In a world where financial stability plays a crucial role in our wellbeing and future aspirations, the concept of financial freedom stands out as a beacon of empowerment.
Financial freedom is the ability to make life choices without being constrained by money considerations. It goes beyond just having a comfortable income; it embodies the power to live life on your own terms, pursuing dreams, and finding peace of mind through a secure financial foundation.
To understand how the post-pandemic, high-inflation environment had impacted the nation’s thinking around financial freedom, MLC commissioned research to explore the aspirations of Australians across generations, genders, and demographics, with more than 2,500 people surveyed.
Released in May 2023, the Financial Freedom Report 1 uncovered the aspirations of modern Australia.
As the most common aspiration held by Australians was financial independence, with 55% of people surveyed sharing that goal, this guide gives you a broader understanding of what financial freedom is and how to best go about achieving it.
DEFINING FINANCIAL FREEDOM
Financial freedom is a state where your passive income (from investments, savings, or other sources) covers your essential expenses, allowing you to sustain your desired lifestyle without being reliant on a traditional 9-to-5 job.
It’s about breaking free from the shackles of living paycheck to paycheck and transcending the cycle of debt. This state enables you to allocate more time and energy towards your passions, personal growth, and meaningful experiences.
Why financial freedom is important?
The journey to financial freedom
Attaining financial freedom requires careful planning, disciplined saving, and strategic investing.
UNDERSTANDING YOUR FINANCES
Understanding key concepts such as calculating your net worth, tracking your spending, and creating a budget can significantly enhance your financial wellbeing.
To calculate your net worth, follow these steps:
Tracking your spending allows you to identify patterns, cut unnecessary expenses, and allocate resources more efficiently.
A budget helps you allocate your income wisely, avoid overspending, and build a solid foundation for your financial future. To create an effective budget:
One of the most significant aspects of financial wellbeing is effective debt management.
Understanding the distinction between good and bad debt is essential for making informed financial decisions. While debt is generally seen as something to be avoided, there are instances where it can be beneficial.
Good debt is an investment in your future. It typically involves borrowing money for assets that have the potential to increase in value or generate income over time. For example, education loans, mortgages and business loans.
Bad debt is money borrowed for items that do not appreciate in value and can lead to financial stress. For example, credit card debt, consumer loans and payday loans. Paying off debt requires a combination of discipline, planning, and commitment. Here are some effective strategies to help you become debt-free:
Debt consolidation is a strategy that involves combining multiple debts into a single, more manageable loan. It can simplify your financial life and potentially lower your interest rates.
SAVING AND INVESTING
Building an emergency fund
Life is unpredictable, and unforeseen circumstances can wreak havoc on your financial stability. This is where an emergency fund comes to the rescue.
An emergency fund acts as a safety net, ensuring that you’re not forced to rely on high-interest loans, credit cards, or deplete your long-term investments to cover urgent expenses. To build an effective emergency fund aim to save three to six months’ worth of living expenses. This should cover essential costs like housing, utilities, groceries, and debt payments. Allocate a portion of your income each month towards your emergency fund and keep your emergency fund in easily accessible liquid assets such as a high-yield savings account or a money market account.
Investing for retirement (super): Securing your golden years
One of the most effective ways to ensure a comfortable retirement is by investing in retirement funds, more commonly referred to as superannuation or super.
The power of compounding
Superannuation harnesses the power of compounding. Compounding allows your investments to grow not only on your initial contributions but also on the returns generated over time.
Tips for successful retirement investing
Passive income: Rental income or dividends from investments
Generating passive income is a key strategy for achieving financial independence. Two popular avenues for passive income are rental properties and dividends from investments.
Rental properties can generate monthly rental income, which helps cover mortgage payments and expenses while leaving room for profit. Real estate properties have the potential to appreciate over time, providing the opportunity for capital gains in addition to rental income.
Dividends from investments
Investing in dividend-paying shares or funds can also yield passive income. Steady income and the option to reinvest dividends for compounding growth make dividends attractive.
Considerations for passive income
INCREASING YOUR INCOME: STRATEGIES FOR FINANCIAL GROWTH
Here are three effective strategies for boosting your income:
Strategy 1: Negotiating a pay rise
Negotiating a pay rise can significantly impact financial wellbeing. Be sure to prepare thoroughly; choose the right time (e.g. after completing a successful project or during a performance review); communicate your accomplishments; and be prepared for negotiation.
Strategy 2: Starting a side hustle
In this era of digital connectivity and diverse opportunities, starting a side hustle has become an increasingly popular way to supplement your income.
A side hustle allows you to explore your passions, diversify your income streams, and potentially turn a hobby into a profitable venture.
Assess your skills, hobbies, and interests to pinpoint areas where you can offer value to others. Create a schedule that accommodates your full time job and side hustle commitments. Begin at a manageable scale and leverage online platforms and marketplaces to showcase your services or products.
Strategy 3: Investing in yourself
Investing in yourself is an invaluable step toward increasing your income potential and personal growth- a long-term strategy to achieve financial freedom. Whether through education, skill development, or networking, self-investment can yield significant returns over time.
ACHIEVING FINANCIAL FREEDOM
Achieving financial freedom requires more than just wishful thinking; it necessitates a strategic approach and consistent effort.
The journey to financial freedom begins with clearly defining your financial goals. Start by identifying both short-term and long-term objectives. Short-term goals might include building an emergency fund, paying off a high-interest debt, or saving for a holiday. Long-term goals could involve retirement planning, purchasing a home, or funding your children’s education.
Make your goals specific and measurable and rank them in order of priority to allocate your resources effectively.
With your goals set, the next step is to create a comprehensive plan to reach them. Start by assessing your current financial situation and create a budget. If you have outstanding debts, devise a plan to manage and eventually eliminate them.
Investing is a crucial aspect of achieving financial freedom. Research different investment options based on your risk tolerance and goals; and stay informed about personal finance, investments, and money management.
Embarking on the path to financial freedom requires dedication and perseverance. To stay motivated and accountable, consider the following strategies:
1 Insignia Financial – Uncovering the aspirations of modern Australia, Financial Freedom Report – May 2023 – McCrindle Research.
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