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What is Financial Freedom? – Formula, Types, Works, and More

What is Financial Freedom?

Financial freedom consists of having enough financial means to cover all your needs in a specific time, without depending exclusively on a salary.

The concept of financial freedom refers above all to the feeling of not being tied to a job simply because you need the money your boss pays you to be able to live.

The Formula of Financial Freedom

financial freedom

You could say that people who have achieved financial freedom have been able to cope with the biblical curse of earning their bread with the sweat of their brow.

But they have not done it because they are rich or have understood the definition and meaning of entrepreneurship better than others. Because they have managed to save and generate a series of income that allows them to dispose of their lives want.

Here we can see two basic elements that are essential to obtain financial freedom:

1. Savings

  • If you are thinking about achieving financial freedom, the first thing you have to do is start saving.
  • If you manage to devote less than you earn, you can build wealth essential to send your boss on a walk with the remainder.

2. Passive Income

  • Passive income is those amounts of money that come to you without you having to sell your time.
  • They can be the returns on an investment, the benefits obtained —for example— with an info-product, or the copyright generated when you sell a book written by you.
  • Therefore, the formula for financial freedom base on this relationship: savings + income> fixed expenses necessary to live.
  • Only when the sum of your savings and your income is higher than the amount of money you need to cover all your fixed and variable expenses can you consider that you have financial freedom.

What are the Types of Financial Freedom?

financial freedom

To achieve financial freedom, we have to assume that a process must be divided into phases or financial independence types.

Unless you are a millionaire from birth, it isn’t easy to achieve financial freedom without first going through the following types:

1. Financial Security

  • The first phase is to move from the uncertainty of not making ends meet to the situation of financial security.
  • We can consider that someone enjoys financial security when they have enough funds to cover their necessary expenses (electricity, water, mortgage or rent, food).
  • When you get to this point, you will not be able to leave your job yet because you have more expenses to face and not cover by your savings and fixed income.
  • Financial Independence
  • In this second phase, you have obtained a more significant amount of stable income. Your investments have grown to the point that you can cover all your basic and extraordinary needs without the need for salary.
  • You will not only have money to pay for the house, electricity, food, etc. Instead, you can go out for dinner one day, go on vacation, buy a car or an appliance.

2. Financial Freedom

  • The last step is what everyone aspires to. It consists of having so much money saved that, no matter how bad things turn out.
  • It could live covering your fixed and extraordinary expenses without having to work.
  • However, it should be made clear that, unless you accumulate colossal wealth, financial freedom most likely does not allow you to live at full speed, giving you many luxuries and whims.

How does Financial Freedom Works – for Beginners

If what you are reading appeals to you, we will show you how financial freedom works because we are sure that you are not familiar with this concept.

Keep in mind that this is something that not achieve in a few months. You have to work hard and be frugal and conscientious for many years.

Anyway, suppose you want to live a better retirement – without depending on state pensions (which will sooner or later reduce) -, or plan to “fire” your boss in the medium or long term. In that case, you must follow this plan aimed at achieving freedom financial for beginners :

1. Analyze

  • Just as a company always keeps accounting to know its economic reality, you cannot achieve financial freedom without knowing your starting point.
  • To do this, make an incline of all your debts: mortgages, school loans, car loans, credit cards, and any other debt that you have accumulated.
  • Don’t forget to include money that friends or family have lent you over the years.
  • Now take a deep breath. Once again. Then add the total.

How Much

  1. If it is a large amount, do not panic since we have written this post so that you learn how to pay it all later.
  2. Suppose it’s a small amount, congratulations! Feel free to share your financial freedom tips in the comments at the end of this article.
  3. Take a look at all the money you’ve saved below.
  4. Make a list of all your current funds: cash, bank accounts, stocks, treasury bills, outstanding debts, retirement savings account, or other retirement plans. Then add the monthly payments you receive like your salary, the income you receive from other jobs, etc.
  5. Keep these statistics in mind as we work through the following tips to achieve your financial freedom.

