What does financial freedom mean to you?
• More time with family?
• Doing what you love to do.
• Helping others?
• Being debt-free.
• Traveling to exotic places.
• Taking early retirement.
We all desire the freedom to choose — the freedom to do what we want to do when we want to do it and with whom. Financial freedom means getting to a place where money no longer influences the decisions you make in your life.
There are seven stages to financial freedom.
Stage 1 Rewiring Your Mindset
The first stage is to rewire your mindset. Everything starts with your mindset. Wealth has less to do with money than everything about how you think about money. Do you have any negative beliefs about money? Or unhealed money trauma haunting your financial decisions?
Stage 2 Clarity
The second stage to achieving financial freedom is clarity, knowing where you’re at and where you want to be. It means having a clear sense of what’s coming in and going out, essentially your cash flow.
Besides that, you also need to know your current net worth. How much do you own vs. how much do you owe? Once you know where you are, you can decide where you want to be. Would you feel you’ve achieved financial freedom when paying off your debt and receiving multiple income streams?
Clarity also includes where you want to be financially in 3, 5, and 10 years.
Stage 3 Building a Foundation
The third stage is creating a money system to build a solid financial foundation. You’ve mastered this stage when you’re making enough money to cover your expenses without getting into debt or getting help from anyone else.
Do you have credit card debt you cannot pay off by the end of each month? Are you “debting” to service a lifestyle you can’t afford?
Stage 4 Wiggle Room
Once you reach stage four, you have more wiggle room. You have money left over beyond your living expenses and debt repayments. And you also have an emergency fund worth at least six months of your living expenses.
An emergency savings fund ensures your financial plans are kept on track by unexpected financial setbacks, such as a leaky roof, job loss, or moving to another city.
In calculating how much you need to save, consider your financial picture and prepare for unforeseen circumstances, not just your regular, everyday expenses.
Stage 5 Financial Stability
Once you’ve paid off all revolving debt, such as credit cards and lines of credit, and have an emergency fund worth at least six months of your living expenses, you may be at stage 5- financial stability.
You now have extra money to save and invest toward your financial goal, such as building an emergency fund, buying your first home or rental property, or investing in your retirement fund.
Stage 6 Financial Flexibility
People at Level 6 have saved at least two years of living expenses. This can be money saved in a savings account, or some could be invested. But it has to be accessible.
If you have it all in a pension at work, it is not accessible. Having two years of living expenses accessible gives you the flexibility to take time off work or pursue a new venture.
Stage 7 Financial Freedom
People who have achieved financial independence can live solely on their investments’ income. In addition, at this stage of financial independence, you can retire.
To achieve this, you must invest a high percentage of your income. This may mean shifting to a more modest lifestyle to drastically lower your cost of living, cutting out extras, and plugging financial leakages.
This money can come from a large sum in an investment portfolio generating income. Or you have rental properties. And the cash flow from the rent covers your living expenses. If you can withdraw 4% of the income from your portfolio, be assured that your money will not run out and will continue to grow as long as you’re alive.
What stage are you at?
Don’t beat yourself up if you’re not at the stage you wished you were. Instead, create a written financial plan to help you achieve your goals and get where you want to be.
Adopt healthy financial habits moving forward, and you will achieve financial freedom if that’s what you want for yourself. You are worth i