By Desmond BREDU
The term "financial independence" along with "financial freedom" are among the most commonly used phrases in discussions about personal finance.
Despite their common usage, numerous people require clarity on the true meanings of these terms. This piece delves into examining financial independence, contrasting it with financial freedom, and explores ways individuals can expedite attaining financial independence.
To begin with, let's pause and tackle the core concept of financial independence. From my conversations with younger individuals, it seems that possessing substantial wealth is their idea of being financially independent.
This, however, represents just one aspect of the narrative. Achieving financial autonomy entails generating sufficient residual income to maintain your preferred standard of living perpetually once your primary source of earnings ceases. To numerous individuals, this equates to no longer depending on their traditional "nine-to-five" salary for livelihood.
This observation underscores the reality that financial independence differs for each individual. Ultimately, it comes down to maintaining one’s preferred way of living. For some who receive GH₵5,000 monthly through passive income, this sum suffices for sustaining their selected lifestyle. However, others might require amounts such as GH₵25,000 or even just GH₵2,000. It has consistently been my stance that personal finance matters are indeed personal, including achieving financial independence.
Let’s now tackle the idea of financial freedom. Picture a scenario where monetary concerns do not dominate your life or your interactions with others. Once financially free, you will find yourself liberated from basing every decision on finances. Instead, the emphasis shifts towards making meaningful impacts. Therefore, achieving financial freedom goes beyond merely attaining financial independence. To reach this state of financial freedom, one crucial stepping stone is first securing financial independence.
Attaining financial autonomy holds significant importance for multiple reasons. Primarily, numerous individuals view job security as a mirage. Factors such as technology, regulatory changes, and company downsizing continually affect employment statuses.
A significant number of companies carried out large-scale job cuts over the last three years following the onset of the COVID-19 pandemic. Additionally, regardless of whether such events affect you personally, everyone must consider retirement since it’s not feasible to remain employed for an entire lifetime.
Attaining financial freedom not only enhances your ability to assist those around you but also amplifies whatever brings joy into your life—be it traveling, enjoying vacations, or retiring early. Moreover, it’s crucial to emphasize that achieving financial independence is a voyage rather than an instant transformation. This objective necessitates persistent efforts, self-discipline, and endurance over time.
True financial independence has no quick fixes. Depicting this path visually helps make these ideas more understandable.
Now that we have set the stage, let's delve into ways to expedite reaching financial independence, regardless of whether you find yourself in a financially strained or secure phase.
Imagine your desired destination. Frequently, the initial step in any voyage involves envisioning where you want to end up. At this phase, reflect on what financial freedom signifies for you personally. Determine the specific amount needed to feel secure. Also consider the timeline within which you aim to reach your objective of becoming financially autonomous. It’s important to recognize that these aspirations vary widely among individuals. For instance, one might aspire to "quit working at fifty, return to their birthplace, and spend time nurturing farmland or grandchildren." Conversely, someone else may wish to stop full-time work at forty-five with plans to travel globally thereafter. Achieving such clear objectives can serve as a guiding light during your journey, keeping you both concentrated and inspired along the way.
Start Planning Towards It Once you've established a clear vision, the following step is to begin. Start this process with an honest evaluation of your current financial state and determine what actions are necessary to attain your targeted level of financial freedom. Identify which assets contribute to your earnings and pinpoint the liabilities or debts that require settlement. Divide your long-term goals into manageable tasks with specific deadlines for achieving key benchmarks. Setting these small, achievable steps toward a larger objective helps motivate me as I celebrate each minor victory en route to my primary aim.
Budget and Smart Spending Budgeting stands out as a prominent topic within financial literature. At its core, it involves spending less than what you make. Various methods and guidelines have been suggested to help with effective management. Remember that "personal finance is personal," so finding the right approach tailored specifically for yourself is crucial. If you're just starting out, consider using the 50:30:20 rule. According to this method, half of your earnings should cover fixed expenses, 30 percent should be allocated toward variable costs, and the remaining 20 percent should go towards saving and investing. To hasten your path to achieving financial freedom, focus on boosting how much goes into savings and investments—first by cutting down variable expenditures, followed by minimizing fixed ones. Generally speaking, increasing the amount saved or invested will expedite your progress toward becoming financially independent.
Increase your income/ earnings This step is crucial for speeding up financial independence. Depending solely on one stream of income may limit your ability to achieve true financial freedom. Evaluate ways to leverage your abilities into lucrative opportunities and enterprises that can supplement your main source of earnings. Expanding your income might involve acquiring additional qualifications or certifications, launching a part-time business, or enhancing your skill set to boost your professional trajectory.
Invest wisely The core principle of achieving financial independence involves generating sufficient passive income to support your preferred standard of living. Earning this type of income can be accomplished via various forms of investments, encompassing both financial and non-financial assets. Financial instruments like bonds, mutual funds, and stocks fall under the category of financial assets. On the other hand, examples of non-financial assets might consist of owning a business or real estate that generates rental revenue. When selecting an asset or investment strategy, assessing your personal risk threshold remains crucial. Remember, attaining financial freedom is a process; therefore, focus on long-term strategies rather than quick riches tactics and steer clear of undue hazards when making investment choices.
Consider your career: The path you choose in your career greatly influences your progress toward financial freedom. Consider whether there are chances for advancement and higher earnings within your current profession. Also, assess how steady your income stream is from this career. Moreover, the place where you work can either help or hinder your quest for financial self-sufficiency because different regions have varying costs of living, tax rates, and employment scenarios. Working in an area where wages tend to be lower can impede your efforts to achieve financial autonomy. Therefore, think about pursuing additional schooling, enhancing your skills, or even switching careers as these steps might more closely match your long-term fiscal objectives and hasten reaching them.
Regularly evaluate your monetary status As your circumstances evolve, adjust your approach accordingly. Once you've managed to clear your debts, consider boosting the portion of your income directed towards investments. Additionally, since we reside in an environment that is constantly shifting, it’s crucial to keep track of how these transformations impact both our daily routines and long-term finances.
It’s crucial that the methods outlined earlier can be cyclical and might not adhere strictly to a sequential order. Additionally, it bears repeating that individual finance is just that—personal—and these tactics should not be seen as all-encompassing. Despite this, adhering to these guidelines while continually enhancing our strategy will contribute to crafting a safer and more satisfying future, propelling us toward financial autonomy. In upcoming pieces, I’ll delve into common misconceptions and obstacles associated with reaching financial freedom.
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