What Does Financial Freedom Mean to You?

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My definition of financial freedom

The first thing that comes to my mind is no financial worries. 

The second thought is to have enough savings and generate enough passive income to quit my job and follow my passion. 

It also means no alarm clock, no commuting to work, nobody to report to, and no deadline.

In addition, financial freedom to me represents a stage in life when you stop working for money and let money work for you.  

Financial life goals

How can you achieve financial freedom?

The thing about money is that you are always looking for ways to get it. After you have it, you have to protect and secure it by being a meticulous planner and strategist.  

Financial freedom requires you to develop a systematic approach to investing your money and ensuring its safety. 

If you want to achieve financial independence, determine how many months or years you need to reach this goal. Calculate how much time between now and the date you expect to achieve financial freedom.

Once you have calculated this sum, you can start your journey toward financial independence. You are now striving with purpose since you know what trajectory to follow.

What are the seven core principles of financial freedom?

Budgeting

Write down how much you spend and how much you earn per month (expense-to-income ratio). Amongst your monthly expenses should be bills, living expenses, transportation, recreation, clothing, shoes, gifts, etc. 

You can use a budget planner, a spreadsheet, a piece of paper, or an app to help you prepare your budgeting plan.

Once you have this information, subtract your earnings from your spending. The results should indicate whether you can save money or if you need to reduce your spending.  

For example, if you spend GBP 1,200.00 per month and earn GBP 1,200.00 per month, you cannot save any money at the end of the month because your spending equals your pay. 

The calculation for this example would be: Earnings GBP 1,200.00 – Spending GBP 1,200.00 = 0

At the end of the month, if you have little or no money left, look for ways to cut back your spending.

The rule of dumb is to save at least 20% of your salary every month. 

Are you in need of a budget planner to begin your financial journey? This paper budget planner is an alternative to online budget planners.

It’s crucial to pay off all your debts before you can even begin saving. It makes no sense to save money if you still owe money with interest. Make a list of all your loans, credit cards, store cards, overdrafts, etc.

Find out where you stand by using the expense-to-income ratio we discussed earlier. If you still have some money left at the end of the month, instead of saving it, use it to pay off your outstanding debts.

Consider clearing the high amount of debt first. If you pay off these debts, you will have more money to reduce the rest of your outstanding debts.

Avoid paying high interest on your outstanding debts. If possible, move your debts to 0% credit cards. It will allow you to reduce your debts faster.  

If your outstanding debts are causing you sleepless nights, seek professional help. There are many companies, agencies, and charities ready to help you. 

You can also approach your creditors and negotiate a manageable monthly repayment. 

Always keep communication with your creditors open and never default on your repayments. Otherwise, it will harm your credit score. 

Three debt management options

There are many alternatives to help you manage your debts. However, in this article, I will only discuss three of them.

IVA

An Individual Voluntary Arrangement (IVA) is a legally binding agreement set up by a qualified insolvency practitioner. This agreement outlines how and when you will pay off your creditors. Your creditors need to consent to the arrangement before it goes ahead. 

DRO

A Debt Relief Order (DRO) gives you a grace period of usually one year, during which you don’t have to pay most of your debts. After a year, the debts become a write-off, and your creditors have no power to stop it.

Additionally, DRO plans aren’t for everyone. The eligibility criteria are strict. You can’t own a house, have assets or extra income, and your overall debt shouldn’t be more than GBP 20,000.00.  

The service is free, but there is an application fee of GBP 90.00. 

Talk to a DRO adviser if you’re interested in this route. They can help you fill out the form.

Bankruptcy

Lastly, you have the option of declaring bankruptcy. This option is not free and costs GBP 680.00 at the time of writing this article. 

The upside of bankruptcy is that it will wipe away your debts, but its downside is that you will need to sell all your belongings to pay your creditors. I would only recommend bankruptcy as a last resort. 

If you’re currently in debt, read The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness, as it can help you get out of it.

Saving

Financial freedom doesn’t require you to earn a lot of money. It all depends on your strategy. People who achieve financial freedom save their money for many years through long-term financial planning. To achieve financial freedom, you need to save money.

In other words, you need to save some money every week, month, or year so that you can build a nest egg. Unfortunately, most people don’t know how to save money. Probably due to ignorance or lack of financial education. 

If you don’t have debts, subtracting your earnings from your spending should show you how much you can save each month. 

You should save at least 20% of your salary every month.

Additionally, make sure you have an emergency fund in case you incur unexpected bills. The advice is to have at least three to six months of savings.

Cost-saving measures

Also, learn to make some cost-cutting changes in your life. It will enable you to save more money each month. 

There are several ways of cost-saving. One of them is haggling. You can haggle the price down for most of your household bills if you are skilled at it.

