what is financial freedom and ways to achieve it?

We currently live in the world where more and more people wish to retire early. People want to travel, explore, see new things and not have to work 9-5 in order to be able to achieve these things. This is where the term financial freedom comes into play.

As the retirement age is being pushed into late sixties in many countries – there is a growing proportion of population who wish to retire in their 30s and 40s. Working for most of your life doesn’t sound appealing at all. While retiring early might sound crazy and unrealistic – people actually manage to achieve this.

Below I will give you an idea of how to approach this vision. The key with the below – the earlier you build yourself a clear plan and vision and start working at it, the earlier you can achieve the financial freedom.

what is financial freedom

Financial freedom or as some call it financial independence – a concept that allows the person to live their life without a need to worry about income and financial security. 

The idea behind is extremely simple – ahead of achieving this, the person accumulates assets that will generate the needed money to pay for their needs and wants. 

The journey to financial freedom usually starts with paying off debt. Once the individual is debt free – they start focusing on accumulating assets. 

These are often in the form of investments like shares or bonds. Other assets often found in the mix are the likes of property and any other assets that can generate regular income stream. Anything that can bring rental income – is a great asset to consider. 

Those looking into financial freedom might have heard of a movement gaining momentum called FIRE. This simply stands for Financial Independence, Retire Early. 

If this is your dream and goal – accumulating enough assets is the key. The last thing you wish is to retire early and then having to come back to work years later. 

how much you need – the 4% rule

While there is no way to predict how much money you need exactly in order to guarantee yourself a life that won’t require you to ever return back to your 9-5 – there are some guiding principles that can help you on your path.

A simple rule of thumb is a 4% rule. This rule is extremely simple and easy to apply. It assumes that on average the markets are growing at over 4%. Which allows you to pull out 4% from your assets each year. This will then get replenished through the asset appreciation.

The types of assets you can have will be the likes of property, dividend or growth stocks, index funds… the list can go on and on! Anything that generates growth and value appreciation can be a great tool for this.

You might be wondering – so how much money do I need in my assets in order to be able to comfortably live off the 4%?

The answer is simple – calculate the amount that you need for your annual expenses. Next, multiply this figure by 25. An example – if you need £40,000 per year, your assets should be worth at least £1,000,000.

The other thing to try and do as you get nearer to your desired retirement age – start reducing the risk of your portfolio. There can’t be a worse scenario than you resigning from your 9-5 and all of your assets dropping by 90% in their value.

Diversify and look into safer investments. Swap your crypto holdings for blue chip dividend shares. Growth shares can be turned into ETFs or even bonds. Rental property can have a share of your portfolio as well.

Look for anything that reduces your risk while allows you to enjoy at least 4% average annual returns.

what are the stages of financial freedom

In my head – there are 3 stages to your financial freedom. And all of us might be happy with reaching a different one. There is no set rule – which of the 3 is the success in life.

1st step: cover your basic needs

This stage is always the first step to financial freedom. Here – your income from your assets is covering all of your basic needs.

The needs I am talking about here are – food, housing, utilities, etc. These are the very basics of anyone being able to have a life. The moment you realise that the income from your assets is covering these – your life will fundamentally change.

2nd step: cover your current lifestyle

This step will be the one for many people in my view. Once you reach the comfort level in your life – you most likely won’t need more than that.

At this stage you will be able to fully cover all the expenses from step 1 as well as all your entertainment, traveling, luxuries and expenditures as you currently have. You won’t be driving a Ferrari – but do you actually need one?

This stage should allow you to have a fully comfortable life that will let you enjoy the basics as well as some finer things in life.

3rd step: cover your ideal lifestyle

This step is the ultimate goal for those for whom step 2 doesn’t do enough. Here – you are able to fund your ultimate lifestyle and be able to afford whatever you wish.

Firstly, for this step you will be required to calculate – how much does your ultimate lifestyle actually cost you. Include all the expenses, travels and finer things in life. 

Once again – the moment you know this figure, you have to multiply it by 25 to get to the value of the assets you have to have in your bank account in order to be able to never have to think about working again.

summary

Financial freedom is a dream for many. This is something most of us could achieve by simply putting in some basic planning and creating a rock solid plan to achieving this.

Your financial freedom only depends on you doing your maths correctly and starting to build your asset column.

As I often do – I will once again recommend going after this dream by opening your ISA and starting to max it out. This can be a life changing account. All the gains and dividends in there will be tax free for ever.

While not having to work for ever might sound unachievable for most – in reality, this is much nearer than people imagine it to be.