What is Financial Freedom? – Formula, Types, Works, and More
Table of Contents
What is Financial Freedom?
Financial freedom consists of having enough financial means to cover all your needs in a specific time, without depending exclusively on a salary.
The concept of financial freedom refers above all to the feeling of not being tied to a job, simply because you need the money your boss pays you to be able to live.
The Formula of Financial Freedom
You could say that people who have achieved financial freedom have been able to cope with the biblical curse of earning their bread with the sweat of their brow.
But they have not done it because they are rich or have understood the definition and meaning of entrepreneurship better than others. Because they have managed to save and generate a series of income that allows them to dispose of their lives want.
Here we can see two basic elements that are essential to obtain financial freedom:
If you are thinking about achieving financial freedom, the first thing you have to do is start saving.
If you manage to devote less than you earn, you can build wealth essential to send your boss on a walk with the remainder.
2. Passive Income
Passive income is those amounts of money that come to you without you having to sell your time.
They can be the returns on an investment, the benefits obtained —for example— with an info-product, or the copyright generated when you sell a book written by you.
Therefore, the formula for financial freedom base on this relationship: savings + income> fixed expenses necessary to live.
Only when the sum of your savings and your income is higher than the amount of money you need to cover all your fixed and variable expenses can you consider that you have financial freedom.
What are the Types of Financial Freedom?
To achieve financial freedom, we have to assume that a process must be divided into phases or financial independence types.
Unless you are a millionaire from birth, it isn’t easy to achieve financial freedom without first going through the following types:
1. Financial Security
The first phase is to move from the uncertainty of not making ends meet to the situation of financial security.
We can consider that someone enjoys financial security when they have enough funds to cover their necessary expenses (electricity, water, mortgage or rent, food).
When you get to this point, you will not be able to leave your job yet because you have more expenses to face and not cover by your savings and fixed income.
In this second phase, you have obtained a more significant amount of stable income. Your investments have grown to the point that you can cover all your basic and extraordinary needs, without the need for salary.
You will not only have money to pay for the house, electricity, food, etc. Instead, you can go out for dinner one day, go on vacation, buy a car or an appliance.
2. Financial Freedom
The last step is what everyone aspires to. It consists of having so much money saved that, no matter how bad things turn out.
It could live covering your fixed and extraordinary expenses without having to work.
However, it should be made clear that, unless you accumulate colossal wealth, financial freedom most likely does not allow you to live at full speed, giving you many luxuries and whims.
How does Financial Freedom Works – for Beginners
If what you are reading appeals to you, we will show you how financial freedom works because we are sure that you are not familiar with this concept.
Keep in mind that this is something that not achieve in a few months. You have to work hard and be frugal and conscientious for many years.
Anyway, suppose you want to live a better retirement – without depending on state pensions (which will sooner or later reduce) -, or plan to “fire” your boss in the medium or long term. In that case, you must follow this plan aimed at achieving freedom financial for beginners :
Just as a company always keeps accounting to know its economic reality, you cannot achieve financial freedom without knowing your starting point.
To do this, make an incline of all your debts: mortgages, school loans, car loans, credit cards, and any other debt that you have accumulated.
Don’t forget to include money that friends or family have lent you over the years.
Now take a deep breath. Once again. Then add the total.
If it is a large amount, do not panic since we have written this post so that you learn how to pay it all later.
Suppose it’s a small amount, congratulations! Feel free to share your financial freedom tips in the comments at the end of this article.
Take a look at all the money you’ve saved below.
Make a list of all your current funds: cash, bank accounts, stocks, treasury bills, outstanding debts, retirement savings account, or other retirement plans. Then add the monthly payments you receive like your salary, the income you receive from other jobs, etc.
Keep these statistics in mind as we work through the following tips to achieve your financial freedom.
2. Write your Goals
Achieving financial freedom must be associated with an emotional goal. Your goal may be, for example, to get out of debt and save for a home you own.
And when you see how your debt decreases and your savings increase, you will experience a good rush.
The usual thing is to get so excited about seeing the numbers change that almost everyone works harder and works harder to earn more money and see a more significant change in their finances.
The best thing is to write down those objectives and analyze whether you are meeting them from time to time.
Below you will discover a template that you can download and use to write down your financial freedom goals and what you will do to achieve them.
You may not get everything you want in a month. But one year is enough time to review your progress and add corrective measures if you are not meeting your initial goals.
It is also vital that your goal tie to a specific number that you want to reach. Believe it or not, you will start working towards those goals without even realizing it.
