Financial freedom means having enough income or wealth to pay for living expenses without depending on others. It is usually an essential goal for most individuals. Financial freedom allows individuals to pursue a lifestyle that suits their choices. Shifting career tracks, travelling the world or saving money for unforeseen medical emergencies are all possible when one practices financial planning with discipline.
Most individuals do not achieve financial freedom and fall short of their financial goals due to overspending and debt. Read on to learn more about the practices to achieve financial freedom.
What is financial freedom?
Different people have different interpretations of the term 'financial freedom'. Some would argue that it is merely about being rich while others say it is about being debt free.
Financial freedom is a goal most individuals wish to achieve. It means having enough income to support your lifestyle while enabling you to pursue your passion in your free time. Financial freedom provides a safety net of savings to anyone who plans for it.
To become financially free, one must pay off debts. Multiple streams of income that gain passive returns are essential in attaining financial freedom.
Financial freedom vs financial independence
Although financial freedom and financial independence are used interchangeably, they are not the same. The journey to financial freedom requires one to attain financial independence first.
Financial independence is when one is financially secure enough to cover their basic expenses, along with other discretionary expenses. Financial security covers expenses for a few months. Financial independence accounts for passive incomes.
If you had enough money to cover subscription services, family vacations and other discretionary expenses or "wants", you would be considered financially independent. Financial independence requires one to build multiple streams of income.
On the final rung of the ladder is financial freedom.
Financial freedom is when you have enough passive income to cover needs, wants and more. One would not worry about income generation as there are multiple sources for the same. When your money allows you to attain anything you want, you have achieved true financial freedom.
7 practices to achieve financial freedom
The journey to achieve financial freedom is long but possible when you build a healthy relationship with your money. Follow these seven practices to achieve financial freedom.
1) Set Specific Life Goals
Set specific life goals for yourself to attain financial freedom. Decide on timelines and the amount you must save to achieve these goals. Ensure that you are more specific about your achievements to attain your goals.
Here are three objectives you must set for your personal finance goals:
- What does your lifestyle require?
- How much money do you need to make to sustain your lifestyle goal?
- How old do you need to be when you save the amount?
Pen down your life goals. Do you need money for an education loan? Or your retirement? Or do you need to save to start a side hustle?
Work backwards from the age you set for your financial goal to your current age. Check milestones at intervals and re-calibrate the amount you need to put aside, as required.
Make sure you set SMART goals. SMART goals are Specific, Measurable, Achievable, Realistic and Time-Bound.
For example, A plan to put aside ₦1000000 by 2030 to set up your own business is an example of a SMART goal.
2) Make a monthly budget
Make a monthly budget for yourself and stick to it. A budget ensures that your savings are on track according to your financial goals.
To create a budget for yourself, you can explore simple budgeting methods like the 50:30:20 rule.
50% of your income is for needs which should cover rent, loan repayments, bills, insurance and groceries.
30% of your income is for wants which should cover shopping, vacations along with fitness & wellness costs.
20% of your income is for savings which should account for your emergency fund as well as achieving your financial goals.
If you are new to budgeting, you can explore the 80:20 rule. 80% of your income is dedicated to needs and wants. 20% of your income is for savings and investments.
Additionally, the 50:15:5 rule is for anyone trying to achieve multiple financial goals. 50% of your income is for needs, 15% is for your retirement fund and 5% is for an emergency fund. The additional 30% is a contribution to any other financial goal you want to pursue.
3) Start investing as early as possible
Do not wait to invest until you start earning a specific amount of money or get around to investing "someday". The best time to start investing is now!
Compound interest is the key to growing your money steadily, irrespective of market conditions.
To explain compound interest, assume that you will invest ₦10000 and earn a 10% return on the money in one year. This means you'll make an additional ₦1000 on your initial investment of ₦10000. You'll end up with ₦11000.
What if you skip investing the principal amount of ₦10000 in the next year? Your initial investment will still grow! Assume that you will still earn the same 10% on your sum of ₦11000. Instead of ₦1000, you will earn ₦1100 because the interest is compounding on a larger balance. You have ₦12100 because interest has been compounding every year.
Your gains will increase over time if you invest early and often. Remember to invest even if the sum is small. The returns will multiply as time passes.
4) Live below your means
Frugality with expenses is the key to attaining financial freedom at the right pace. Living below your means and adapting to minimalism can drive up your savings rapidly.
When you live below your means, you have enough money as a safety net to handle any unforeseen medical expenses, save for retirement and fund your side hustles.
Living below your means does not rely on one feeling deprived. One must learn to differentiate between needs and wants to drive down unnecessary spending.
5) Take care of your health
The old saying “health is wealth” stands the test of time.
Taking care of your physical and mental health allows for your financial health to enjoy dividends.
Make timely visits to the doctors, schedule health checks and sign up for a sound insurance policy to take care of medical bills and unforeseen expenses.
Build a lifestyle that includes moderate exercise and a healthy diet.
6) Keep up with financial issues
Stay financially literate about taxes and deductions to ensure you make the most of policies and laws. Track financial news and the stock market to adjust your investment portfolio as required.
Financial literacy is essential as your track to achieving your savings and investment goals becomes weak if you do not keep up with current events.
7) Create multiple sources of income
If you are serious about financial freedom, a single source of income from your 9 to 5 job will not suffice. You may have to look for additional sources of income.
There are two ways to build an additional source of income. One way is to trade time for money. You can take up side hustles and smaller gigs to earn money on the side.
The other way is to earn income passively, where your returns are automated. Selling e-books and courses, becoming an affiliate marketer and investing in stocks will generate more money on the passive income front.
See how you can make the best use of your time and take small steps towards building other streams of income.
Importance of financial freedom
The seven-step formula will bring you closer to your ideal lifestyle and unique goals as per your standard of living. Making your financial dreams a reality relies on managing your finances in the right manner. Financial freedom allows one to achieve the lifestyle of their choice by making the most of existing income on hand by planning for the future.
Financial freedom can allow one to have a more fulfilling life experience. Financial freedom is possible only if you start working towards it now!
How much money should you have to achieve financial freedom?
As you reach the end of this article, you must wonder, how much money is enough money?
Some say that putting aside a corpus of at least 30 times your current expenses is enough to attain financial freedom.
While there is no fixed amount one must put aside to achieve financial freedom, it depends solely on one's personal goals and lifestyle preferences. Starting early and growing your investments over time, along with your streams of passive income is the key to attaining financial freedom.
Q. How can I be financially independent without a job?
A. While the path to financial independence is hard without a stable source of income, it is not impossible. Financial independence is possible only when you have built multiple streams of passive income to sustain your current lifestyle. Some examples of side hustles are:
Starting an online business
Freelance content writing
Building a following on social media
Q. How much money is required for financial stability?
A. Financial stability is when one can maintain a stable income without the addition of debt or overspending. Ensuring you have funds for a rainy day along with the means to manage household expenses for a sustained period involves financial stability. To attain financial stability, one must practice sound financial planning.
Q. What is the key to financial freedom?
A. The key to financial freedom lies in the plan behind attaining specific life goals. Following a stable budget every month, avoiding debt and credit card bills while automating savings can boost your investment and savings journey much faster. Additionally, maintaining your belongings and your health can help you save on unforeseen repairs or medical bills.
Q. How long does it take to achieve financial freedom?
A. Financial freedom can be achieved in any time frame, depending on the income you receive, the streams of passive income you build and your investment habits. This goal varies for every individual. To attain financial freedom, one must budget in the right manner, invest on time and practice sound financial planning.
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