Financial independence attracts many people. And this is not surprising, because it gives freedom and solves most of life’s problems. A lot of money – a lot of freedom. The main thing is to learn how to manage them correctly. If this skill is not developed, the situation will turn in the opposite direction. Here finances will begin to control a person.
Financial independence or financial freedom. Is there a difference
Independence in the general sense is the absence of any kind of dependence. This is a state in which you can live the way you want, regardless of the circumstances and situations around you.
Financial independence is the absence of dependence in terms of money (from employers, monthly salaries, etc.), a sufficient amount of funds to meet needs.
Financial freedom is a state in which the total income is much greater than the expenses. At the same time, you already have everything you need for a successful and high-quality life (apartment, cottage, car, travel, etc.). With this freedom, you can choose when and what you will do: work, travel, run your own business, lead an active life, devote time to your family. And at the same time, you will not be bothered by material issues.
There is no significant difference between expressions of financial independence or freedom. The main thing is to achieve a standard of living in which you do not need to worry about money issues, money works for you, and you fully enjoy a full and high-quality life. This is financial independence and freedom.
Financial independence levels
The following main levels of financial well-being are distinguished:
Pit. Spending more than income. At the same time, you have debt obligations to creditors and there are no savings. This is the worst stage.
Instability. Income is equal to or slightly higher than expenses. This state is not much different from the previous one. You have a job, as a rule, this is the main source of income. But when you leave, you can again find yourself in a state of financial hole.
Stability. In this state, income exceeds expenses. You have the opportunity to save money and create a “safety cushion”. Your well-being has improved markedly, but you still depend on your main active income.
Financial independence or freedom. This is the highest degree of well-being. At this level, incomes greatly exceed expenses. Moreover, the income is passive, the money comes without your direct participation. You have significant savings and investments working for you.
Before you start moving on the path to independence, try to determine what level of financial condition you are currently in.
The road to financial independence
So, you have determined at what level you are at the moment. Most likely, this is one of the first three. The good news is that you can always change your wealth for the better and become financially independent. The main thing is desire, aspiration, certain knowledge and skills in the field of investment, systematic steps towards your goal. Gradually, step by step, with a clear goal and a developed strategy, you can come to financial independence.
Analysis of the current situation
The first step towards financial independence is to analyze the current financial situation. It is very helpful to regularly record income and expenses. The budget should be prepared for monthly accounting of the flow of funds and for planning finances for the future. If your expenses are higher or almost equal to your income, it’s time to think about changes in your financial situation. The most versatile way is to reduce expenses or increase income. Analyze your spending and think about possible ways to reduce it. Smart economy gives good results. But remember, cutting costs can hurt your quality of life. Therefore, a more correct option is to search for additional sources of income, including passive ones. It is desirable that passive income be the basis of a higher state of financial independence.
Creation of reserve capital
Reserve capital is a mandatory reserve that will come in handy in case of unforeseen circumstances (loss of work, business, solving major domestic issues, treatment, etc.) that require large cash expenditures. Experts advise doing it in the amount of 3-6 months of your expenses. Let’s consider some rules for creating reserve capital:
Regularity of investments. Set aside a percentage of your wages or other income every month. It is better to do this right away, without waiting for the end of the month. Otherwise, the money earned can be spent.
Inviolability of capital until unforeseen circumstances occur. This may seem like the hardest part. Learn to restrain yourself from fleeting expenses for the sake of greater gain in the future.
Quick access to money. The money from the reserve fund should be available to you at any time in case it is needed to invest in your passive income. To keep money in the bank, it is best to open a replenishment deposit with the possibility of early withdrawal of the deposit without losing interest.
Fund replenishment. If force majeure did happen and you had to take part or all of the money from the reserve fund, try to return to replenishing it as soon as the situation stabilizes.
Once the contingency fund is created, you can move on to the next step in your financial path.
Achieving financial stability
Stability makes you feel more confident. You have enough funds, an airbag has been formed. Now the main thing is not to stop, but to continue increasing investments every month. As in any business, first you need to develop a strategy, understand what you are going to come to as a result of your activity. You also need to develop tactics for passing the intended path. At this stage, you need to clearly formulate specific goals and decide what you are saving money for. The goals can be short-term (buying clothes, household appliances, etc.), medium-term (buying a car, traveling, repairing an apartment) and long-term, requiring large investments (apartment, house, teaching children, etc.). After the goals are formulated, you can draw up a personal savings plan. He will help to prioritize, determine the exact amounts and savings instruments suitable for each goal.
Achieving financial independence
The top of your path is independence. At this level, you have complete freedom, you can do what you love, live in the place or country where you like, receive the highest quality service, services and goods, enjoy life to the fullest. At the same time, the issue of money is not important to you, your money works for you.
Obstacles to financial independence
What barriers can you face on your path to financial well-being? These are bad habits:
An impulsive waste of money. It is better to plan the purchase in advance. This is especially true for large purchases and things. Shop with a list, try not to fall for promotions and gimmicks.
Inability to save money. To live beyond our means, take loans and overpay interest to meet immediate needs. This is one of the worst financial habits.
Live for today. Do not try to form a “safety cushion” in order to have a reserve money in case of unforeseen expenses.
If you want to change your attitude towards money and learn how to manage it, you need to get rid of these habits.
Finance plays an important role in people’s lives. They give freedom. You become free to make decisions, you can do what you love, travel, live a full, interesting and fulfilling life. Lack of money and their irrational use deprives you of this freedom.
Any long road starts with the first step. It’s the same with the road to financial freedom. Define specific goals, create a strategic movement plan and get started!