www.taxprofessionals.com - TaxProfessionals.com
Posted by

8 Levels of Financial Freedom

8 Levels of Financial Freedom

When was the last time you woke up on a beautiful morning and felt happy and light, free from everyday rigmarole? You must have felt this when you were on vacation, and it was because you were away from your stressful daily routine and enjoyed the day off from those daily goals/deadlines.

Imagine waking up one beautiful morning and feeling happy and light, but this time you're not on vacation; it's just another normal day of the week. There is this calm, and you have more control over your life. What you are experiencing now is what happens when you have achieved financial freedom.

What is financial freedom? Is it that mountain top you can only aspire to but never conquer? Is the gold at the end of the rainbow what everyone is looking for? Or does it mean being in control of your own life? The truth is that financial freedom varies from person to person.

For some, a big part of financial freedom is having a heart and mind free from the cares of life. For Robert T Kiyosaki, entrepreneur and author of Rich Dad Poor Dad, financial freedom is the absence of fear. For famed life coach Tony Robbins, financial freedom means "working because you want to work, and not because you have to."

To some, the basic meaning of financial freedom can be more time to do the things you love and more time to spend with your family.

Rising work-related stress, shorter lifespans, longer life expectancies, households, and a rapidly changing world make it difficult to keep up with the speed at which life moves. These are some reasons that make financial freedom more crucial than ever. Take, for example, the concept of FIRE (Financial Independence, Early Retirement), which is gaining popularity among the younger generation. It is a movement characterized by frugality and very large savings and investments. With FIRE, you save up to 70% of your income, retire early and manage your expenses with small withdrawals.

To achieve financial freedom, you must first identify the level of financial freedom you want. Do you remember that feeling of joy and vitality when you wake up? Financial freedom can be divided into eight levels, and each of us can aim for a certain level depending on our goals in life. The 8 levels are:

  1. Savings and Investments: Financial freedom would mean having a good emergency fund and saving money every month for some who spend as much as they earn. If you're young, this might be a good place to start.

  2. Debt-Free: Several people have taken out expensive loans to achieve their short-term goals. For them, being debt free is a form of financial freedom.

  3. Save comfortably: Don't be too frugal, but saving 30% to invest in long-term goals can be a form of financial freedom for many of us. 

  4. Work-life balance: Some define financial freedom as maintaining a work-life balance; when you have the time to take regular vacations and follow some of your desires, tastes, or hobbies, it might be working out regularly at the local gym, playing sports with friends, learning to sing on a musical instrument, etc.

  5. Long Break: For some, financial freedom would mean having enough investments and an emergency fund to take an extended break from work to pursue a dream startup or take a trip around the world.

  6. Bare Minimum Retirement: Financial freedom can also mean having a good amount of accumulated wealth to retire to in a smaller city than the one you currently live in, with all your goals covered with low padding. 

  7. Maintain the Pace: Financial freedom can mean stepping back and sticking with your current lifestyle. It requires a large corpus to maintain daily expenses and to have all objectives covered with good padding to overcome worst-case scenarios.

  8. Not Slowing Down: Retire with a big margin of safety, with enough wealth to support your current lifestyle, accomplish all of your goals, have money to go on an exotic vacation, and even move on to the next generation's level of freedom.

Once your target level of financial freedom has been identified, the next step is to prepare a financial plan to achieve it. Set clear and achievable goals and strive to achieve them. Don't be intimidated by "financial planning" or other overbearing terms. Financial planning is more behavioral than intellectual.

The point here is that financial planning is a discipline. A discipline applied to your expenses and investments. This discipline gives you the confidence to achieve the financial freedom you desire over time. Financial planning is a behavioral aspect that can lead to financial freedom. Not sure of where to start from? Consult a tax professional.