Knowing precisely what you want to attain will make achieving financial freedom much easier.
3. First, Financial Security
Even if your ultimate goal is to achieve financial freedom, you should go little by little.
It means that it is not very common to achieve financial freedom without first reaching financial security unless you hit a fair ball or hit the lottery.
Therefore, your first financial objective should ensure that your funds can cover your essential fixed expenses.
Start there, and then it will be easier for you to reach financial freedom.
4. Create a Passive Income System
Although you will see that it is imperative to save in the next point, you must also generate this income type. Because as long as you do not articulate this income-generating system, you will be wasting your time (since in a job, you sell your time to your boss, and the time available to work is limited).
Start rational about how you are going to generate income like these periodically:
A good investment generates returns in the form of interest or dividends. If you buy shares, prizes are distributed from time to time.
And if you buy treasury bills, the state agrees to pay you some interest to remunerate you periodically.
If you are a property owner, you can rent them to obtain economic returns in the form of rents.
There are many ways to earn additional money that you can exploit. For example: if you sell affiliate products or have a membership.
It will receive amounts of money from time to time as payments for the service offered in the membership or commissions for the sales you make through your website.
Analyze what your competitive advantage is and take advantage of it to get more recurring funds.
If you write a book, you will entitle to a percentage of that sale as copyright each time it sells.
The same happens if you compose a song, since Spotify’s reproduction, for example, generates royalties.
And if you sell a course, every time someone buys you access to that course, you will be making money without doing anything.
5. Save Everything
Remember that the richest is not the one who has the most, but needs the least.
For this reason, although we live in a hyper-consumerist society, we also contrast a trend with more and more followers: minimalism.
Minimalists preach that it is possible to live with fewer things. It is not necessary to have 20 clothes if you can live with 5.
Nor is it necessary to have two cars when with only one you would more than serving.
Learn to be frugal and to live with fewer things. That way, you can reduce your unnecessary expenses and start saving money.
How to get Financial Freedom?
You have already seen what financial freedom means and how economic freedom achieve when you are a beginner.
We’ve even given you a little plan to get you started. But maybe you find yourself a little lost and don’t know how to start saving and generating that first income.
So now we are going to give you some examples of how to achieve financial freedom. Examples and ideas to achieve financial freedom:
1. Invest your Savings
Remember that your money should always be making more money.
So do not leave your savings stored under the mattress and invest everything you have leftover. In this way, you will get two effects:
You don’t spend your savings on unnecessary things: because you don’t have them available.
Investments will generate more income: in the form of returns, interest, or dividends.
2. Buy Experiences, not Things
Life is short. It’s not about saving all your money until you’re 65. You can like life while you are alive.
Ultimately, the things that will help you live a fuller life will be the experiences you have and not the products you own.
Maybe you have a friend with who you love to exercise. Well, invite him to train at your house with a playlist of the most viewed YouTube videos.
Or maybe today you have a date, and you want it to be unforgettable. Well, you can find a fantastic activity you’ve never done on Groupon for a lower price.
Life makes of moments. The best ones come from the quality time you spend with friends and family. While some products can help you spend time with your family (video game night), most of them don’t add much value.
So don’t spend the money; you don’t have to pretend you have a lot of money.
3. Pay your Debts as soon as Possible
After paying off their debts, most people are relieved.
If you have a debt of 50,000 euros, even if you have 30,000 in the bank, you will not feel financially free because you still owe 20,000 euros.
And although paying someone else is not as satisfying as having the money in the bank, doing so will bring you closer to financial freedom.
There are two main ways to pay off debt:
Snowball strategy: pay the smallest debt first.
Avalanche strategy: you pay off the debt with the highest interest rate first.
Paying off debt takes a significant burden off your shoulders. After paying your debt, you will see that the amount of money you have in the bank increases.
It’s an incredible feeling to see the number go up (even if you saw it decrease at first), and it keeps you motivated to keep growing.
4. Create Additional Sources of Income
If you want to have financial freedom, it will cost you blood, sweat, and tears.
If you don’t have enough with your regular job, you should find money by doing more jobs in the time you have free. Some experts recommend having seven sources of income.
We never tire of repeating that if your income base on the time you work, you limit by the hours of the day. We give you some ideas to start a profitable business with which to obtain additional income:
Become a freelance writer and look for work on platforms like Twago.
Help a business owner as a virtual associate with jobs at Upwork.
Become an Uber or Cabify driver.
Help with housework at Task Rabbit.
