Financial freedom has become a buzzword made popular by Youtubers, writers and bloggers. Many of us have the goal to be financially free, but far fewer actually attain that goal. One of the reasons for this is that we say we want to be financially free, but have no idea what that actually means, or why we want it.
Find your why
The traditional meaning of financial freedom is the ability to cover your expenses with an income that you don’t actively work for. That’s quite technical and not very personal, which makes it hard for some of us to strive for financial freedom.
The key to financial freedom is to understand the motivation (or the why) behind wanting to attain it.
When a friend says that they’re investing and saving money so that they can be financially free, their motivation might be that they want to take ownership of their finances or be able to make big life decisions without being stressed about money. Your motivation might be different; perhaps that you want to regain control of your time or you don’t want to be dependent on someone paying you a salary.
Can you see how the why makes it real? The why makes it stick, the why gives you the motivation, the why is personal. So instead of basing your goal on the umbrella term, “I want to be financially free”, understand why you actually want to be financially free. That is the start of the process to achieving financial freedom.
Be financially free today
When you think about financial freedom, it typically represents something that will only happen far into the future — a future which is usually 15–25 years away and difficult to visualise now. Knowing why you want to be financially free can help bring that goal closer to the present reality. Knowing why doesn’t have a time limit or expiry date and it can help you stick to the process every day. Basing your current financial decisions on the why can create good financial habits. Old habits die hard, which means you’ll find it easier and easier to continue to make better financial decisions as time goes on. There’s no better feeling than accomplishing what you said you’d would, day in and day out — it becomes almost addictive.
These tips will help you understand how to create a future where expenses are covered by passive income (income from investing or saving).
- Create a simple spending plan. First, take what you earn after tax, save and invest anywhere between 10–40% of after tax earnings (whether it’s 10% or 40%, the important thing is that it is something). That way, the rest can be spent without you feeling guilty. Try to create a budget and stick to it so that all your money has a place to go.
- Bring your debt levels down. Having debt means you’re subjecting yourself to a definite future interest expense covered by your current income which unfortunately isn’t certain. The sooner you pay off your debt, the sooner you can start putting money towards savings and investments.
- Automate, automate, automate. We can’t automate a diet, we can’t automate exercise but we can automate our finances. Your savings and investing amount should come off your accounts before you can even think about spending it. It might feel like you’re relinquishing control but what you’re actually doing is stopping yourself from being able to make a poor decision with that money.
- Live below your means. This one has a bit of a bad rep because we live in a consumerism dominated society. However, it’s actually about making small adjustments by distinguishing between the things you need and the things you want. Of course, you can still treat yourself every now and then, but distinguishing between the two makes it easier to focus on the needs, and spend less on the wants.
- Start investing now. In its simplest form, investing is about exposing your money to compound interest. The power of compound interest is quite frankly mind boggling. To illustrate its powers, if you had a choice between R3 million today, that couldn’t earn interest, and 1 cent today which doubles in value every single day, which would you choose? You might be tempted to go for the R3 million, but if you waited just 30 days, the 1 cent would be worth over R5,3 million. Mind blown! Before you get too excited though, when investing, this process is a bit slower, but the example illustrates that over the long term your money will grow exponentially.
There you have it! Knowing your why and then executing on the how is the winning combination to help you achieve financial freedom. While any aspiration towards being financially free is great, finding the why and how makes the goal feel more realistic and achievable and the journey towards financial freedom becomes easier.
Written by: Ross Reid