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What is Financial Freedom and Ways to Achieve It

Achieving financial freedom is a challenging goal that requires consistent efforts. Financial freedom is thus not only about accumulating enough money to meet basic needs but also about becoming wealthy and fulfilling one’s life goals. Everyone strives to achieve financial freedom, but many struggle to accumulate enough funds to meet their needs.

With financial freedom, you can make wide choices without facing any financial constraints, thereby creating more security and flexibility in your daily life. Continue reading this blog to gain detailed insights about what is financial freedom, how to achieve it, and more.

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Financial Freedom

What is Financial Freedom and Ways to Achieve It

Financial Freedom
December 03, 2024

Table of Content

 

What Is Financial Freedom?

Financial freedom means having sufficient income to cover your everyday expenses. It involves having adequate money not only to cover basic necessities but also to pay for entertainment, luxuries, and whatever goals you may have.

By attaining financial freedom, you will have enough money saved in your bank accounts so that you are no longer restricted or limited by lack of funds. Financial freedom thus implies owning a large number of assets, which provides a stable cash flow with which you can stay assured of being able to pay bills without being employed in any organisation.

Although financial freedom's meaning varies from one individual to another, it basically denotes having enough money to spend on basic needs. Practically, financial freedom requires you to have enough investment, savings, and assets to yield a passive source of income that covers your needs and wants. Most importantly, by attaining financial freedom, you can stay debt-free or have manageable debts with easy-paying capacity.

How to Achieve Financial Freedom?

Gaining financial freedom is all about attaining control over finances to lead a stress-free life. This involves building sustainable wealth and reaching your desired long-term goals. Making a solid budget and habit of saving and investing enable you to reduce your financial stress. Financial freedom thus helps you pursue your dreams and attain financial stability over time.

Let’s explore ways about how to achieve financial freedom below in details:

  • Set Your Goals

The first and foremost step towards managing finances effectively is gaining a proper understanding of the concept of financial freedom. This varies from one individual to another. For some, freedom means leading a debt-free life, while for others, it means quitting a 9-5 job, retiring early or having the ability to begin a new venture.

Thus, to achieve financial freedom, setting your financial goals is of utmost importance, as is taking proper steps to achieve them. Once you've identified your goals, begin to save to reach the desired goal, considering your risk appetite. If you are a risk-averse individual, you should invest a significant portion of your portfolio in fixed-income assets. If you are a risk lover, you might prefer the high returns provided by equities.

  • Make a Monthly Budget

To save a specific amount weekly or monthly in specific categories, making a monthly budget is a must as it reduces unnecessary expenses. Through budgeting, you can create savings on a regular basis after paying your living expenses. Thus, make sure to allocate a significant portion of your money toward the savings.

While creating a monthly budget, it’s a good idea to follow the 50/30/20 rule. As per this rule, you should allocate 50% of your after-tax income to basic needs and 30% for fulfilling wants. The remaining 20% should go towards savings. You can put your money in an emergency fund or contribute to a pension plan for long-term investment.

  • Become Debt Free

Debt can stand as a significant barrier between you and your financial independence. Thus, paying off your debt as soon as possible is a crucial step. You must avoid the accumulation of high-interest debts as it can cripple you financially. If you maintain a healthy credit score, closing all loans will be easier, and it will make you debt-free.

There are two primary ways of paying off your debt – the snowball approach and the avalanche approach. In the snowball method, paying off the smallest debt first is mandatory, and then you can approach paying off bigger debts. On the other hand, the avalanche approach allows you to pay off debt with a high rate of interest first and then switch over to repaying lower-rate loans.

If you have a significant debt amount, both these methods are ideal options. But you need to choose which method works best for you. Thus, undoubtedly, paying off debt is one of the most important factors for achieving financial freedom.

  • Keep an Eye on Your Credit Score

To achieve financial freedom, keeping an eye on your credit score is mandatory. Start by ensuring bill payments are on time, as it boosts your credit score significantly. Also, check your credit report frequently to identify potential errors that can lower your score.

Alongside this, maintain a credit utilisation ratio below 30% to manage debts responsibly. Maintaining a healthy credit score not only helps you to save money on interest but also enables you to build a strong financial foundation.

  • Inculcate a Habit of Investing

To build wealth for the future, inculcate the habit of investing. This will help to multiply your wealth over time. Place your investment focus on the long term rather than the short term and continue diversifying your portfolio. Invest considering your risk appetite and make yourself prepared to face the ups and downs in financial markets.

  • Automate Your Savings and Investments

Automating your savings and investments helps you achieve financial freedom to a great extent. Keeping your savings and investment automated assures consistent contribution of money within the due date.

Opt for direct deposits using recurring deposits or SIP (systematic investment plans) to invest in a disciplined way. This ensures regular investments in stocks, mutual funds, or ULIPs. Thus, automation not only enables you to manage money easily but also allows you to achieve financial independence with minimal effort.

  • Be Ready for the Uncertainties of Life

If you aim to achieve financial freedom, building an emergency fund should be your top priority. It helps you to be ready to face uncertainties of life that include repairing cars, medical emergencies, deductibles, and more. Thus, raise your emergency fund beforehand, covering at least 3-6 months of expenses.

Keeping cash ready on hand to cover unexpected events provides you with peace of mind and plays an important role in financial coverage. Moreover, maintaining a fully funded savings plan also helps you overcome uncertainties with ultimate confidence.

  • Live Below Your Means

Every individual should spend less than the income earned. This might sound simple, but most people find it challenging to achieve. Thus, to inculcate this habit, create monthly budgets and make sure to follow them. Avoid being an impulsive buyer and stay debt-free. Also, strive hard to save a significant portion of your income.

