emergency fund (or an automated transfer from your checking) that can be tapped for unanticipated expenditures. Additionally, consider an automated contribution to a brokerage for an Individual Retirement Account.

Regardless, keep in mind that the suggested quantity to save is widely debated, and the suitability of such a fund is sometimes even in question given certain circumstances.

Invest

There is nothing much better, and no more tried and true way to grow your cash than through investing. Whether you choose a 401(k) or an IRA, now is the time to do your research and decide which direction you will start. But start! That is the most important step.

Monitor Your Credit

A person's credit report influences any interest rate related to car, truck, or home loans or refinances as well as credit cards and store cards. It likewise impacts unrelated things, such as car insurance and life insurance premiums. The line of reasoning is that someone who is reckless in their financial routines might also be careless in other areas of life, such as driving and consuming. The reality is that, as a group, individuals with lower credit ratings get into more accidents and submit larger claims to their insurance companies than individuals with higher credit ratings. This does not mean someone with poor credit is a bad driver, just as a male who is 23 years old and not married is not a poor driver. However, he will pay higher monthly premiums because he is young, single, and male. Poor credit is just one of many risk pools insurance companies use when determining your monthly premium.

Bargain

Many Americans are reluctant to negotiate for purchases and services, believing it makes them appear cheap. Many from other countries would recommend American’s conquer this cultural handicap. You might save thousands of dollars each year. Smaller merchants, in particular, tend to be open to negotiation. Purchasing in bulk or with repeated transactions can open the door to good discounts.

Learn What Must be Learned

Stay up-to-date with financial news and events in the stock exchange, and do not be reluctant to adjust your financial investment portfolio accordingly. Knowledge is the very best defense against those who victimize unsophisticated consumers to turn a quick buck. In terms of your credit card, make sure you know your credit limit so you do not overspend. It is your responsibility to stay aware of such details.

Take Care of Your Things

Taking good care of your home and your possessions makes everything from automobiles and lawnmowers to shoes and clothing last longer. Imagine if you did not have to buy clothing and shoes as often as you do. You could hold on to your car longer, spending less in the process. Maintenance is the key to saving money.

Live Below Your Means

Mastering a frugal way of life by having a mindset of living life to the maximum with less is not as difficult as it might seem. Many wealthy individuals lived frugally below earning their abundance. Frugality is not an obstacle or the adoption of a minimalist approach to life, nor is it a call to dumpster diving or to extreme hoarding. Frugality is the wise purchase of important items and the responsible stewardship of such possessions.

Get Expert Advice

Even if you are not yet at a point where you have begun amassing wealth, getting expert financial advice to educate yourself and help make good choices will help you prevent problems. From nonprofit credit counseling agencies to your local county extension specialist to accredited financial counselors, there are plenty of reliable experts available to help you at no cost or for minimal fees.

Stay Healthy

Some companies offer limited sick days, so it is a noteworthy loss of income once those days are used up. Weight problems and ailments lead to skyrocketing insurance premiums, and poor health may require earlier retirement with lower monthly benefits. Taking care of your health will not solve all your cash problems, but it will assist you in developing practical habits that can get you on the course toward financial freedom.

In the End

Ask yourself if you are doing everything on the list now. Then ask if you have the ability to do every item on this list. Chances are your answers will be “no” then “yes.”

Your likelihood of achieving financial freedom increase dramatically if you can save money, control your credit and minimize your debt. You will be better able to provide for your family and yourself, not to mention the awesome feeling of being debt-free.

 

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Todd Christensen

About the Author

As the education manager for Money Fit, author, speaker, and financial educator, Todd Christensen develops financial education programs and provides credit and debt counseling for individuals and groups around the country. In 2014, Todd published his first 5-star-rated book, Everyday Money for Everyday People based on stories and ideas he had heard in nearly 1,000 workshops he facilitated on budgeting, credit, debt reduction, saving, and identity protection.