Financial freedom is a term we often come across today. The term is part of the area of personal finance and it is very useful to be able to identify what we mean when we talk about it in order to achieve a truly financially free life. Different people come up with different definitions of this idea. Some say: it’s about buying what you want and when you want; have no debts; be able to support yourself or just be rich. The phrase has become so popular that business and life coaches use it frequently to describe that dream relationship that everyone wants to have with money: a state of equilibrium in which money is no longer a pressing concern in your life. life and you can enjoy the achievements of your work without worrying if you have enough to cover the bills because you have already covered that.
Many of the ideas that various entrepreneurs and life coaches offer about financial freedom, however, remain vague. Although we often spend time discussing the subject and how we can achieve financial freedom, the truth is that many times we have no idea what it really means.
And, if we don’t have a clear idea of what our goal is, how can we reach that goal? In this article, we will discuss financial freedom and a correct approach on how to achieve it step by step.
DEFINITION
So what is financial freedom?
Financial freedom is having enough residual income to cover your living expenses. It’s not about being rich and having tons of money, but about having enough to cover your expenses so that you can spend your precious time doing what you love instead of doing things just to earn money. This can only be accomplished when you are ready for it. All it takes is a little financial planning.
The concept of financial freedom has also come to be defined by experts as financial independence, this being the state of having sufficient income to pay living expenses for the rest of life without having to be employed or depend on others. The income obtained without having to work in a job is commonly known as passive or residual income, so financial freedom or independence consists of having enough passive income to be able to face all the basic expenses that a person commonly faces: food, roof, bill payment, education, health and clothing.
POPULARITY OF THE TERM
/https://assets.iprofesional.com/assets/jpg/2020/06/498426.jpg?w=1200&ssl=1)
During the 1990s Robert Kiyosaki played an important role in popularizing the concept.
The idea of financial freedom has been made widely known in popular culture by millionaire and real estate entrepreneur and writer Robert Kiyosaki.
In 1997 he published the Book Rich Dad Poor Dad, in which he explained the different mentalities of people regarding income and how to achieve a financially free life through the right type of position in the business world and ways to earn income. Kiyosaki would later call these positions the money flow quadrant.
The idea took more form and was embodied in a book the following year (1998) titled in the same way, The Quadrant of the Flow of Money. In this book, Kiyosaki explains that in today’s society there are four ways to earn money:
The first and most common is being an employee who works so that another person reaps most of the benefits, the next way is being self-employed, constantly working in a business of his own where time is exchanged for money, the third form is being a business owner that has a system to generate income such as a large company and franchises managed by third parties or a network of multilevel network marketing where other people help us to generate income (in this third position of the quadrant a person is already free financially), the fourth and best way to obtain income is by being an investor, where the person lets their capital operate in different types of assets (bonds, stocks, business shares, gold, property, art) and generate money without doing absolutely nothing. For Kiyosaki, this last position in the quadrant is the one that grants true financial freedom.
From the two books by Robert Kiyosaki, the idea of financial freedom has become more defined in the world of contemporary entrepreneurship, to the point that reading the first two books by Kiyosaki, Rich Dad Poor Dad and the Quadrant of the Money flow, they are an essential guide for anyone who wants to understand the basic elements of authentic financial freedom
RESIDUAL INCOME AND FINANCIAL FREEDOM
The concept of residual income is key here. Financial freedom is not simply that you can work and have an asset flow with a positive balance at the end of the month. That is something that most people can do without much trouble and not necessarily due to the fact that the result is positive, we call it financial freedom.
When we talk about residual income, we are saying that you get a constant flow of money without being present working directly, that is, you earn money freely without setting foot in the office or on the job site. For example: through royalties for having written a book, through income from renting a place or a house, when you receive interest month after month for a fixed-term deposit, with returns in a variable income fund, in a hedge fund, in a fixed income fund such as government debt bonds or other similar products.
TYPES OF RESIDUAL INCOME:
The following is a non-exhaustive list of residual or passive income sources that potentially create financial independence.
- Fixed bank deposits and monthly income.
- Property of the company (if the company does not require an active operation), in this case we can talk about shares of a company or its simple ownership, whether it is managed by third parties or does not require large operating activities to generate income.
- Dividends from stocks, bonds, and income trusts.
- Interest accrued from deposit accounts, market accounts, hedge funds , exchange-traded funds, monetary assets, or loans
- Annuity.
- Notes, including stocks and bonds
- Oil leases.
- Patent license.
- Pensions
- Rental of homes, commercial premises, buildings and other real estate.