Get a casual job on Craigslist or Fiverr.
And you can do many more things to earn money from home!
If you don’t have much time to pursue one of these ideas, you can focus on increasing your income stream by doing the following:
Fortunately, your seven sources of income can come from the same source.
For example, if you are an e-commerce expert, your seven income sources may come from creating seven different virtual stores.
Don’t underestimate this business model; You have no idea how much you can earn with an online store.
And remember: you do not need to start with all seven simultaneously; you can develop them over time.
5. Move to a Poorer Country
In addition to these money-making business ideas, there are other alternative ways to save.
One of them may be to move to a country lower than yours. It makes sense because the cost of alive in rich countries can mean a significant loss of income.
Although salaries are usually higher, so are all fixed expenses.
Also, now that more and more people are teleworking, you can continue providing your professional services in a rich country – with a high salary – while living in a more impoverished country, where expenses are lower because the cost of living is lower.
Since the lockdown caused by the coronavirus pandemic, many workers discover the virtues of telecommuting.
It has generated that more and more people work in countries such as Germany, Sweden, or Norway, and who are considering moving to countries with a lower standard of living, such as Spain.
The reason is easy to understand: to work from home, and it doesn’t matter if you do it in Berlin or Palma de Mallorca.
And the quality of life, together with lower prices, is ideal for these teleworkers who will get economic benefits with the move.
There is also a significant trend towards what is called digital nomadism.
The digital nomads travel all year, spending long periods in exotic countries such as Thailand, Indonesia (primarily Bali), Panama, or Costa Rica.
While visiting these countries, they continue to operate popular online businesses or serve as an SEO consultant, copywriter, or web designer. These are jobs that can carry out with a computer and Internet access.
6. Invest in the Stock Market
Investing in the stock market is based on the fact that you buy shares in a company, and this company gives you a part of its profits in the form of dividends.
If you buy a lot of shares, you will get juicy dividend amounts.
But we do not recommend, unless you know the stock market’s mechanism well, that you speculate by buying shares and selling them more expensive, because it is easy that you end up losing a lot of money.
A technique called buy and hold consists of creating a portfolio of securities made up of shares of stable and consolidated companies.
The system base on buying more shares every month with the money.
It has available so that the portfolio grows and the dividends do so to the same extent.
As it is a long-term strategy, it does not matter if the shares go up or down because what matters is to get dividends.
7. Invest for the Future
Our last tip on how to achieve financial freedom is essential.
Suppose you follow the advice and recommendations in this article, pay off your debts and increase your savings.
That might be enough to help you right now. But what if something unexpected happens? Would you be prepared?
It is essential to save money for the future, and you should not think that retirement is too far away because you are still young.
Time passes very quickly, and if you don’t start sowing now, you won’t be able to reap the fruits of your work tomorrow.
You have a permanent job, of those from 9 to 5, talk with your company about the possibility of subscribing to a retirement plan or check if you have one in place.
Also, it is good to review it periodically so that you see your savings grow.
You should also save enough to have an emergency fund.
Some experts say that you have to save the equivalent of 3 months of salary, although others extend it to 6 months.
However, for those who do not earn very high salaries, saving the equivalent of 6 months of pay for an emergency fund can be a complicated task. Therefore, it is better that you start with a goal that you can meet.
If you have spent too much on credit cards, do not use your emergency fund to pay off that debt: focus on looking for business ideas to earn money that will help you play faster.
The emergency fund is for emergencies only.
Calculation of Financial Freedom
Now that you know it let’s do a calculation to find out how to achieve financial freedom and how to answer the question of “how much money do I need to live without working?”
This financial freedom calculator base on three elements:
1. Find out How Much Money you Have
First, you must know how much money you would have right now if you stopped working.
To do this, add the cash you have at home, the one that is deposited in your checking accounts, deposits, and very liquid investments (that you can recover in less than a week).
It is about knowing what state your finances are in if you suddenly stop receiving your salary.
2. Calculate your Monthly Expenses
Analyze in detail all your fixed and variable expenses. To do this, you should think that payments make monthly (such as electricity, gas, or the mortgage) and others.
It can be annual (such as insurance policies).
Only with that information will you know if you spend more than you enter or if you can save.
3. Calculate your Financial Freedom
The financial freedom calculator helps you know how many months you could live if you lose your job, and therefore your income stream is interrupted.
For example: if you have 20,000 euros, and your monthly expenses are 1,000 euros, if you left your job correct now, you have financial freedom of 20 months.