The term ‘Financial Freedom’ has a different meaning for different individuals. It depends on the individual’s own perception. However, what remains common among all the people is that they all want Financial Freedom. So, let’s start by making a common ground on what Financial Freedom is, and explore what set of behavior and actions are needed to achieve Financial Freedom.
What Is Financial Freedom?
To begin with, Financial Freedom is all about taking ownership of your finances. It is to make sure that you have a reliable cash flow that allows you to live on your terms. You aren’t burdened by piles of debt and also not worried about how you’re going to pay the bills or any sudden unforeseen expenses.
There are various approaches to creating ‘that reliable cash flow’. Having enough cash reserves, savings and investment are the most common of them. Others include having cash flow generating real estate, a source of income that does not require your active involvement, etc. You can choose any one or a combination of them to achieve financial freedom for you.
The levels of Financial Freedom explained below would help you have a deep understanding of the concept.
7 Levels Of Financial Freedom:
Any task, if looked at first seems to be huge and quite tricky and sometimes even improbable and unachievable. However, if you break it down into portions, the entire perspective changes. The once improbable looking task seems manageable with little milestones to achieve along the way.
Based on the same principle, I have divided Financial Freedom into 8 stages, taking reference from ‘Forbes’. Below are the 8 levels of Financial Freedom.
1. Breaking The Paycheck Barrier:
This is the first level of Financial Freedom. The majority of people are living paycheck to paycheck. Means their salary gets credited, they use it and again wait for the next paycheck (salary credit). This way you can’t cope up with any unexpected expenses like a medical emergency, a major car repair, etc.
If you can come out of this paycheck to paycheck cycle, you have achieved what the majority of people can’t. Creating an emergency fund equivalent to 6 months’ income or 9 months’ expenses, whichever is higher, should give you a sense of security of this level.
2. Enough Money To Quit Your Job (For A Bit):
The next step is to have enough money to generate reliable cash flow so that you can quit your job for a bit, may a couple of years. No, the idea is not to quit the job at this point in time. It’s just to give you the sense of security that even if you quit your job for 2 years or so, you won’t have to worry about paying bills and those uncontrollable and unexpected expenses.
After all Financial Freedom is all about making ‘work’ an option. Having enough money to quit the job forever is a huge task and having enough to be able to take some time away from working is an important milestone in that direction.
3. Enough Money To Enjoy Present And Save For Future:
Life is to be lived fully while having fun along the way. After all, life is a journey. This level is based on the very fact that you need to enjoy the present to its fullest and you need money to enjoy it.
This doesn’t mean you live in the present only and forget the future needs and requirements. This level is all about balancing between present enjoyment and a ‘No-Worry Future’. Having and using enough money for both is the essence at this stage.
4. Freedom Of Time:
Given a choice, most people would prefer spending their day doing a set of all other activities like playing with kids, watching their favourite movie or sports, going out with friends or spouse, etc over going to work.
However, the majority of people can’t follow or do what they prefer because their financial situation doesn’t allow them to. The need for money dictates how they utilize their time. Having enough money to not let ‘the need for money’ dictate how you utilize your time is the essence at this level of Financial Freedom.
If one can maintain the cash flow over a sustained period of time, you are having Freedom of Time.
5. Basic Retirement Freedom:
Basic retirement freedom means having a nest egg that will support the bare-bones lifestyle without working ever. A bare-bones lifestyle means living your life on bare minimum requirements without seeking comfort and convenience.
For people who literally hate their job and are willing to do anything for doing away with the job, this level of freedom is the one that would open up a whole new set of possibilities.
6. Dream Retirement Freedom:
The possibilities of what you would be doing if money doesn’t dictate what should be doing form the basis of this level of freedom. Having enough money and a dependable cash flow to do whatever you want to do without worrying about money is what this level of freedom offers.
Most people seek this level of freedom but fail to achieve it even after attaining the designated age of retirement. Further, you want to do the things you want to do while age is on your side and not at the age of 55, 58, or 60. So, reaching this level of freedom while time and age are on your side is key.
7. Financial Abundance:
This is the ultimate level of Financial Freedom. Having more money than you could spend over your lifetime is what this level represents. Target this level as your goal and plan all your strategies and actions to achieve it. It would surely be worth it.
The 11 Distinctive Traits:
Now that you are aware of what is Financial Freedom and the different stages or levels of Financial Freedom, Let’s discuss the distinctive traits that have been observed in people who have achieved Financial Freedom on their own. Being aware of what needs to be done to achieve something is the next logical step towards achieving that goal.
1. Goal Clarity And Goal Orientation:
Way back in the 1950s, Earl Nightingale said the reason why some people fail and the majority don’t is because of the goals. The people who succeed are those having clear goals. How true it is today too and in any and every walk of life.
People who achieve Financial Freedom have their goals clearly defined. Therefore they know what they are doing and where they are going. It is the clarity of goals and planning everything around the achievement of those goals that differentiates the achievers from non-achievers.
