What is Financial Freedom?

I’m sure that if you search the web you’ll find lots on this topic with everyone having their own specific definition of what Financial Freedom is. The basic meaning however will always be the same.

Financial Freedom is when you have enough money to live without needing to actively work each day. (There will always be some level of work in order to manage your finances and investments).

Imagine quitting your job and having enough money to live for the rest of your live! Did you read about how to measure your wealth? Well financial freedom is the ultimate goal.

 

A new way to measure your wealth

mansionMost people measure their wealth by looking at the value of their house and cars and other things they have. They see value and wealth in their “stuff”. Of course, you can include the value of your pension fund and other investments you have. This is definitely a valid way to measure your wealth (provided of course that the assets you’re taking into account are actually paid off), but I’d like to propose a new way to measure and track your wealth.

It all comes down to one simple question. How many months could you survive without a job? Another way to look at it is to remember that you could be retrenched or fired very easily – whenever your current employer decides that they no longer need you. How long can you survive without any income?

How to calculate this?

Firstly, you need to know what you monthly living expenses are. For this you need a budget. You can manipulate your budget a little as not having a job would definitely cause you to priorities your spending and you would almost certainly immediately stop all frivolous spending. Don’t forget about your debts as you would still need to be paying these! So know how much you need each month to service debts and survive?

Then, how much money do you have available? Think of any savings you have, or money that you could access. Only take into account money that is actually your own. By this I mean that you could possibly access a lot of money from your home-loan, or you could take a personal loan; but that is simply debt. How much money do you have that is your money and that you can access now? Some retirement and pension funds have rules about what age you can access the money at, so think about your situation right now. Don’t forget any other income you may have that would not be affected, such as rental, commission, royalties, etc (At this point we’re not looking at selling assets in order to survive, rather just look at cash and investments)

 

This excise could help you to relieve some stress if you see that you would actually survive many months without your income, but at the same time this could highlight to you if your finances are in a terrible state. Perhaps you won’t be able to survive even just one month.

When you lose your income, it doesn’t really matter what house you live in, what car you drive or how many diamond rings you have. These things can’t find you food on a day-to-day basis. Having lots of debt makes the situation worse and you could really end up in an awful situation!

The results:

Whatever stage you may be at, set yourself a goal to improve your situation.

0 months  –  This should be a HUGE WARNING sign to you to take charge of your financial situation immediately!

1 – 3 months – You are not in a great situation, but there is a little leeway should something happen regarding your income. Your situation is definitely not good.

4 – 6 months – You are probably better off than most people but don’t feel too comfortable here as things are still not great. You would most probably survive a job loss as you have some time to find a new job, but it would be a stressful situation!

6 – 12 months – If you are in this bracket then you should feel some relief that you could survive some tough financial circumstances. You are in a good position but don’t think about early retirement or that year of travel yet.

More than 12 months – well done, you are on your way to financial freedom! Don’t forget to keep checking your situation regularly and set goals towards the ultimate goal of Financial Freedom.

 

Pay yourself first

keyboardThis is one of those things that you’ve probably heard many times before and you know you should do it, but most likely you don’t. So let’s look at what is meant by paying yourself first, and how it will help you save.

To pay yourself first really means that once you have set up a monthly budget and worked out how much you can save each month, then you should transfer that amount into a savings pocket immediately after being paid. If your bank allows, you can set up a recurring payment to transfer the money each month.

We’re used to setting up payments for accounts and debt repayments, but we seldom take our savings “payment” seriously. You should think of this as another account that you have to pay.

The advantage of transferring the savings amount out to a Savings Pocket immediately is that you cannot be tempted to spend it. You can’t spend what you don’t have (well you can with a credit card but that is a discipline you need to solve for yourself)

Challenge

Work out how much you can save (either actual savings or extra payments towards debt) and set up an automatic payment now to transfer this money. If you’re not sure how to create a budget, read this blog.

The start

So what’s this page all about and why the cover photo with shoes and some random objects?

Well, I am forever striving to reach a state of “financial freedom” and although that term can mean different things for different people, I really would like to get to a point where I can be in control of my time and lay out my items needed for the day and spend it just as I would like to. Sounds great doesn’t it? Well I do fully believe it’s possible, it just takes focus and daily effort.

This page is set up for me to share things that I find along the way, and to create a community of like minded people who can help each other reach their financial goals. Join me in the Facebook Community and let’s see where this goes.

It’s so easy to let the chaos of life take over and to lose track of money and to forever be in a state of financial stress. It’s time to take charge of your money!