2. Write your Goals

  • Achieving financial freedom must be associated with an emotional goal. Your goal may be, for example, to get out of debt and save for a home you own.
  • And when you see how your debt decreases and your savings increase, you will experience a good rush.
  • The usual thing is to get so excited about seeing the numbers change that almost everyone works harder and works harder to earn more money and see a more significant change in their finances.
  • The best thing is to write down those objectives and analyze whether you are meeting them from time to time.
  • Below you will discover a template that you can download and use to write down your financial freedom goals and what you will do to achieve them.
  • You may not get everything you want in a month. But one year is enough time to review your progress and add corrective measures if you are not meeting your initial goals.
  • It is also vital that your goal tie to a specific number that you want to reach. Believe it or not, you will start working towards those goals without even realizing it.
  • Knowing precisely what you want to attain will make achieving financial freedom much easier.

3. First, Financial Security

  • Even if your ultimate goal is to achieve financial freedom, you should go little by little.
  • It means that it is not very common to achieve financial freedom without first reaching financial security unless you hit a fair ball or hit the lottery.
  • Therefore, your first financial objective should ensure that your funds can cover your essential fixed expenses.
  • Start there, and then it will be easier for you to reach financial freedom.

4. Create a Passive Income System

Although you will see that it is imperative to save in the next point, you must also generate this income type. Because as long as you do not articulate this income-generating system, you will be wasting your time (since in a job, you sell your time to your boss, and the time available to work is limited).

Start rational about how you are going to generate income like these periodically:

Interest

  1. A good investment generates returns in the form of interest or dividends. If you buy shares, prizes are distributed from time to time.
  2. And if you buy treasury bills, the state agrees to pay you some interest to remunerate you periodically.

Rents

  1. If you are a property owner, you can rent them to obtain economic returns in the form of rents.

Recurring Income

  1. There are many ways to earn additional money that you can exploit. For example: if you sell affiliate products or have a membership.
  2. It will receive amounts of money from time to time as payments for the service offered in the membership or commissions for the sales you make through your website.
  3. Analyze what your competitive advantage is and take advantage of it to get more recurring funds.

Copyright

  1. If you write a book, you will entitle to a percentage of that sale as copyright each time it sells.
  2. The same happens if you compose a song since Spotify’s reproduction, for example, generates royalties.
  3. And if you sell a course, every time someone buys you access to that course, you will be making money without doing anything.

5. Save Everything

    • Remember that the richest is not the one who has the most but needs the least.
    • For this reason, although we live in a hyper-consumerist society, we also contrast a trend with more and more followers: minimalism.
    • Minimalists preach that it is possible to live with fewer things. It is not necessary to have 20 clothes if you can live with 5.
    • Nor is it necessary to have two cars when with only one you would more than serving.
    • Learn to be frugal and to live with fewer things. That way, you can reduce your unnecessary expenses and start saving money.

Calculation of Financial Freedom

Now that you know it let’s do a calculation to find out how to achieve financial freedom and how to answer the question of “how much money do I need to live without working?”

This financial freedom calculator base on three elements:

1. Find out How Much Money you Have

  • First, you must know how much money you would have right now if you stopped working.
  • To do this, add the cash you have at home, the one that is deposited in your checking accounts, deposits, and very liquid investments (that you can recover in less than a week).
  • It is about knowing what state your finances are in if you suddenly stop receiving your salary.

2. Calculate your Monthly Expenses

  • Analyze in detail all your fixed and variable expenses. To do this, you should think that payments make monthly (such as electricity, gas, or the mortgage) and others.
  • It can be annual (such as insurance policies).
  • Only with that information will you know if you spend more than you enter or if you can save.

3. Calculate your Financial Freedom

  • The financial freedom calculator helps you know how many months you could live if you lose your job, and therefore your income stream is interrupted.
  • For example: if you have 20,000 euros, and your monthly expenses are 1,000 euros, if you left your job correct now, you have financial freedom of 20 months.

Also Read: What Are Altcoins? – Types, Pros, Cons, Understanding, and More

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