Financial freedom or financial autonomy is an important concept. It reflects the autonomy of an individual over their financial circumstances. Financial freedom allows individuals to lead their lives on their own terms driven by their independent financial decisions. It is an empowering concept which motivates individuals to be aware and informed and to make choices for personal fulfillment rather than in fear of scarcity.
Financial freedom allows individuals to make their decisions based on passion and interest. This concept is the key attribute in the personal growth of any individual. The ability to understand the resources and utilize them effectively and efficiently avoids individual form financial subjugation.
Financial Freedom State
Financial freedom is a state. You can achieve this freedom based on your circumstances, goals and financial approach in life. Financial freedom state reflects some of the prominent characteristics. Some of the characteristics are:
No Debt Stress
Debt serves as a major chunk in modern lifestyle. It is the biggest obligation of modern time. Debt impacts the financial ecosystem. To be in a state of financial freedom, one should pay off all the debt obligations such as mortgage, loans, credit balances. Debt-less situation reduces the financial burden and increases the cash flow for satisfactory spending or investment.
Most of us now understand the need for an emergency fund. If you have managed to set up an emergency fund to avoid or cover the requirement during unforeseen circumstances then you have entered an ecosystem of financial freedom. Emergency funds includes:
- Medical Emergency Funds
- Car Repair Funds
- Travel Emergency Funds
- Family Emergency Funds
- Business Emergency Funds
Retirement planning provides financial independence at later days. It is a part of financial freedom where you plan for your retirement needs or after retirement lifestyle. Retirement planning can include retirement saving, pension plans, insurance and care, investment diversification, rental income, part-time work, freelancing and consulting etc.
Passive Income Stream
Passive income maintains the effortless cash flow for you. Investing in projects that generate passive income lets individuals fully enjoy the financial freedom state. Passive income generating investment, rental income, dividend stocks, royalties, dropshipping, blogging, real estate, vehicle rent out etc are passive income streams. Passive income covers the living expenses and lifestyle without the need for active employment.
Financial freedom means financial flexibility. This means the ability or flexibility of an individual to adapt and respond effectively to changing financial situations. Financial flexibility includes liquidity, enough saving, contingent planning, financial discipline, bargaining position, information access etc. Such flexibility makes individuals capable of making investment opportunities, managing financial downturns, improving financial decisions and well-being.
Financial freedom will allow you to spend quality time without any stress or pressure. Financial dependence drags individuals into the vicious circle of financial struggle. In the state of freedom, you relax and enjoy the time in the way you want without any work schedule.
In the state, work is optional. You will already have different passive streams of income, you will have managed your debt obligation and made proper investment and you will have planned for your retirement. In such a situation, you will have a choice to ‘not work’ or work as you like. Work life will be optional for you and you can retire anytime from your work life. Financial obligations lead individuals to work. Hence, in the absence of financial obligation, work may be temporary or by choice.
In absence of any obligation and work pressure, a financial freedom state empowers individuals to follow their passion and interest. Individuals tend to be more creative and invest their time in an effective manner in the work they want.
Financial Freedom Planning
Financial freedom is not a one time investment rather it is a careful planning state. There are various practices and principles one can follow to have financial autonomy. Some of the basics to achieving the financial freedom are:
Understanding the finance and components of finance is important. Before starting anything, we need to understand how finance works. Understanding how money works is crucial. We need to understand the financial market, debt and equity components, tax strategies, investment opportunities etc. before planning for financial freedom. Financial literacy helps in making informed financial decisions.
Budgeting is one the essential steps towards the state of financial independence. It is a roadmap for managing income and expenses. Creating and sticking to the budget will allow you to manage all your financials. Budgeting leads to a disciplined management of funds. This practice involves assessing and tracking expenses and income to ensure saving and investment and to avoid overspending. It helps in prioritizing financial goals and empowers individuals to manage their finances and reduce financial stress.
One can achieve financial freedom when individuals consider risk management along with saving and investment. Protection of investment and saving is equally important to making an investment. Individuals must make plans and select alternatives that reduce the existing risk factor and make decisions with less risk potential.
Debt management skill has an utmost importance if you need financial independence. Debt decision is responsible for upscaling the financial freedom if managed properly. Reducing the debt in your financial ecosystem is critical to financial freedom. Debt management includes:
- Financial Planning
- Creating repayment plans and schedules
- Consolidating debts
- Financial counseling
- Monitoring debt levels
- Prioritizing debt and debt repayment
Investment is a way of accumulating and growing wealth and achieving financial freedom. Involvement in investment from an early age could provide you with some financial benefits and compound growth. For investment, individuals must have financial literacy regarding the diversification of investment for minimizing the market risk. Diversified investment manages investment risk.
Avoiding Impulsive Spending
Consumerism has led individuals towards impulsive spending. Confused consumers from aggressive marketing are spending without knowing the impact and consequence of it on their financial independence. Avoiding the impulsive purchase and adapting the mindful spending can make you financially independent as it maintains the financial focus and ensures the value and priorities of your income or financial sources. Avoiding impulsive purchase and mindful spending is crucial to financial planning.
Regular Financial Assessment
Most of us ignore this factor while planning for our financial autonomy. We plan and forget. There is no regular assessment of our financial planning, about its direction and process. Regular review of our plan, selections, investment opportunities, risk assessment is equally important. Financial assessment aligns our goal and planning to our desired result. It is essential to understand the deviation on time.