Financial freedom: Steps to Achieve Financial Freedom

If you’re hoping to achieve financial freedom, the team here at Moneyfarm can assist you with designing an investment strategy that will help you to reach your financial goals. To discover more, please read on.

What is meant by the term financial freedom?

The term “financial freedom” refers to the state of personal financial well-being whereby you have sufficient wealth and resources to be financially independent, live comfortably and make choices without being confined by financial constraints. You can cover your living expenses, meet financial goals, and have the freedom to make choices and save enough money to invest based on your personal preferences and values.

The benefits of financial freedom

Financial freedom brings numerous benefits and can significantly enhance your life in various ways. Here are some of the advantages you can enjoy when you achieve financial freedom.

Peace of mind

With money freedom, you will be able to enjoy financial peace of mind. As long as your source of income remains steady, and you’ve set aside an easy access emergency fund, just in case, you’ll be able to banish financial anxiety, and being financially free, you’ll be able to focus on enjoying life.

Flexibility of choice

Once you have financial freedom, you will be able to make choices based on what truly matters to you. You can choose to work on projects that align with your passions and spend more time with your family and loved ones. You’ll have the freedom to select a career or business that fulfils you rather than solely having to be motivated by your financial obligations.

Improved mental and physical well-being

Money worries take a toll on your mental and physical health. Achieving financial freedom means being able to say goodbye to financially induced stress. As well as brightening your mood, being financially independent may enable you to afford better healthcare and live a healthier lifestyle with room for personal growth and development.

Promoting the causes which better the world around you

When you attain financial freedom, you no longer need to feel constrained to invest in things just for your own financial benefit. You can start investing in more philanthropic choices that help to benefit others, like pursuing ESG investments, for example – investments that can help make a difference in the world in which we live.

The 5 pillars of financial freedom?

The concept of the “5 pillars of financial freedom” is not something that is universally defined. In other words, there is no specific financial freedom formula. However, there is a commonly referenced or accepted set of principles that are often associated with achieving financial freedom. They are:

Budgeting and financial planning

Good financial planning starts with creating and maintaining a budget, which is essential in order to manage your finances effectively. It involves tracking your income and expenses, and noting your savings goals, all of which will help to allow you to make better-informed decisions and prioritise your spending.

Saving and investing

Developing a habit of saving and investing is essential for long-term financial freedom. Saving money in an easy-access savings account allows you to accumulate a financial cushion to meet unexpected expenses while you learn how to invest your way to financial freedom through various investment vehicles such as stocks, bonds, real estate, retirement accounts, etc.

Debt management

Taking control of and, where possible paying off your debt is an important aspect of financial freedom. It involves understanding your debt obligations, creating a repayment plan, and avoiding high-interest debt when and wherever possible. By managing debt effectively and, if you can, becoming debt free, you can reduce financial stress and focus on freeing up resources for your other financial goals.

Income generation and career development

Expanding your income potential is essential for attaining financial freedom. This fourth pillar is about improving your skills, pursuing career advancement opportunities, and seeking additional passive income streams, thereby increasing your earning potential over time.

Financial risk management and protection

Protecting your financial well-being from unexpected events is another key element of financial freedom. This last pillar includes having appropriate insurance coverage, such as health, life, and property insurance, in place, as well as building an emergency fund to cope with unforeseen expenses or job loss, as mentioned earlier.

How to create a financial plan to achieve financial freedom

You need to fully understand the 5 pillars of financial freedom because it is by observing them that you will lay the foundation for your financial planning.

The financial planning guide is a very useful place to start. It takes the 5 pillars discussed above and builds on them to discuss things like tax and what happens after you die, which, when added to the 5 pillars, form the basis of the 7 steps to financial freedom.

How do you become financially free?