- Copyrights of creative works, For example: photographs, books, patents, music, etc.
- Deed of trust (real estate).
- Third-party managed property and art trade.
HOW TO ACHIEVE FINANCIAL FREEDOM
Once we have defined what freedom is and the types of assets that make up the income that a person who enjoys financial freedom has, we can move on to the next phase: defining how to achieve the long-awaited financial freedom.
Achieving financial freedom is a goal for many people. It generally means having enough savings, investments, and cash on hand to allow us the lifestyle we want for ourselves and our families, and a growing reserve that will allow us to retire or pursue the career we want without having to earn one. a certain amount of money each year.
Unfortunately, many people do not reach this goal. They are burdened by mounting debt, financial emergencies, wasteful spending, and other problems that keep them from reaching their goals. And they encounter unexpected events, such as the 2020 pandemic for example, that destroy their plans and reveal gaps in the safety nets that they are trying to weave for themselves and their families.
Almost everyone has problems when it comes to managing finances correctly, but these 12 habits can put you on the right track to stay on track and achieve your most coveted goals.
KEY IDEAS
Set life goals, both big and small, financial and lifestyle, and create a plan to achieve those goals.
Make a budget that covers all your financial needs and stick to it.
Pay off credit cards in full, so you have as little debt as possible and control your credit.
Create automatic savings through your employer’s retirement plan and establish an emergency fund.
Take care of your belongings, as maintenance is cheaper than replacement, but more importantly, take care of yourself and stay healthy.
1. SET LIFE GOALS
What is financial freedom for you? A general wish is too vague a goal, so be specific. Write how much you should have in your bank account, what the lifestyle you want implies and at what age you should achieve it. The more specific your goals are, the greater the likelihood of achieving them.
Then, count back to your current age and set financial milestones at regular intervals that you can achieve in the short and medium-term all the way to the long term. Write them all down carefully and place the goal sheet at the top of your financial portfolio.
2. MAKE A BUDGET
Make a monthly family budget, and stick to it, that’s the best way to ensure that all the bills are paid and that the savings are on track. It’s also a regular routine that reinforces your goals and strengthens determination as you fight the temptation to splurge.
3. PAY CREDIT CARDS IN FULL
Credit cards and high-interest consumer loans are toxic to building wealth. Make sure you pay the balance in full each month or avoid these types of loans whenever you can. Student loans, mortgages, and similar loans often have much lower interest rates; paying them is not an emergency. Paying on time is and will create a good credit rating for you. A good credit rating can strongly affect the amount of money you access in the future, which could give you access to enough money to make investments in personal businesses and ventures.
However, it is our duty to say that credit cards can also be used correctly to achieve financial freedom. Many people use several credit cards, but not as a means of financing, but as a means of payment, this allows them to access bonuses for their purchases and save a lot of money on all the things they consume, these people defer each payment to a single installment and they never pay interest for the use of their cards.
4. CREATE AUTOMATIC SAVINGS
Pay yourself first. Enroll in your employer’s retirement plan and take full advantage of any matching contribution benefits. It is also advisable to have an automatic withdrawal for an emergency fund, which can be used for unexpected expenses, and an automatic contribution to a brokerage account (such as a hedge fund or an exchange-traded fund) or something similar.
Ideally, the savings money should be automatically debited the same day you receive your paycheck, so it doesn’t even touch your hands, avoiding the temptation to spend it entirely. However, keep in mind that the recommended amount to save is hotly debated. In some cases, the viability of such a fund may be questionable.
5. START INVESTING NOW
Bad stock markets can make people question this, but historically there has been no better way to grow your money than by investing, stocks have always outperformed other types of assets on the market. The magic of compound interest will help you grow your capital exponentially over time, but it takes a long time to achieve significant growth. Don’t try to be a stock picker or fool yourself into thinking you can be the next Warren Buffett. There can be only one.
Instead, open an online brokerage account that makes it easy for you to learn how to invest, build a manageable portfolio, and automatically make weekly or monthly contributions. Today, the new financial or fintech technologies associated with traditional consumer and investment banking allow you to do this from the comfort of your cell phone in just a few minutes.
Achieving financial freedom can be very difficult when dealing with mounting debt, cash emergencies, medical problems, and overspending can be a huge hurdle, but it can be achieved with discipline and careful planning.
To invest correctly, the best thing you can do is to use financial instruments that allow you to obtain a great diversification in your investment, such as the so-called exchange-traded funds or mutual funds, these instruments invest in a large number of shares so they greatly minimize the risk of losses. Brokers such as eToro or XBT currently allow you to invest in exchange-traded funds with very low costs. Additionally, remember to hold your investment positions long-term so that you can see consistent returns.
