What is Financial Freedom?
Financial freedom is an objective many hope for – but what does it mean to achieve it? Having Financial Freedom means that your life is not dependent on the income of your job. It means you are free of the worry of how you will make ends meet, you are no longer living paycheck-to-paycheck, you have the means to live comfortably once you retire and the freedom to live the lifestyle you have planned for without concern for how you will pay for it.
What that lifestyle looks like will vary depending on who you ask.
The Stages of Financial Freedom
There are several stages as you journey to financial freedom. Each stage brings with it a new milestone and degree of freedom bringing you closer to the ultimate goal of achieving financial freedom.
Preparation Stage – Stage 1: Living Within Your Means
During this initial phase, you are plugging holes – you have stopped the bleeding – built a dam. Prior to this stage, there was financial uncertainty, financial insecurity, and an overall feeling that one financial emergency would create hardship.
Financial Freedom entails not being dependent upon your salary in order to live comfortably. Financial freedom also means that you are able to live life with few worries about money–you are free from living paycheck-to-paycheck and have a buffer for when unexpected expenses happen.
You have achieved this level of Financial Freedom when you have reached the following milestones:
- You no longer live paycheck-to-paycheck
- Your bank accounts stay positive and you do not incur regular overdraft fees
- You have a small emergency fund
- Your basic living needs are provided by for
- You utilize and stay within a budget
- You have a plan to begin saving for retirement and/or you have started saving
Foundation Building – Stage 2: Financially Stable
When you have reached this phase you have reached a level of financial certainty. You are confident in your ability to provide for your financial needs and weather most financial emergencies. During this stage of financial freedom, you are still dependent on your income and a long-term job loss or decrease in income would be worrisome.
You have achieved this level of Financial Freedom when you have reached the following milestones:
- You have a plan of how you will reach retirement
- You’re working toward your retirement goals
- You are contributing to your retirement accounts
- You actively look for opportunities to increase your retirement contributions
- You have a sufficient emergency fund, typically 3-6 months of expenses but could be 12 months or more for the self-employed or those with irregular income.
- You have cut your expenses as much as possible by doing one or more of the following:
- consumer debt-free
- credit cards paid off each month
- vehicles paid for
- living simply
- reducing taxable income
Accumulation Stage 3 – Wealth Accumulation
Growing wealth is the primary focus of this stage. At this stage of the journey toward financial freedom, most have reached a point of maximum accumulation. Many are able to max out one or more available retirement accounts and contribute to after-tax investments.
A benefit of this stage is that large purchases like travel, vehicles, and other luxuries, can be made without worry. Financial Freedom at this stage is dependent upon continued savings and investment performance. A person at this stage of wealth accumulation has sizeable funds in both retirement accounts and after-tax accounts; however, it is not enough to retire on.
Another important component of this stage is regular review of your retirement strategy. Your retirement strategy is fluid and will need to be modified as circumstances change.
Continued education is another characteristic of this stage of financial freedom. People at this phase of their journey strive to continue learning how to maximize their wealth accumulation and seek out new information.
Finally, at the end of this phase, you will begin executing any preparations that need to occur to begin your retirement. For instance, accounts may need to be transferred, account types changed ( converting a traditional IRA account to a Roth), or the allocation of the investments modified (Increasing the percentage of a portfolio into Bonds).
Maintenance Stage 4 – Retirement
Congratulations! If you have reached the Maintenance Stage, you have officially retired. The goal of anyone who has made it to this stage is to be able to retire comfortably and have enough to live on for the rest of their life.
However, to be able to ensure funds do not run out early will require ongoing review of the accounts, modification to investments as needed, as well as being able to live within their means and stay on budget.
Financial health as well as overall good health, in general, is vital.
Preservation and Growth Stage 5 – Generational Wealth Building
Some are content to live out their retirement years and spend all they have before they pass. Others, however, in addition to living their best life during retirement, desire to leave generational wealth to their children and sometimes looking forward to future generations.
As a result, this last stage of Financial Freedom is all about keeping the money and income streams already acquired while still increasing them so that future generations benefit.
Having a well-thought-out and executed estate plan (will, trust, beneficiary deed, etc.) in this scenario is likely a good idea to help ensure the estate is well managed for the benefit of future generations.
Investments during this final stage are regularly reviewed and modified as needed focusing on preservation of existing funds and growth.
Persons in this final stage are not only able to enjoy their remaining years content in the knowledge that they are not only financially secure, but will have enough left over to help take care of future generations.