Follow the golden rule of savings, which states to save first and then spend rather than spending at the beginning and saving later on. To achieve financial freedom, saving a minimum of 10-20 percent of your salary is a must.

  • Maintain Your Health

Maintaining a healthy diet and doing exercises regularly doesn't seem like typical financial advice. However, for long-term financial health, your physical and mental health is important. If you have poor health, it might impact your financial freedom. This is because health problems lead to frequent visits to doctors with a rise in medical bills, which leads to high insurance premiums.

Taking care of your physical health also implies mental and spiritual health and well-being. Several studies corroborate that individuals following a healthy diet fall ill less often, cutting their health insurance costs.

  • Invest in Your Future Retirement

Making a wise decision towards your future retirement is crucial for growing your wealth. Take enough time to learn about the different kinds of investment options available to you and choose the one that meets your needs. It's not about following any specific trend but rather making an overall strategy aligned with your financial goals.

The first and most efficient step in this regard would be to start a Systematic Investment Plan or SIP in a mutual fund with long-term objectives. Investing in an SIP account can help you earn high returns in the equity market.

  • Ask for Professional Help

If you are new to investing and unsure how to achieve financial freedom, get professional help. Tax experts and investment planners can offer strategies tailored to your needs and preferences. These professionals assist you with their comprehensive services, which can involve everything from assessing your finances and portfolio to investment advice and tax planning.

A financial advisor is of great importance when you have accumulated substantial savings or taxable income. They can guide you to pick proper investment strategies that maximise your earnings and enable healthy financial habits.

  • Conduct Regular Financial Checkups

To stay updated and achieve financial freedom, make sure to go through financial checkups regularly. Review your savings, investment, and financial goals to ensure adjustment with your set financial objectives. Adjust your plans accordingly to explore new opportunities in the financial market. With the help of tools and apps, you can effectively monitor financial progress. This helps you achieve your financial well-being and stay active over the period.

What Is the 50/30/20 Budget Rule?

Maintaining a detailed budget can be challenging. Creating a budget helps people experience peace of mind and make financial decisions confidently. Thus, considering the 50-30-20 rule would be beneficial for splitting expenses into three different categories.

The 50-30-20 rule suggests allocating 50% of your money toward needs, 30% toward wants, and 20% toward savings. In the savings category, the amount needed to fulfil your future goals is included.

Almost about 50% of the budget is allocated towards needs. These expenses include health care, utility bills, grocery shopping, etc. Wants constitute about 30% of your budget, allowing you to spend money on restaurant meals, vacations, subscriptions, and other things. It keeps you happy and encourages you to pursue long-term goals.

The remaining 20% is allocated towards savings to build a financial foundation for the future. For this portion, you may decide to invest money in an emergency fund, contribute towards retirement income, etc.

How Can I Tell If I’ve Achieved Financial Freedom?

Knowing if you have achieved your financial freedom is possible only when you have multiple streams of income to cover your basic expenses and lead to a decent standard of living. You should not have to depend on your job or career to arrange for these expenses if you are financially free. This provides you with the ultimate freedom of working as you enjoy your life.  

To achieve financial freedom, focus on creating a budget that considers expenses such as food, utilities, insurance, housing, and other discretionary spending. Make a thorough comparison of the income you receive from all sources, including part-time work, rental income, investment, transportation, and others. If your income is higher than expenses, you might have achieved financial freedom.

In short, attaining financial freedom is a journey that takes time and effort to reach your desired goals. With proper planning of how to save and invest, it is possible to achieve financial freedom without compromising on your dreams.

Final Words

Financial freedom is all about the journey and not just a destination to reach. To attain freedom, you will need financial discipline, the habit of saving, patience, discipline, and other qualities. By setting proper strategic goals and developing an investment strategy, you can pave the path towards financial independence.

Financial freedom is not only about the accumulation of wealth but also about fulfilling life goals aligning with your values and wants. It's about reaching your goals and pursuing a passion without worrying about finances. To achieve financial freedom faster, start working on it today and get a bright financial future.

FAQs on Financial Freedom

1. What is meant by financial freedom?

Financial freedom means having adequate income, investment, and savings to lead a life you long for without being dependent on a traditional job. It's about gaining control over your finances and the choices you make.

2. What are the four rules for financial freedom?

The four rules to follow to attain financial freedom include building an emergency fund, avoiding excessive debt, creating multiple sources of income, and creating a realistic budget.

3. What are the 5 foundations of financial freedom?

The five foundations of financial freedom include debt management, savings for retirement, management of debts, insurance coverage, and emergency funds.

4. What gives financial freedom?

Creating a basic budget, meeting education expenses financially, smart maintenance, deduction of debts, and automating savings are some essential steps to get financial freedom.

5. What stage is financial freedom?

Stage 5 denotes financial freedom, where your passive income is sufficient for meeting your basic needs. Thus, a financially independent individual can take retirement at any time without worrying about future costs.

6. How do you achieve financial freedom?

Financial freedom can be achieved by following the following steps:

  • Setting specific goals
  • Creating a monthly budget
  • Becoming debt free
  • Building a habit of saving
  • Keeping an eye on your credit score
  • Automating your savings and investment plans
  • Living within your means
  • Maintain a healthy life
  • Investing for future income
  • Opting for help from professionals
  • Carrying out financial checkups regularly

7. What is an example of financial freedom?

If you have the means to quit your job and pursue your passions without worrying about income or meeting expenses, that is an example of financial freedom.

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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