6. TAKE CARE OF YOUR CREDIT
Your credit score determines what interest rate you are offered when buying a new car or refinancing a home. It also affects seemingly unrelated things like auto insurance and life insurance premiums.
The reasoning behind bank interest rates and fees on insurance and other financial products is that someone with reckless financial habits is also likely to be reckless in other aspects of life, such as driving and drinking. That’s why it’s important to get a credit report at regular intervals to make sure there aren’t any wrong black marks to ruin your good name.
7. LEARN TO NEGOTIATE
Many people are hesitant to negotiate goods and services and are concerned that this will make them appear stingy. Overcoming this cultural handicap could save you thousands of dollars each year. Small businesses in particular tend to be open to negotiation, where buying in bulk or repeating purchases can open the door to good discounts. In this sense, you can also make use of loyalty programs from grocery stores or shopping centers, which can be an excellent way to save money both in the short and long term.
8. IMPROVE YOUR KNOWLEDGE OF FINANCE
Review all applicable changes in tax laws each year to ensure that all adjustments and deductions are maximizing your benefits. The tax system of each country allows citizens to access tax discounts as long as the corresponding adjustments are made (This practice called tax avoidance is very different from tax evasion and is totally legitimate) Keep up to date with financial news and developments in the stock market and feel free to adjust your investment portfolio accordingly. Knowledge is also the best defense against those who take advantage of unsophisticated investors to make a quick buck.
9. PROPER MAINTENANCE
Taking good care of property makes everything from cars and lawnmowers to shoes and clothing last longer. Since the maintenance cost is a fraction of the replacement cost, it is an investment not to be missed.
Learn to know the difference between the things you want and the things you really need. Think for a moment, do you really need a new shoe to go running? Your old shoes may just need a good shoe rack fit. At the end of the day, when you go for a run, wearing a new garment is the least important thing, as long as you can keep your clothes in good condition, you can continue with your lifestyle without putting an additional burden on your finances.
10. LIVE BELOW YOUR MEANS
Mastering a frugal lifestyle with a mindset of living life to the fullest with less is not that difficult. In fact, many wealthy people developed the habit of living below their means before achieving affluence. Warren Buffett bought his house in Omaha, Nebraska in 1958 for just $31,500 and continues to live in it to this day (Sure, in constant dollars that’s roughly $270,000 today, however, it’s still a very low value for a billionaire’s mansion.)
It is not a challenge to adopt a minimalist lifestyle or a call to action to go to the dumpster with the things that you have accumulated over the years. Making small adjustments in distinguishing between the things you need and the things you want is a financially useful habit to put into practice and have a really balanced budget.
11. GET A FINANCIAL ADVISOR
Once you’ve reached a point where you’ve accumulated a decent amount of wealth, whether it’s liquid investments or tangible assets that aren’t as readily available to convert to cash, find a financial advisor who will educate you and help you make decisions. At first, this may seem like an unnecessary cost, but over time, and your investment portfolio is bulky, this will be an expense that will pay off pretty well. Many great opportunities that ordinary people overlook can be easily identified with the help of a good advisor.
12. TAKE CARE OF YOUR HEALTH
The principle of proper maintenance also applies to the body. Invest in good health with regular visits to doctors and dentists, and follow health advice on any problems you encounter. Many problems can be fixed, or even prevented, with lifestyle changes, such as more exercise and a healthier diet. Some companies have limited sick paydays, which becomes a significant loss of income for you once you have exhausted your available sick days. Obesity and disease cause insurance premiums to skyrocket, and poor health can force you into early retirement with a lower monthly income than you could have earned by working up to retirement age.
13. MAKE THINGS DIFFICULT
Many people have the misconception that they should only do those things they love and are passionate about in order to reach their financial goals. This is an idea that has been sold a lot recently. People are encouraged to pursue their dreams and focus on those special talents and abilities that distinguish them from others.
While it is true that we should dedicate ourselves to that profession that we are most passionate about and those trades that most arouse our interest, it is also important to remember that on our way to achieving those goals and all those things that we are passionate about, we will also encounter difficult things and we should not avoid them.
Our profession is an integral whole and those things that we dislike if we learn them correctly can play a very important role in our development.
14. FIT ALL THE PIECES
The steps we’ve seen to achieve financial freedom cannot be taken separately if your goal is to achieve true financial freedom. Probably if you follow one or two of these steps, that will lead you to have a positive account balance at the end of the month or at the end of your life. However, remember what financial freedom is really about, we are talking about you being able to have a steady stream of income without having to work. Sounds ambitious, right? And even for people who greatly value work this may seem greedy or want to parasitize society.
