How To Reach Financial Freedom in 7 Easy Steps
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Learn how financial freedom can change your life and help you achieve your dreams!
It starts when you are a kid: your family tells you that to be happy, you need to study hard, go to university, get a degree and find a permanent job that will give you security.
Do that, and you’ll find happiness.
But are you really happy?
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Let me tell you my story:
I followed this path for most of my life: I got a degree, I started my career, and after a few years, I found that permanent job everyone should wish for.
But I wasn’t happy.
I worked 60+ hours a week, spending more time chained at my desk than having fun. Too tired most weekends to do anything, working day after day, just waiting for a one-week holiday a year in the sun.
I don’t know about you, but seven years ago, I decided that I had had enough. I couldn’t spend the rest of my life trading my time for a paycheck at the end of every month.
But how can you live your life without working every day?
That’s when I discovered the concept of Financial Freedom, and my life changed forever!
Also read, 7 Financial Freedom Books That Will Change Your Life.
What is Financial Freedom?
Financial freedom means you can keep your current lifestyle without relying on a paycheck.
If you are financially free, you have assets that generate enough income to cover all your expenses.
This is also known as passive income, a term I learned to love and the key to financial independence.
Why is financial freedom important?
Can you imagine a life made of choices? A life where you can do what you love and have time to discover your real passion and take control of your time?
This is why financial freedom is so important!
Financial freedom is about giving you the choice to do what you love: it’s about being financially independent and not having to trade your time for money anymore.
But the most important thing about financial freedom is that you finally don’t have to worry about money anymore: you don’t have to wonder how you can pay the bills if you lose your job or how you will pay for the boiler when it needs to be replaced.
You are covered!
Remember:
“Money is infinite, time is not!”
You can always find a side job, create a new business or start a new career, but your time on this earth is limited.
Be sure you are spending most of it doing what you enjoy!
What does financial freedom mean to you?
Each of us will have a different dream, and we must be specific about our goals.
These are just a few examples of what financial freedom can give you:
- Freedom to travel around the world
- Freedom to spend more time with your family
- Freedom to do a job you love, even if the pay is not great!
- Freedom to help others
- Freedom to exercise more and take care of yourself
- Freedom to quit your job for good and find your passion
- Freedom to keep working but finally enjoy your job because you don’t give a f**k about losing it
- Freedom to retire earlier
Above all, you will be free to do what you love without having to worry about money all the time!
Does this sound too good to be true? It kind of is, and I think that’s why many people don’t even try to get there or dismiss it as an impossible thing to achieve.
But thousands of people use financial freedom to live their dreams, and by following these steps, you can too!
How do you get to financial freedom?
So now you know what financial freedom is, and you want to get there. But how do you do it?
It looks pretty complicated:
How can you generate passive income? How much money do you need?
While going through this myself, I never imagined that I could actually live off my savings in a million years.
Then I came across The Shockingly Simple Math Behind Early Retirement from Mr. Money Mustache (a crazy guy that retired in his 30s and taught me that becoming financially free was possible), and my life changed.
How To Achieve Financial Freedom
- Find out how much you need
- Track your net worth
- Spend less than you earn
- Manage your money
- Pay yourself first
- Invest
- Adjust your goals
1. Find out how much you need
To reach financial freedom, you need to generate enough income to cover your expenses FOREVER. You don’t want to end up being 91 without money in the bank.
This means that you must put aside a stash of money that will last you all your life.
That doesn’t seem very easy.
Well, it is complicated, but it’s not hard to calculate!
Based on “The 4% rule”, you need to save 25 times your annual income, and then you’ll be financially free.
What does this mean?
If you spend $25,000 a year:
$25,000 x 25 = $625,000
If you spend $40,000 a year:
$40,000 x 25 = $1,000,000
If you spend $60,000 a year:
$60,000 x 25 = $1,500,000
But where does this rule come from, and how does it work?
The 4% rule is based on the Trinity study. This study goes through a series of very complicated calculations to show that if you withdraw 4% of your assets every year, your money will last forever.
This study considers the worst-performing markets in the last 65 years over 30 years and demonstrates that you will be safe by living off 4% of your funds every year.
And if you are wondering, yes, this study takes into account inflation!
What if the stock market implodes?
Oh well, if the stock market implodes, it means that all the companies in the world are worth nothing, and everyone will have massive financial problems, whether your savings are in the stock market, in a bank, or under your mattress!
Now, to be realistic about it:
If we look at the last big financial crisis of 2008, the S&P 500 lost 37% in a year.
But if you did nothing and waited without adding any more funds:
S&P 500 Annual Total Return
| Dec. 31, 2008 | -37.00% |
| Dec. 31, 2009 | 26.46% |
| Dec. 31, 2010 | 15.06% |
| Dec. 31, 2011 | 2.11% |
| Dec. 31, 2012 | 16.00% |
You would have got all your money back in around four years. Not too bad for the biggest crash in the last 18 years.