Becoming financially free typically involves a combination of careful planning, disciplined saving, wise investing, and managing your expenses effectively. Here are some steps that can help you work towards financial freedom:

• Set clear financial goals: Define your financial objectives and create a plan to achieve them. This might include saving for retirement, paying off debts, or building an emergency fund.
• Budget and track expenses: Create a budget to understand your income and expenses. Track your spending habits and identify areas where you can cut back to save more money.
• Reduce and manage debt: Minimize and manage your debts by prioritising high-interest loans and credit card debts. Make regular payments and consider strategies like debt consolidation or refinancing to lower interest rates.
• Save and invest wisely: Develop a habit of saving a portion of your income regularly. Build an emergency fund that covers at least three to six months of living expenses. Explore different investment options, such as stocks, bonds, mutual funds, or real estate, based on your risk tolerance and financial goals.
• Increase your income: Look for ways to boost your income, such as negotiating a raise, starting a side business, or exploring additional sources of income like freelance work or investments that generate passive income.
• Continuously educate yourself: Enhance your financial literacy by reading books, attending seminars, or taking courses on personal finance and investment strategies. Stay updated with market trends and financial news to make informed decisions.
• Seek professional advice: Consider consulting a financial advisor who can provide personalised guidance based on your specific situation and goals. They can help you create a comprehensive financial plan and provide expertise in areas like tax planning and investment management.
• Practice disciplined spending and avoid lifestyle inflation: As your income grows, resist the temptation to increase your spending proportionately. Instead, focus on saving and investing the extra money to accelerate your journey towards financial freedom.

Remember, achieving financial freedom is a long-term process that requires patience, discipline, and perseverance. It’s important to stay committed to your financial goals and regularly review and adjust your plan as needed.

The importance of investing for financial freedom

Investing is key when it comes to achieving financial freedom. Having set enough money aside in your emergency fund, you then need to focus on long-term financial freedom and wealth management. It is important to save enough money as an emergency contingency, and so is investing. Investing is the key to long-term financial freedom.

This is where you may need to contact an advisory service. A specialist wealth manager will be able to give you the best investment advice.

Why is investing important? It’s because investing allows your money to grow over time. By putting your money to work in various investment vehicles, such as stocks via a stocks and shares ISA, bonds, mutual funds, real estate, or businesses, you have the potential to generate returns and accumulate wealth. Over the long term, the compounding effect of investment returns can significantly increase your net worth.

Yes, there is an element of risk with investing. But whereas saving in easy-access savings accounts is likely to lose you money in real terms because of inflation, making the best use of compound interest rates can grow the value of your investments, nullifying the effect of inflation.

Speaking to a financial advisor could be a good way forward. You need to understand risk and be aware that the value of your investments can fall as well as rise. A good financial advisor can assist by suggesting investments that match your investor profile.

If you fall into the average disposable income category, you might not be able to afford to invest. It depends to a certain extent on which UK region you live in. The cost of living is considerably higher in London than it is in the North, so earning the same income there goes much further than it does in the capitol.

The problem is that the importance of investing, especially for your retirement, simply cannot be overstated.

Strategies for increasing your income

The best ways of improving your disposable income are to get rid of as much debt as you can and find ways of increasing your income. If you are in employment, you might be able to negotiate a raise.

Earning a passive second income stream is ideal if you don’t have any time to spare. Taking in a lodger could be an option, or if you’re young, staying with mum and dad a little longer or moving back in with them could be a short-term solution.

Some sources of passive income require investment, and reducing your cost of living in this way can provide the funds you need to begin investing in ETFs or stocks and shares ISAs that pay regular dividends.

FAQ

What does it take to gain financial freedom?

Financial freedom requires time, effort, and financial adjustments based on individual circumstances. You must work towards financial freedom with proper budgeting and financial planning, saving and investing, debt management, income generation and career development, and financial risk management and protection.

How can I increase my income to achieve financial freedom?

You can increase your income by negotiating a salary raise, exploring passive income streams, reducing expenses, and investing in income-generating assets like ETFs or stocks and shares ISAs.

Why is investing important for financial freedom?

Investing allows your money to grow over time and can help you achieve long-term financial freedom. It provides the potential to generate returns and accumulate wealth, offsetting the impact of inflation.