What is financial freedom and how can it be achieved?

Key Takeaways

• Financial freedom is the ability to live the lifestyle of one’s choice without incurring debt.

• Achieving financial freedom is largely a matter of developing and executing a plan for saving money, investing well, controlling credit, and minimizing debt.

• Alternative investments such as those offered by Yieldstreet can help mitigate the effects of market volatility and preserve capital so that money can continually work for the individual, rather than vice versa.

While most people have different financial goals, there is one universal element when it comes to personal finances: the attainment of financial freedom. That said, the idea of financial freedom can mean different things to different people. Within that, though, it is generally agreed that financial freedom entails a life unbound from the reliance upon most forms of debt to obtain necessities.

What is Financial Freedom?

Those who have sufficient savings, investments, and liquid assets to support the lifestyle they prefer are seen as having financial freedom. Some people are born into it because of inherited family wealth. Others must overcome financial adversities and/or unhealthy financial habits to get there. 

Either way, financial freedom ultimately means an individual’s money is working for them — rather than vice versa. 

These people have the resources they need to live the life they choose. They can take whatever career path they want (if any at all) and retire without the concerns of earning a salary. Those who enjoy financial freedom are also unlikely to experience monetary setbacks in major crises such as pandemics, wars, or natural disasters.

Why Financial Freedom is Important

Financial freedom matters because it enables people to take control of their lives. It also holds the potential to reduce stress and improve interpersonal relationships. 

Those who have achieved financial freedom can focus on what they want to do, as opposed to what they must do. Having financial freedom also provides the ability to make decisions based on long-term goals as opposed to day-to-day, week-to-week or month-to-month survival. 

The need to sacrifice is largely foreign to the lives of people who enjoy financial freedom. As a result, their actions can be aligned with their values. They are freed from the need to perform specific acts to remain employed. Those who enjoy financial freedom can also view the future in terms of how their actions can serve the greater good rather than their own specific needs. 

How to Achieve Financial Freedom

The first step toward achieving financial freedom is the establishment of monetary goals designed to make independence a reality. The goals should be specific, include deadlines by which milestones are to be achieved, and recorded in writing so they can be reviewed and updated as progress is made.

Objectives to consider include the nature of the desired lifestyle, the amount of money needed to make it happen and a deadline by which the ultimate objective is to be realized. Budgeting is key to this endeavor, as knowing where the money goes makes employing it efficiently easier to accomplish.

Adopt a Frugal Lifestyle

Far too many Americans spend beyond the limits of their incomes. This makes it very difficult to achieve financial freedom, because a disproportionate percentage of their earnings must be earmarked for the servicing of debt. 

The key is developing the ability to recognize the difference between needs and wants. 

Most people who have achieved affluence did so in part by living below their means while they worked to attain their wealth. When moved to make a large purchase, it is prudent to ask whether the object is a necessity or a desire. Avoid making large transactions based on impulses. Wait a week or so before completing the transaction. The urge might pass. 

Perform Preventive Maintenance

Servicing an automobile according to the manufacturer’s recommendations can make it last longer and cost less to operate in the long run. This is also true for appliances, clothing, and tools for example. It is less costly to keep things in good condition than it is to repair or replace them. 

This is especially true when it comes to managing one’s health. Regular physical examinations, visits to the dentist, and consistent exercise can help stave off expensive illnesses. So too can maintaining a healthy diet of fresh foods while minimizing the intake of fast food, sugar, and alcohol. 

Learn to Negotiate/Look for Deals

The price presented is not always the price that must be paid. Always ask what discounts are available, particularly when making expensive purchases. Along these same lines, it makes sense to look for bargains. 

Many items provide faithful service even when purchased used. This is especially true for durable goods such as cars. Always look for the best price. Less money spent means less debt and more cash available for saving and investing. 

Eradicate Credit Card Debt

Within the budget should be funds earmarked for the elimination of credit card debt. Other forms of debt, such as mortgages and student loans, are more benign, so tackling credit card debt first is a wise approach. That said, the overarching goal should include the eradication of debt altogether. 

Maximize Credit Scores/Monitor Credit Reports

A key determining factor when it comes to mortgage interest rates, car loans and refinancing properties, credit scores can also come into play when purchasing insurance policies, leasing a residence, or seeking employment. 

Regular credit report monitoring is critical to ensuring financial wellbeing. Identity thieves can have free rein for extended periods of time when credit reports are left unmonitored. Mistaken entries on credit reports can also have a negative impact on a credit score, which can make getting a mortgage loan difficult to accomplish. 

Annual credit reports are available free of charge at AnnualCreditReport.com

Establish Savings Accounts/Emergency Funds

Saving is also key to making the strategy work. The first milestone in that regard should be the accrual of an emergency fund capable of meeting household expenses for at least six months in the event of an income stream interruption. The exact amount will of course vary based upon individual circumstances. Still, automatic withdrawals and deposits into savings accounts can make this easier to accomplish.

Those who are employed should also enroll in matching contribution plans offered by their employers. Keep in mind though that the tax-advantaged accounts these contributions typically accompany are difficult and costly to liquidate before they reach maturity. Therefore, these accounts should be established to serve future needs, rather than meeting near-term concerns.

Institute an Investment Regimen 

Investing is a key aspect of attaining financial freedom. The ability to harness compound interest afforded by an ongoing investment strategy has the potential to grow money exponentially. Take some time to learn how investing works, open a brokerage account and contribute to it on a regular basis. 

In most cases, buying into an index fund is a smart way to get started. These track several companies, rather than one specific company, which introduces some diversification into a portfolio. So does investing in fixed-income assets such as bonds. A well-balanced portfolio can also benefit from investments with minimal correlation to the public markets.

Incorporate Alternative Investments 

Traditional asset allocation envisions a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split incorporating 20% alternative assets may make a portfolio less sensitive to public market short-term swings. 

Real estate, private equity, venture capital, digital assets and collectibles are among asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less correlated with public equity, and thus offer potential for diversification. This can help protect a portfolio during periods of extreme volatility.

Alternative assets were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors who buy in at very high minimums — often between $500,000 and $1 million. Yieldstreet was founded with the goal of dramatically improving access to alternative assets by making them available to a wider range of investors. 

Pay Attention to Financial Issues/Seek Professional Help

Developing an understanding of tax laws to ensure the maximization of adjustments and deductions can result in significant savings. Keeping an eye on current events can help inform investment decisions. It’s also a good idea to enlist the services of a financial advisor, a tax advisor and an investment advisor as the plan picks up steam. These people can help ensure that all available capital is best put toward attainment of the main goal — financial freedom.

Conclusion

Achieving financial freedom is largely a matter of developing and executing a plan for saving money, investing well, controlling credit, and minimizing debt. Attaining all this might seem difficult at first. However, with small steps at a time, financial freedom and all the benefits that come along with it can be achieved.