Remember, based on this rule, you will never run out of money. And this is assuming you will never make another penny.
The reality is that you’ll probably still earn some extra money by doing what you love!
If you want to be extra safe, you could save more and use a 3% withdrawal rate. This means you need to save roughly 33 times your annual spending.
If you spend $25,000 a year:
25,000 x 33 = $825,000
If you spend $40,000 a year:
$40,000 x 33 = $1,320,000
If you spend $60,000 a year:
$60,000 x 33 = $1,980,000
2. Track your net worth
Now that you know how much you need to be financially free, you need to figure out how much you actually have right now.
Your net worth is a sign of your financial wealth; in simple words, it’s everything you own (your assets) minus what you owe in debts (your liabilities).
How do you calculate your net worth, and how do you track it?
Your net worth is:
Net Worth = Assets – Liabilities
What are your assets?
- Cash in bank accounts
- Investment account value
- Investment property value
- Personal home value (many people don’t include this in their net worth as you are not really making any money from your home, but you are still saving rent and potentially building equity, so as far as I am concerned, it’s in!)
What are your liabilities?
- Mortgages
- Student loans
- Car loans
- Any other loan
- Credit card balance
Knowing your net worth will give you an idea of your current financial position and help you measure your goals.
How often do you need to track your net worth?
I find it helpful to calculate my net worth every month. I want to make sure my net worth goes up while I am still working, and by making sure my expenses are less than what I earn, I can always increase my savings.
You can use a simple spreadsheet to calculate your net worth every month or automate your calculations using a great tool like Personal Capital.
You just need to create a free account to easily track your net worth, create a budget, and manage all your investments in one place.
3. Spend less than you earn
One of the most critical steps to reaching financial freedom is to live below your means. The biggest mistake people make is to inflate their lifestyle based on how much they earn.
Ignore your friends that spend all their money on a bigger house or a new car! By learning to live a more minimalist lifestyle and understanding what you need rather than what you want, you will increase your chances of building wealth.
This doesn’t mean you don’t need to enjoy life during your journey to financial freedom and deprive yourself of everything!
If you deprive yourself too much, you risk creating a miserable life. Remember, reaching financial freedom is a long journey: it can take you anything between 10 to 20 years, depending on your savings rate.
Focus on happiness and spending money to bring joy into your life instead of thinking about luxury.
You just need to find the right balance and think twice before spending on things you don’t need.
4. Manage your money
To become financially independent, you need to understand money. This means you need to know where your money comes from and where it goes every month. It’s impossible to reach financial freedom if you live paycheck to paycheck.
No matter how much money you have or where you are in your financial journey, you need to manage your money with a purpose.
By tracking your expenses or creating a monthly budget, you can check areas you can optimize and improve.
This will also help you to uncover past mistakes. Don’t worry! Everything is fixable!
Uncover all your debt and start paying it off one loan at a time. Once you are debt-free, you’ll be able to increase your net worth much faster!
5. Pay yourself first
We mentioned before the importance of saving money. The percentage of the money you can set aside every month plays a key role in your financial freedom journey.
This means you need to set aside a percentage once you get your paycheck and move it to your investment or savings account. You need to do this before you do anything else! This comes before paying the bills and your food.
By learning to live with what’s left, you’ll be able to avoid temptations and build wealth.
6. Invest! Yes, it’s that simple!
There are many ways to generate passive income, but the two we used to achieve financial freedom are:
- Investing in real estate
- Investing in index trackers
Investing in real estate
Investing in real estate is one of my favorite ways to grow wealth! It’s the first passive income stream we explored and decided to try, as we love interior design, and we do like to have a tangible investment (see risk aversion issue below!).
If you want to invest in real estate, you will generally need some capital to start, and you will have to do a lot of research to find the right rental property (low cost for higher returns).
Although many people don’t really consider real estate rentals a passive business, it’s definitely more passive than going to the office every day!
And if you use a great property manager to look after your tenants, it’s pretty much a set-and-forget strategy!
Investing in index trackers
Up until a few years ago, when I thought about investing, I could only picture this:
Yes! Risk! Gambling! You name it!
And I hate risk. I still remember when we went to a casino, and they gave me a free chip. I walked around all night with that chip in my hands! I couldn’t even risk that, because I thought I could get my money back if I returned it at the entrance (true story!).
It turned out the free chip wasn’t refundable!
Anyway, that’s how much I hate risk!
So:
Investing in the stock market? Are you kidding? I couldn’t stand seeing market fluctuations, corrections, and, worst of all…crashes.
But then, after I read some great investment books like The Simple Path to Wealth…something changed.
I decided to do a coaching session with The Escape Artist and finally found the courage to invest!
Is it really safe to invest in the stock market?
What if I told you there is a way to invest in the market that, over the years, will give you an average return of 10%?
And this includes bubbles and crashes over the last 100 years!