2. A Sense of Responsibility:
People who achieve Financial Freedom are the ones who take responsibility for their life and finances. They think they are at a level as a result of their own thoughts, actions, and behavior. Furthermore, they take responsibility for what is going to happen in their life as they know the actions and behavior of today are shaping their future.
Had that friend or Bank Manager or XYZ not sold me this plan, I would have had an ABC amount with me. Had the market crash not affected my portfolio or had my MF distributor told me to switch money from equities before the crash, my ROI would have been in the high teens.
No. It doesn’t work that way. It’s your life and your money. It’s you who should have sought to know the basics of investments and decided for yourself whether to buy that plan or rebalance your portfolio to decrease the equity exposure before the crash.
Understand, instead of blaming circumstances, incidences, and other people for your life and finances, start taking responsibility for the present as well as future.
3. Long Term Orientation:
Having a vision for your financial life goes a long way in achieving Financial Freedom. People who achieve Financial Freedom have a vision that guides their decision making. The majority of their decisions are based on long term effects on their financial future.
You need to delay the gratification for your own good instead of getting lured with instant gratification. Remember, Financial Freedom is a journey from where you are and gradually moving one level up the ladder up to Financial Abundance. It won’t happen overnight and hence having a long-term orientation is a must.
As discussed above, Financial Freedom is a journey moving from one level to another which takes time, having patience along the way is key to success. Not seeing visible results despite consistent efforts should not be an excuse to give up.
People who have achieved Financial Freedom have demonstrated patience along the topsy turvy way. Grit, determination, perseverance are some of the other virtues that add up to patience.
5. Multiple Source Of Income:
Financial Freedom is having enough money to generate reliable cash flow without working actively. If that’s true, then having more than one source of income helps. Obviously having more sources of income and earning more would help in reducing the time taken to build the required corpus.
Almost all of the people who have achieved Financial Freedom have one primary source of income and various other sources too. They build these multiple sources of income by leveraging time, systems, people, and money itself.
6. Self Control:
People who achieve financial freedom demonstrate exemplary self-control in almost every area of their life. Special mention needs to be made about their spending habits. They know the fact that in order to save money their expenses need to be lower than their income. Hence they become very judicious about what they spend their money on.
Thrift, minimalism, and frugality are some of the terms that you need to look at if you want to have control over your spendings. Each of the three words signifies one thing. Save as much as you can. Thrift and frugality emphasize cutting down your spending mercilessly on the things which are not important to you. Minimalism implies keeping your materialistic requirements to a bare minimum.
7. Leveraging Resources:
As touched upon in the 4th trait, Multiple Streams of Income, leveraging all the available resources optimally is one of the keys to achieving financial freedom. Apart from time, systems, people, and your own money, borrowed money is another important resource that, if leveraged to your advantage, can help you immensely to achieve Financial freedom faster.
Understand the difference between good debt and bad debt. Work out ways to leverage good debt instead of typical people who are either burdened by debt or run away from debt.
8. Save And Invest:
Making your money work for you by saving and investing money is the key to achieve Financial Freedom. Earn maximum amount by leveraging all your available resources including debt, control your spendings in line with the concept of minimalism and frugality and save as much as you can so that you can invest the money.
You can’t achieve Financial Freedom if you keep the mindset of a spender and keep spending the majority of your earnings. Similarly, you need to look at money as a tool to create wealth and financial freedom instead of meeting needs and luxuries.
9. Better Risk Management:
Risk is omnipresent. The choice you have is either to avoid or manage it. The majority of the people get turned off to an idea when they hear or come to know that it involves some sort of risk.
If you were to achieve Financial Freedom, instead of avoiding risk, embrace it. Look at risk as an opportunity. You can mitigate or transfer all the risks which are insurable. For others, you can work out strategies and tactics which are in line with your goals and values.
This way you can reduce the downside impact of risk to minimal and cash in on the upside or positive side. How well you manage risk in investments and life will contribute in a big way to achieving financial freedom.
10. Strategic Actions:
The people who achieve Financial Freedom seem to act strategically. Each and every action they take is aligning with their goal, purpose, and strategy. At times, looking from an outsider’s perspective, some of the actions might look weird or even unfruitful or unnecessary. However, they all are strategic.
So, stop acting randomly, if you are to achieve Financial Freedom. Work out a purpose, some values, strategies, and tactics, and then align all your actions based on that.
11. Continuous Learning And Coachability:
The zeal to learn anything and everything at any given point in time are vital to achieving any life goals and Financial Freedom is no exception. Learning is not an academic activity, not anymore, particularly in this ever-changing and evolving day and age. You need to be a lifelong learner.
Apart from the zeal of learning, you need to be coachable. Being coachable means letting go of what you know, what you have been doing or what’s working for you and imparting new knowledge, staying abreast with time, and adapting to the needs of an ever-changing world.
Figure out at what stage you are in your Financial Freedom journey and set a goal for yourself. Work out your values and strategy based on the values. Then if you impart the required skills, habits, and attributes, Financial Freedom is not beyond your reach.
What are your 2 action points or takeaways to achieve Financial Freedom? Write down in the comments section.
To Your Financial Well-being.