Get money back from your purchases when you use cashback cards.

You can save approximately GBP 325.00 on your shopping by using cashback sites like Topcashback.

You can save money on your groceries and petrol by using a loyalty card from designated shops.

Finally, compare online prices using sites like MoneySupermarket, which can help you save on household, insurance, money, and travel bills.

Read the Richest Man in Babylon if you want to learn how to save money and how to handle your money.

Investing

Consider investing early and often to build your wealth. If you have never invested before, learn how to do it. You can start your investment journey by grasping the basics. Also, know that you don’t need to be rich to start investing. You can start with as little as GBP 20.00.

Investing can seem intimidating to both novice and experienced investors alike because of the risky nature of this business. Fortunately, there are different levels of risk when it comes to investments. Always assess the risks before investing, and avoid putting all your eggs in one basket.

Before investing, make sure you have paid off all your debts and have at least six months’ worth of cash to fall back on. 

You can invest with the help of a financial advisor, or you can use an online fund supermarket to make your own strategic decisions. Make sure you understand the fees involved, as they can affect your returns.  

Additionally, learn to diversify your investment portfolio. Do not invest exclusively in one type of asset, such as bonds or shares, and don’t invest only in one country.

Keep your eggs out of one basket and invest in low-cost index tracker funds. Vanguard is the pioneer in index tracker funds. The company has been around for 45 years, and they have the lowest fees on the market.

Once you have decided on the assets to invest in, leave them alone and don’t touch them. Otherwise, you will end up reducing your returns or increasing your costs. Review your investments once a year. Investing is for the long term. If you are not taking this approach, you are not doing it right. 

If you are new to stock market investment, a good book for beginners that’s educational and humorous is The Little Book That Still Beats the Market.

Spending

Spending should be part of your money management plan and your overall financial goals. Neglecting this part of your money management plan can derail all your financial goals. You should be familiar with how, where, when, and why you spend your money.

The 50/30/20 rule

Elizabeth Warren’s 50/30/20 rule suggests you should spend 50% of your income on necessities and obligations, 20% on savings or debt payments, and 30% on any extras you don’t need but want.

The 30% of extra stuff we don’t necessarily need but want are all the leisure activities we do, such as going to the cinema, going to dinner, going to the gym, going on vacations, and buying the latest gadget, handbags, dresses, shoes, etc. These are things that make our lives more pleasant and comfortable. However, we don’t necessarily need but still want.

Spending is an area of money management where you can save the most money by cutting back on non-essential items.

Rather than going out to dinner, why not cook at home? Rather than joining the gym, why not work out at home or in the open?

Discover how you can get your finances in order by reading Elizabeth Warren’s book: All Your Worth: The Ultimate Lifetime Money Plan.

Monitoring

Once you have defined and enforced your financial goals, it is now time to monitor these goals.  

As you are going through the different stages of life, such as buying your first house, having a family, and retiring, your financial goals may need to be tweaked and adjusted. 

Life’s five financial stages

The following example illustrates the five financial stages of life to help you determine when to make adjustments.

1. Teenage Years (13-17): At this stage, learning the basics of money should be the focal point. The objective is to set mini-saving and budgeting goals.
2. Adulthood (18-25): This phase focuses on attaining financial stability. You have created your financial road map. Put a retirement plan in place. Start saving 20% of your salary from your first job. Reduce and pay off your debts.
3. Family Planning (26-45): Consider the financial obligations that arise with becoming parents. Add your future kids to your financial plans. Invest your money to grow it. Budgeting and saving should become second nature.
4. Pre-retirement (46-64): At this stage, you should be at the peak of your earnings, and saving should be automatic and set in stone. Diversifying your investments is essential to reduce risk and grow your money. Write a Will.
5. Retirement (65+): At this point in your financial planning, you have everything in place to have a peaceful retirement. House paid for, and you have no debts. Budgeting becomes important again because you are most likely living on your pension and savings.

Have you been thinking about your retirement or are you just starting out your career and want to plan ahead? I would recommend reading Planning Your Retirement: A Practical Guide for Turning Your Dreams Into Reality.

Expert advice

If you feel lost and need advice in designing your financial future, a financial advisor can do just that. 

However, I will only consider one if I can save 20% of my monthly income or if I suddenly receive an inheritance. 

In the long run, I wouldn’t recommend consulting a financial advisor beforehand because of the fees involved. 

Conclusion

In conclusion, creating a financial plan and following it to the letter is key to achieving your financial goals and freedom. 

Consider putting in place a budget plan the moment you earn money. A budget helps you see your expenses versus your earnings and helps you plan better ahead. 

In addition, learn how to manage your debt, save, invest, reduce your spending, monitor your investments, and get expert advice if necessary.

Discover how to make money online to take that next step toward financial freedom.