Important: Saving only makes sense in relation to financial freedom if you can direct it towards investments that generate income without having to do administrative or work operations personally.
THE ROLE OF FINANCIALLY FREE PEOPLE IN SOCIETY
People who are financially free tend to generate two types of attitudes in our society. On the one hand, they are considered greedy, stingy and, paradoxically, they are envious of their standard of living. On the other hand, they are role models for other people and can do great good to society by making investments in strategic areas for development, donations to activities of great public interest. It all depends on the perspective you want to take towards them.
But even when all the aforementioned prejudices about financial freedom surround our popular culture, the truth is that financially free people make great contributions to society, first: because they invest in assets and productive assets that generate wealth for the whole society and second They can dedicate their time to activities that they really like, and these activities are not always idle, they can also be quite beneficial in terms of production. And even when the activities to which financially free people dedicate themselves are idle, that leisure translates into personal and collective well-being, since it generates better relationships, greater happiness, fewer expenses in health systems, things that in the long run benefit people. society as a whole.
So make sure you put all the pieces together and actively pursue your pursuit of fearless financial freedom. It is the best you can do for yourself and for society.
SHOULD GOVERNMENTS PROMOTE FINANCIAL FREEDOM?
There is currently a very broad debate about whether governments should actively promote financial freedom.
The proposals that have been generated around this idea have as a central aspect the concept of Universal Basic Income, which consists of granting each person a fixed amount of money each month so that they can freely spend it on whatever they want.
The criticism surrounding this proposal is that it would generate a high degree of monetary inflation and make people idle. However, these criticisms do not seem to take into account that human beings become much more creative when they allow themselves leisure and when they have better living standards.
In the past, before the Industrial Revolution specifically (when the era of economic growth began) achieving financial freedom was something that only a very narrow handful of people (kings, nobles, clergymen or military) could aspire to. The vast majority of people were generally poor. Today, however, due to technological advances and the massive growth that the economy has seen over the past two centuries, achieving freedom is something that is within the reach of many more people and could soon be a possibility that the 100 can aspire to. % of the society. Prosperity has become a collective good.
THE ROLE OF SCIENTIFIC INNOVATION
As governments and companies promote scientific and technological innovation, much of the work today is done by robots and this is increasingly spreading to more sectors of the economy. Even so, the tax systems and the design of the current economy mean that these advances mainly benefit the richest 1% of society. With the right tax systems and increased investment in education and technology, the technology revolution could move forward to bring greater financial freedom to people.
Although it sounds like a utopia, in the future work, understood as an obligation to earn a living, could be eliminated. Robots would do most of the work, an income better distributed and people could use their free time for creative activities that enrich the economic system, without this having to be an obligation to obtain a livelihood.
STILL YOU HAVE TO DO YOUR PART
So yes, governments and technological advancements could play a more active role in making people more financially free, and when this is achieved it will be a big step for society as a whole, with stronger and better welfare states. quality of life levels; what economists call a high human development index.
This does not mean that you sit back and wait for what the government and technology can do for you. Planning, discipline, saving, smart investment and well-structured work will always be key to achieving the greatest possible freedom, so do not forget to follow the advice mentioned above. They will be the basis for you to fulfill your dreams and have the financial stability that you long for.
BUT MANY GOVERNMENTS HINDER THE FINANCIAL FREEDOM OF SOCIETY AS A WHOLE
Governments have not always been aware of the benefits of shared prosperity. For this reason, they have tended to privilege a few as opposed to the interests of the whole of society. Proof of this is that on many occasions taxes tend to be regressive, that is, much lower if you are rich, and they tend to widen social divisions. These attitudes and policies have been taken for various reasons, in some cases, it is believed that privileging the rich is more efficient and in others it is simply a reflection of the existing power relations in society.
Additionally, governments can also present great obstacles to financial freedom with erroneous economic policies, which lead to a large part of the population ending up living in poverty. The nationalizations of companies, for example, can end up making large economic sectors inefficient. On the other hand, the constant issuance of currency by central banks can contribute to the loss of value of the local currency in inflationary waves that weaken the purchasing power of citizens.
When these circumstances occur, it is very important that citizens are aware of the fragility of their economy and seriously incorporate financial education into their lives, both for themselves and for their families. By knowing the risks of inflation and economic inefficiencies imposed by negligent governments, people will be much better equipped to deal with each of these challenges on a day-to-day basis.
