What exactly constitutes being financially free? The reality is being financially free may mean different things to different people and the answer to this question will largely depend on a number of things such as your own personal circumstances, your upbringing and your outlook on life.
To me being financially free means not having to worry about money at all, or more precisely not having to worry about whether or not you have enough money to pay the bills. To have accumulated enough to know that your expenses are always going to be covered and you have investments which are paying you a regular income and that you have a positive cash flow – that is that your income is greater than your expenses.
It doesn’t mean that I want to buy a huge house, a flashy sports car and life the life of a celebrity. It doesn’t mean that I never want to work, but rather have more flexibility in when I choose to work and what I want to work on.
What are the biggest obstacles to becoming financially free?
One of the main obstacles to becoming financially free stems from the traditional advice that most of us receive from our parents, the education system and life in general.
The Poor Mentality
Go to school, go to university, get good grades, get a job, get a house, get a car, keep up with the Joneses. People end up with student debt, a house they can’t really afford, a car they can’t really afford and go on holidays they can’t really afford.
Now I’m not saying buying a house is a bad thing. However you don’t need to buy the biggest house that you can get based on what the bank is willing to lend you…. Having a car isn’t a bad thing either if you need one but you don’t need to get a car loan that costs £1,000 per month. People generally spend money they don’t have to support a lifestyle that they think they deserve right away without making any initial sacrifices or putting in the work to get there. They are living pay cheque to pay cheque and therefore have to carry on working to support that lifestyle and repay debts.
The Rich Mentality
The Rich Mentality on the other hand is focused on acquiring assets rather than liabilities. Not buying things you don’t need. Generating passive income rather than spending the rest of your life working for ‘the man’. If this is all new to you I would highly recommend you read Rich Dad Poor Dad by Robert Kiyosaki. This is number one best selling personal finance book of all time and teaches some simple but essential lessons that you must learn if you are serious about moving away from the poor mindset.
Fear of Failure
The fear of failure is a major hurdle for many people and why most people will get a steady job and work for someone else for their whole life. If you are afraid to put time and effort into earning income out with your regular 9 to 5 because you think you won’t be able to make a success of it then you are never going to achieve true financial freedom.
If you want to achieve financial freedom you have to be willing to accept failure. Failure is the best teacher and nobody get’s it right first time. You have to be willing to put the time and and accept that you are going to fail. However if you keep at it eventually you will succeed.
What is considered financially independent?
Financially independent is essentially the same as financially free. It is defined in Wikipedia as “Financial independence means you have enough wealth to live on without working. Financially independent people have assets that generate income (cash flow) that is at least equal to their expenses.”
How can I be financially responsible?
Being financially responsible is different from being financially free but without being financially responsible you will never achieve financial freedom. How to be financially responsible is a whole posts worth of content on it’s own. However to me there are three main elements.
Pay Yourself First
Ask any financially free free person and they will tell you this is the most important part of becoming financially free. Pay yourself first, what does it mean? It means that when you get income, whether that’s your regular salary or money from a job you have done on the side, you pay a percentage of that to yourself first – you take it and place the money in a savings or investment account that is going to make you money. How much should you pay yourself? As much as possible is the obvious answer to this. However a realistic goal for most people and the minimum recommended by most financial experts is 10% of your income. Personally my long term goal is to save 40% of my income (I’ve got a long way to go!).
Have An Emergency Fund
Having an emergency fund is a key part of being financially responsible. The general consensus is you should aim to have 3 – 12 months of living expenses saved and not to be touched unless there is a genuine emergency; like the roof falls in or your car breaks down. Not that you don’t have the latest 65″ TV. Having an emergency fund that you can turn to when disaster happens means you avoid putting that cost onto a credit card and getting back into debt.
Live Within Your Means
Forget about keeping up with the Joneses. Just because your neighbours have decided they want to drive about in a brand new Range Rover doesn’t mean you have to. Can they actually afford it? Or are they living the life that you now understand to be a sure fire way to never achieve financial freedom? Live like others wont now so you can live like others cant in the future. You can have a car if you need one, heck it could even be a nice one, as long as it’s within your budget. A real budget where you are paying yourself 10% first and meeting all your expenses while having income left over. Not the fantasy budget you previously created.
How can I get financial freedom?
I’ll let you know when I get there! What I do know however is that it starts with having the right mindset, being willing to make sacrifices, put in the effort and follow the rules of being financially responsible. If you are willing to adhere to those basic elements then you are giving yourself a good chance of one day being able to say you are truly financially free. I’ll see you there!
by Jon Craig
I am the creator of Project Financially Free and I started this journey to both educate myself and share my insights on personal finance. I’m passionate about financial literacy and I invite you to join me on this transformative path. See more.