The term financial freedom gets bandied about a lot these days, but many people do not really know what it means. That is certainly understandable, largely because the term has a different meaning for everyone who uses it.
To the new lottery winner, financial freedom may mean using that windfall to quit their job and move to a tropical island. To the worker in the prime of life, the quest for financial freedom may include regular contributions to a workplace retirement plan and a sound investment strategy. For the newly retired, financial freedom may include the ability to live on the income stream their investments can provide.
No matter what financial freedom means to you, it is important to understand the intricacies hidden behind these seemingly simple phrase. Here are some of the real world implications involved in seeking, and ultimately achieving, financial freedom.
Learning to Spend Less Than You Earn
Learning to live on less than you make is a key underpinning of financial freedom, and it will be impossible to reach even the most basic financial goals without first developing this skill. Whether you make $25,000 a year, $250,000 or $2.5 million, spending every penny you earn is not a strategy for long term success.
There are a number of ways to develop the ability to spend less than you earn, but adopting the pay yourself first model is probably the easiest. This simply involves treating your savings and investments as just another bill, one that must be paid before anything else. It could be as simple as splitting your direct deposit between a checking and savings account, or as complex as setting up an automatic monthly investment to a quality mutual fund. As your savings muscle continues to develop, you will likely find additional ways to put the pay yourself first strategy into place.
Having Multiple Streams of Income
Being financially free ultimately means not being reliant on a job to pay your living expenses, but that is a long term strategy that will likely take many years to implement. In the meantime, you can make yourself more financially free by diversifying your streams of income.
That diversification of income has never been easier thanks to the many side hustles that are now available. Whether you love to write, drive or produce computer code, you can probably find a side hustle that will pay you for the skills you already possess. By adding these additional streams of income, you get that much closer to financial freedom, and that is a step in the right direction.
Developing a Workplace Exit Plan
Financial freedom and the ability to retire comfortably are often confused, but they are actually two different things. There are very wealthy people out there working hard every day, long past the time they could retire and take it easy. The idea of retirement is part of financial freedom, but it is not necessarily the end goal.
At the same time, achieving financial freedom can be seen as a kind of workplace exit plan, one that can be implemented at a moment's notice. Once a given worker achieves a certain level of savings and investments, he or she can leave work at any time, and it is hard to beat that kind of feeling.
Achieving financial freedom can also make a phased retirement more realistic, giving workers a chance to try out their new lifestyle before making a clean break. Some people may find that working part time or consulting from time to time gives them the best quality of life, while others may discover that they prefer a full time retirement, one that includes only leisure.
Having a Plan to Turn Your Savings Into Cash
No matter what it means to you personally, any sound plan to achieve financial freedom should be based on turning accumulated savings into spendable cash. This transition is not as easy to make as it sounds, especially for dedicated savers.
Whether you plan to retire in two weeks, two year or two decades, it is important to look at what you have saved, how much income it can reasonably generate and how you plan to make up any difference. You can start by looking at any guaranteed sources of income you have coming, including traditional pension plans and Social Security, then add other sources like dividend income and capital gains from mutual funds.
You can work with your bank or brokerage firm to determine how far your income streams will stretch and how you can increase your earnings in retirement. This process can be time consuming, so the earlier you start the better off you will be.
Financial freedom is a commonly used term, but it has a different meaning for everyone who hears it. For some, financial freedom means walking into the boss's office and saying goodbye forever, for others it could mean a phased retirement plan or even staying on the job. If you want to achieve your own financial freedom, start by identifying the term for yourself, so you can work toward your unique personal goal.
