The complete guide to financial freedom
Think of some of your biggest dreams in life. You want to own a beautiful home. You want to provide for your family. You want to be able to travel the world and experience incredible adventures. What’s preventing you from doing these things?
More often than not, the answer is money. While you might be able to reach some of these goals as time goes on, to achieve them all while remaining in a good place money-wise, you need to establish financial freedom.
What is financial freedom?
One financial freedom definition is having the monetary stability to do what you want in life without having to worry about your bank account. Financial freedom is being able to take that amazing trip to Tahiti without worrying about not coming into the office. It’s buying the house that your family dreams of and still having the funds to pursue your other interests.
Some people equate financial freedom with retirement, and while being free to retire when you want is important, financial freedom does not need to wait until then. Depending on your unique situation, financial freedom could mean having the means to pursue your passions and turn them into profit. It could mean not relying on a 9-to-5 job so you can spend time with your kids or support your partner while they work to build a business they love. Financial freedom means connecting to your deepest values and having enough money in the bank to support those values without having to worry about paying the bills.
What is financial freedom? Essentially, it’s the key to unlocking an extraordinary life.
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Financial freedom vs. financial independence
Many people use the terms financial freedom and financial independence interchangeably, but they don’t mean the same thing – and to truly work toward freedom, it’s important to know the difference. Financial independence hinges on the key word “independence.” It’s the ability to meet your own financial needs without relying on anyone else. When you’re financially independent, you have a steady source of income, pay all of your bills yourself (including any debts like student loans or a mortgage) and have some money in savings. You may even start investing. But you’re not yet financially free.
Financial independence is an essential first step to financial freedom, but it isn’t the end game. Financial freedom is a long-term plan to build the life of your dreams. As Tony Robbins says, “Success is doing what you want to do, when you want, where you want, with whom you want, as much as you want.” That’s also financial freedom.
Is financial freedom possible?
For many people, true financial freedom seems like a far-fetched dream. Student loan debt is at an all-time high. The economy is unpredictable. Investing can be intimidating. We spend more time working and have poor work-life balance, yet make less money. What is the solution to all of these seemingly impossible obstacles? It’s to take responsibility and make the changes you desire.
Tony tells us, “Your income right now is a result of your standards; it is not the industry; it is not the economy.” It’s easy to blame the economy and resign yourself to the way things are. It’s much harder to raise your standards and work toward the life you want. But when you do, you’ll find that financial freedom is more realistic than you may think.
6 steps to financial freedom
Breaking down the steps to financial freedom via building a massive action plan (MAP) empowers you to connect emotionally to your goal and lay out the actionable steps needed to achieve it.
Step 1: Determine your number
What is financial freedom to you and your family? One of the most important steps to financial freedom is thinking about your number or the amount of money required to help you become financially free. There’s no magic number for everyone. There’s a certain amount of money you could make that would enable you to live freely and pursue your passions. How much money is that?
Take into consideration normal living expenses, a cushion for unanticipated expenses and enough surplus so you won’t feel financial anxiety. Write down a number that makes sense to you, keeping in mind it might seem large. Now, do some analysis. How much are you currently earning? What do you need to do differently to make this amount of money?
Step 2: Address limiting beliefs about money
Financial fear can affect anyone – even those who have plenty of money in the bank. To live the life of your dreams, you must address financial fear and the limiting beliefs that are behind it. Do you believe you’ll never be wealthy because no one in your family has ever experienced financial freedom? Do you think you’re not talented or smart enough to earn the money to be financially free? Once you have identified these beliefs, you can replace them with empowering beliefs like “I am an abundance maker” or “I am worthy of experiencing financial freedom.”
Step 3: Get a handle on your finances
Just because you believe you’re worthy of making the money you deserve doesn’t mean all your old financial problems will disappear. In this step, you need to take a good, hard look at your finances and see which messes need to be cleaned up. Do you have a lot of unsecured debt? Balances on credit cards with high interest rates? Are any of your accounts in collection?
If you owe money to others – especially if it comes with a high interest rate – a good chunk of your monthly income will be going to someone else. If you get a bonus or a raise, immediately use those funds to pay off your debt. Use the snowball method to pay off your smallest debt first, then use the money you would have put toward that debt to start paying down the next one. Once you’ve gotten out of debt and developed a budget, you’ll have more money each month and more peace of mind.
Step 4: Create a short-term strategy for building savings
Achieving financial freedom will not happen overnight and you need to have a buffer to pay for the expensive surprises life can throw at you while you put your plan into action. Once you’ve gotten out of debt, you will have more money to budget each month and to put into savings. Once you’ve created a six-month emergency fund that can account for everything – from a sudden income loss to major medical issues – you can then put those extra dollars toward your money-making machine.
Having this emergency fund is practical and it’s necessary for your mental well-being. When you know you have a financial cushion, you can take more risks at work and say yes to those experiences that bring you true happiness without the fear or guilt that would otherwise accompany them.
Step 5: Create the machine
Now it’s time to find a way to make financial freedom a reality. Start by creating a money-making machine. You can do this by taking advantage of the power of compound interest. Divide your money into three imaginary buckets: security, risk/growth and dreams. Your security bucket is where all the money for your bills goes – you need this money to make your life function. Then, your risk/growth bucket is for things like high-yield bonds and stocks.
Lastly, your dream bucket is money that you can have fun with. When you receive a bonus or win a sum of money, it goes here. Many people taking steps to financial freedom find it helpful to work with a fiduciary who can give them information about investment options and help them develop the best strategy for their unique needs.
Step 6: Evaluate and make changes
Pay attention as you work through the previous steps to financial freedom and make changes when necessary. Watch your portfolio for red flags that could be affecting your returns. Put more money into your buckets when you or your partner receives a raise or takes a new job with a hike in pay. Watch the market and diversify your investments as needed.
If you’re working with a fiduciary, evaluate how that relationship is going and make sure they are putting your interests first and that you feel comfortable with your relationship. If your broker is a bully or you don’t trust the advice they are giving you, you’re under no obligation to stay. A new financial advisor can open your eyes to new options or you may find that your financial intelligence has gotten to the point where you can handle investing on your own.
Remember that the question “What is financial freedom?” can be answered differently depending on your unique goals, values and standards of living. Knowing what financial freedom means to you will help you make your financial dreams a reality. By actively managing your finances and using the power of interest, you can one day achieve financial freedom. Financial freedom isn’t about being rich – it’s not about power or prestige – it’s about having the flexibility to make the most out of your life without relying on a job or paycheck.
Financial freedom is attainable, but you need to begin working toward it now.
Want to experience true financial freedom?
The expert tips from Peter Mallouk and Tony Robbins in The Path will help you take the first steps to financial freedom.