The S&P 500 has returned an average of 10% since its inception in 1928. And the UK stock market has returned an average annual rate of around 11%.
So it’s not as risky as the news wants us to believe!
But how do you decide what to invest in?
There are so many options to invest in the stock market, but if you want peace of mind and a simple strategy, you should invest in an index tracker.
An index tracker is a fund that copies one of the main stock market indices (like the S&P 500 or FTSE 100, for example).
Think about it this way:
The stock market is made up of the biggest and most profitable companies in the world. If you invest in an index tracker, you buy a tiny amount of every successful company in that stock market index.
You pretty much buy a piece of the whole market.
Books I read before investing:
7. Adjust your goals
Investing your money and generating passive income is crucial to becoming financially free, but managing your investments and rebalancing your decisions is even more important.
Even if you have chosen to invest in a simple index tracker, you need to keep an eye on the market and adjust your goals accordingly.
If you live mostly off your investments and the stock market crashes 40%, you need to think about an action plan. Instead of just living off the same amount as the previous year, you could try to reduce your spending or get a part-time job to pull through the rough times.
By being flexible, you will have a much higher chance to keep living your dream life without worrying about money ever again!
How long will it take you to reach financial freedom?
The million-dollar question!
You are probably thinking:
Hey, all of this is great. But when can I go and live on that beach in Thailand?
Don’t worry about that! I have you covered!
You need to know the following:
- How much you make every year
- How much you spend every year
- How much is your current investment portfolio
And using this handy online calculator, you can get a graph like this:
You can significantly reduce the number of years you need to reach financial freedom by increasing your savings rate!
Your savings rate is the most important bit if you want to become financially free fast. It’s even more important than the magic of compound interest.
Are you ready to achieve financial freedom?
Financial freedom will give you opportunities:
- You could carry on working with the financial security that you would be ok if anything happened.
- You can explore other paths and do what you love.
- You can take time off to explore the world.
Anyone can achieve financial freedom. You don’t need to be rich. You simply need to understand how much you need to save to live the life you want to live and plan for it. Be mindful of what you spend and remove unnecessary expenses from your life that don’t increase your happiness level.
The sky is the limit!
What’s next?
Check out the best books that helped me on my journey to financial freedom here.
And find out who is already living a financially free life! All these bloggers helped me in my journey.
I wouldn’t be here without their help!
Good morning please my name is Rapheal Gladman Jonah. I need help on how to invest my funds. I have been working all most all my life but no passive income before the end of the month I will go back to zero again please I need your assistance thanks yours faithfully.
Hi Rapheal,
You can check out my post on Passive income for some ideas on how to invest your money!
I hope this helps 🙂
Hi Sara, very valuable article! Love how deep you’re diving into it. We have started learning about financial independence and passive income recently, we have mixed feelings about the 1st point. Although many of the financial freedom experts say that you need to generate (or save) so much money to cover your expenses forever, we struggle with this point. Especially if you are as us in your late twenties, it’s difficult to predict your long-term expenses (e.g. family planning). We try to approach it in the way that we try to generate at least as much passive income to cover our current monthly expenses, and then invest further to make money work for us. How do you see it?
Hey Anastasia,
Of course, it’s hard to predict how much you will need for the rest of your life. I think researching potential future expenses is key here, as it’s tracking what you spend every month. I’ve been tracking what we spend every month for the last 5 years, and that really helped us to see if any expenses were creeping up and to manage them.
For example, we now spend a lot more on travel (because we love it) but have reduced our expenses in so many other areas (like utilities, mortgage, clothes etc.) that at the end of the day, what we spend and what we need hasn’t really changed.
That’s the whole point of planning your financial freedom.
And if you are worried about how much you’ll spend if you end up having kids, you can just add a contingency to your total. Plus your plan can always change! And I completely agree with you: as long as you create passive income streams to cover your expenses, you’ll be fine!
Also for me, financial freedom isn’t really about not working ever again, it’s about having choices and not having to worry about the financial implication when you make those decisions.
Very concise write-up! I wish more people would realize that they don’t have to enslave themselves to working for the next 40 years just to sustain a lifestyle that they don’t truly need. This concept of building up enough savings to cover your living expenses for the rest of your life is so incredible. It’s not a deal to be passed up!
Yes, MMD! Financial Freedom is an incredible concept. I wish I discovered it sooner. But better late than never 😉
Hey, Thank you for taking the time to write this. I have to start blogging again soon ugh.
Hey Giselle,
Glad you enjoyed this post! 🙂
Financial freedom is the ultimate goal for me! Like you, I graduated from college and got what should’ve been my “dream job” yet I’m miserable. I’m working on building wealth so that I can spend more time with my children!
Yes, financial freedom is the ultimate goal to get back your time and be able to do what you love.
Good luck with your plans 🙂
“Finacial literacy is very much important nowadays” Expect more blogs on this topic.
Yes, learning how to manage your money should be a top priority for everyone!