The Road to Financial Freedom
Being financially free means money is no longer a cause of tension; you live a debt-free life with enough money for early retirement, and you never have to go to a job that you don’t like.
Although reaching financial freedom may seem difficult, but it is achievable when taking the right steps, having the mindset, and enjoying the journey.
Levels of Financial Freedom:
The Financial Freedom journey goes through several stages; it might start from instability and insecurity where you rely on debts to survive, and goes all the way to the actual financial freedom where your money works for you and you never have to worry about it again.
The below image shows the levels of financial freedom. Check it out and take a moment to realize which level you currently are at.
Instability – Your income is less than your expenses, and you rely on debts.
Survival – Your income equals your expenses
Safety –Your income covers your living Expenses and Emergency Funds
Debt Free – Your income covers living expenses with Emergency Funds, and You are Free of Debt (excluding mortgage)
Security – Emergency fund, debt-free with investments paying for your roof and the food on your table
Independence – Investments and Passive income paying for your lifestyle without relying on your 9-5 job.
Freedom – Managing investments, traveling, and doing things you are passionate about.
While reaching Financial Freedom is never a straight line journey, it’s crucial to understand that the path will indeed hold several challenges. The most important thing to remain focused on is understanding that reaching a high top only happens by making small steps.
Steps for Financial Freedom:
We will breakdown the big goal of Financial Freedom into steps where we discuss each step and what you should do to move to the next steps.
Understand Where You Are:
Without understanding your starting point, you can’t reach Financial Freedom. It can be frustrating to look at how much debt you have, how much savings you hold, and how much cash you need. Yet, it’s a precious jump in the right direction.
You might realize that you are still in the Instability or Survival phase. But it’s totally fine. As long as you started to be aware of where you stand, you can make sure you are on the right track.
Now you know where you stand, it’s time to take a step further and move to the next level.
1. Set an emergency fund:
Setting an emergency fund is the most crucial change you need to bring to your financial life. It’s not recommended to think about investing or buying any fancy stuff before setting emergency funds.
If your income doesn’t allow you to set any money aside, you need to re-visit your expenses and lifestyle and make the necessary adjustments. You can start to gradually build that fund by setting aside a small amount of your monthly income, any unexpected income, or bonuses until you have a worth of 3 – 6 months of your cost of living basics.
Having an emergency fund ensures that you have enough money on hand to deal with any unexpected incidents. You should have at least three – Six months of income saved in your bank. Whether you lost your job, got sick, or had an urgent major repair, this will allow you to continue to pay the bills. There are always things that are surprising in life that happen. When the time comes, you may want to be prepared.
Now you have your emergency funds aside, and you made it to the security zone. It’s time to step up to the next level.
2. Get rid of Consumer debts.
Although some types of debts can expand your financial opportunities, they do not support your financial development in the long run. Keeping in mind all those payback dates, stressing out about debt is something you would want to avoid in the first place.
While it is understandable that there are situations in which debt is unavoidable, in the long run, you need to terminate it from your life. Paying loans or credits back should be a number one priority, as your financial freedom can only start when you owe nothing to anybody, excluding yourself!
In this stage, you are only required to pay off your consumer debts and not your mortgage (if you have one) since paying off the mortgage at this stage is unrealistic.
Now you are free of debt and made it to the Debt-free level. Let’s go one step up and discover the next level
3. Build a Monthly Systematic Investment:
After setting up emergency funds and paying your consumer debts, it’s time to pay yourself and start investing in your future.
By paying your loans and credit cards, you were able to free up a part of your monthly income. So what are you going to do with that extra money?
In many cases, investing small amounts for the long term has proven to be better than investing a large amount as a lump sum. For example, monthly and consistent investment in the stock market will do miracles over the years,
Remember, this is long term investing; you don’t have to look at the stock prices every day or even every week; keep on investing.
By doing so, you are spreading your capital over tens and even hundreds of monthly payments, meaning that it won’t matter if you invested in some stocks for one month and prices went down because you will be buying again next month with the low price.
Once your investments start to grow and generate income, you can comfortably say that you are at the security level.
4. Get Insured:
Life is unpredictable, and when you least expect it, it has a way of tossing surprises at you. To be completely able to cope with life contingencies, then you need to consider getting insured.
Your financial status can be affected in a moment by unforeseen incidents; no matter how much you earn or how much you have invested, all can be wiped off. So, covering yourself, your families, and your belongings with insurance is the perfect way to become financially confident and anxiety-free.
5.Create Additional Sources of Income
Now that you have your monthly investments growing and paying for your necessary expenses, you still rely on your job to pay for your lifestyle.
It is time to step further and start building different income sources, passive incomes that pay you while you sleep.
It’s not that simple, and it doesn’t come overnight, it takes a lot of effort, commitment, and hard work, but once you make the necessary setup, the money should flow passively while you enjoy your time and spend it doing the things you love.
Having more than one source of income gives you the peace of mind that you would still be fine even if you lost one source because you have other sources to cover it up.
Now, after building multiple sources of income, it means you made it to the independence level. You are one of few people who made it to this level because of your commitment, hard and smart work.
You are one step away from reaching the financial freedom you have always dreamed about.
6.Manage your Wealth and Enjoy Life:
Congratulations. You made it to financial freedom! You have entirely shifted from thinking and worrying about your income to managing your investments, cash flows, and planning for the next generation’s finances.
With more free time and less stress, you can spend more time with your beloved ones, travel, find your passion, and do the things you love.
Financial freedom might sound too good to be true, but if you follow the steps we discussed, you will find yourself jumping from one step to another, but always remember: Enjoy the journey as much as the destination.