What is Financial Freedom?
Imagine your life where you wake up and you can do what you love — without worrying if you can earn from it or not. What if you can follow your passion full time – be it painting, travelling or maybe building your own startup? Well, what if I tell you that it can be actually possible to do so if you achieve financial freedom (or financial independence).
Financial Freedom or Financial Independence is achieved when the money you have makes more money than what you earn from your job. Stated another way, It means you don’t have to worry about your monthly living expenses as those are now fulfilled by your investments. That means you replace your employment income with the earnings you’re making off of your investments and assets. This in turn frees you up to start doing whatever it is that you want to do with your time because you’re no longer tied to a 9-5 job.
Understand that financial freedom is not about “not working anymore”. It’s about owning your time and doing things which you WANT to do and not what you are forced to do.
Now that you understand what is financial freedom, the biggest question is how can you achieve it?
How to achieve Financial Freedom?
Most important thing you need to understand is that you should not think of slogging in your job which you hate till 40 years, ignoring your hobbies, your family and simply saving and investing blindly for many years so that you can live life after achieving financial freedom. This may lead you to good financial planning but certainly it’s not good “life planning”.
The secret to achieving financial freedom is that there is NO SECRET. Persistently saving and investing in correct financial mediums right from your first paycheck is what will lead you to financial independence. Keep in mind the following general points:
- Start investing as early as possible. Preferably right from your first paycheck.
- Try to follow this general rule for your monthly income
- Spend 50% on expenses
- Spend 20% on lifestyle
- Spend 30% on savings and investments.
How much money do you need to achieve Financial Freedom?
Now the question comes how much money do you need to achieve financial independence?
Well, this can be easily calculated using this sheet provided you are aware about few things which are as follows:
- Your current age
- Your current monthly expenses
- Retirement age – This is the age when you want to achieve financial independence
- Life expectancy – Number of years you are expected to live
- % expenses after retirement – percentage of your current monthly expenses which you will have after retirement
- Inflation rate
- Return on corpus – your expected return on your investment
If you input above mentioned things in this sheet [https://docs.google.com/spreadsheets/d/1DllDa2OLk9lBc5725b3lRCaUUDfJ2KwW5lBHzj83FoQ/edit#gid=0]
Then you will get an amount which you need to achieve financial independence.
Now that at least you know your goal, you can work towards achieving it.
How to collect the target money and where?
- Create an Emergency Fund: You should have at least 6 months of your income saved up in liquid funds. This money should only be used when your life gets derailed eg: card gets damaged, emergency health issues etc.
- Have no debt: Try to have no (or as low as possible) loans.
- Start Retirement Fund: Understand that Compound interest is the 8th wonder of the world. You basically gain interest on the money which was previously gained as an interest. Depending upon your current age and risk taking abilities, you should explore investing 20%-30% of your monthly income into stocks, mutual funds, small cases, gold, fixed deposit etc.
To conclude, there is no secret to achieving financial independence. Know your target, aim at investing persistently for at least 10-15 years and start investing right from your first paycheck.
I wish you good luck on starting your journey to financial independence!