Tips to Help You Reach Financial Freedom
Financial Freedom means being able to live comfortably and have enough to live on for the rest of your life without worry. Financial freedom comes from cutting expenses, boosting income, and investing wisely. We’ve come up with a list of 11 tips that you can implement to expedite your journey to Financial Freedom.
Tip 1: Set Clear and Acheivable Financial Goals
The very first tip is most important. Spend time reflecting and contemplating what Financial Freedom means to you. Once you have a clear goal in mind you can begin developing your strategy to achieve it. Your entire plan for retirement flows from here.
Tip 2: Cut Expenses
Cut as many expenses as possible, especially if it means you can lower costs for your vital expenses like housing, transportation, food, and insurance. This is not to say that you should only pay the minimum due on credit cards or never buy new clothes but cut where you can in order to have more money available to reach Financial Freedom.
Housing and living expenses make a big percentage of most people’s budget. If you live in a high cost of living area, you may consider moving somewhere less expensive.
A few ways to cut transportation expenses are to decrease the number of vehicles in your household, use public transportation or using a bike if you are able to.
Tip 3: Create a Budget and Use It
A budget is the key to allocating your income and getting rid of unnecessary expenses. Keep in mind, Financial Freedom is more than just about creating a budget – it’s about living according to that budget.
Tip 4: Avoid Debt
Debt is similar to a black hole. You don’t know when you’ve fallen into it, where you’ll end up, or how you’ll get out! It is one of the biggest barriers to Financial Freedom. Every payment towards debt is money that is not going towards investments and you are losing not only the funds to debt but also losing out on the benefit of time and compound interest.
Tip 5: Increase Income
This is not necessarily always an option for everyone, but increasing your income is another way to expedite your path the Financial Freedom. Are you getting paid what you’re worth? Have you looked into a possible raise or promotion at work or other opportunities to make more money at your current position?
Changing jobs is another way to increase your income exponentially. Experts agree that people who stay at their jobs longer, earn significantly less money, than others who change jobs every few years.
Tip 6: Invest Wisely
Investing your income wisely and benefiting from growth in the market, as well as time and compound interest, is critical to achieving Financial Freedom. It is essential that your money does more than just sit in your checking or savings account earning minimal interest. Put your money to work for you by investing in the stock market, index funds, real estate or any number of other investment products. Diversification, not putting all of your money into one basket, is also wise.
If you are not comfortable knowing what types of investment vehicles to use, you should educate yourself so that you are comfortable with your investments. You might also consider using a financial advisor. However, be aware of all the hidden fees, commissions, and other costs that may come with one. To help ensure that you are maximizing your returns and not spending a good portion of commissions, using a fee-only financial advisor may be a good option as they have a fiduciary duty to put clients first.
Tip 7: Continuing Education
You’ll want to continue learning and gaining knowledge in order to maximize your earnings. You should consider staying up to date with financial news, reading books, or listening to podcasts on investing and making sure that you have a firm hold on current market trends so you can make informed investment decisions.
Tip 8: Put All Your Savings and Investments on Auto-pilot
You should always try to have a certain amount of your income automatically deposited into a savings or investment account each month so that you are compounding the power of time and interest in your favor. This makes the task effortless and ensures you are paying yourself first and not out of the leftovers.
Tip 9: Avoid Lifestyle Creep
Overspending and not paying attention to your spending are good ways to derail your entire plan to reach Financial Freedom. Be mindful of your spending and review your spending periodically to ensure you are staying on track.
Tip 10: Keep Cash Reserves
A well-funded emergency fund is another way to ensure your plans to reach Financial Freedom are not jeopardized in the event of financial hardship. This could include any number of the following:
- Decrease in income
- Sharp declines in the market
Tip 11: Adjust Your Withdrawal Rate as Needed
Be open and aware that you may have to adjust your withdrawal rate once you have retired. Many agree that 4% is a safe rate to withdraw funds at retirement once you have attained Financial Independence. INSERT AN INTERNAL LINK TO EXPLAIN… However, there may be times where the market is down for an extended period of time and to ensure that your funds last, may require you to reduce the percentage you withdraw temporarily. For instance, instead of withdrawing 4% while the market is in a downturn, you adjust that to 3.0% for a time.
Financial Freedom means different things for different people, but the steps necessary to get there are universal. It’s important not only to focus on earning more money but also investing wisely and continuing education in order to reach Financial Independence. The tips we’ve provided above will help you set yourself up for success so you can continue with your Financial Planning goals without worrying about what might happen if life throws an unexpected curveball at you!
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