It is critical to integrate financial planning into your to-do list and cater for a secure future. A high-income job defeats its very purpose if you continuously live way beyond your means.
Similarly, if you have always been saving, average earnings need not imply a hand-to-mouth existence. When you achieve financial freedom, it allows you time to pursue your interests rather than only focusing on earning a living.
Every smart action on your part towards money management puts an end to sleepless nights spent dwelling on covering your living expenses. Your earnings should give you spending power and equip you with reserves to cater to unforeseen emergencies.
There is no overnight formula for achieving such financial independence; only gradual steps assist in making advancements into this territory. With each level you complete, your financial stress decreases. Moreover, you find yourself with more options to improve the quality of your life.
As youngsters, you are dependent on your parents. When you find yourself borrowing from others to cover your expenses as an adult, it is a classic example of a dependency in later years. To assess where you currently stand and help you navigate better, refer to these six distinct stages to financial freedom:
Stage 1: Solvency
Here you are capable of surviving as you fulfill your monthly financial commitments without depending on someone. You can clear your bills as your expenses do not exceed your earnings. Even if you still have a loan to pay off, you are not adding to your recurring expenses.
Stage 2: Financial Stability
When you successfully pay off considerable outstanding debts and keep your expenses low, you can commence saving. This cash reserve comes handy in emergency scenarios where otherwise you may have had to borrow to survive. Your savings make you self reliant and prevent you from getting deeper in debt.
Stage 3: Debt Freedom
Attempt to clear any significant debt like a student loan, a mortgage on your home or car, as now you are not merely surviving financially. You are spending within your means, and your earnings allow you to save. Hence, generating the requisite funds to clear all pending debts is much more achievable.
Stage 4: Financial Security
The funds diverted towards your savings are best invested wisely, assuring you of returns, whether short, medium, or long-term. You are at a stage of financial freedom when your investment income pays for your living expenses.
Your costs of housing, food, transportation, and other utilities are covered. The additional income from your job allows you extra indulgences.
Stage 5: Financial Independence
A point comes when you can invest more, thereby ensuring that the steady flow of investment earnings facilitates a comfortable lifestyle. At this stage, you have sufficient cash reserves to cater even for your future expenses. You may also consider quitting your job to pursue your dreams.
Stage 6: Financial Abundance
Reaching this stage of surplus implies you have a sound financial portfolio that meets more than just your basic needs. It allows you to divert your surplus funds in lucrative avenues or give you immense peace of mind.
Adopt a measured approach to achieve the process of financial freedom, step by step.
