How to start planning for Financial Freedom and why that is important

Diana Neculai·

Person sitting on a pile of coins - achieving financial freedom or independence

More often than not, we associate wealth with expensive possessions like big houses and luxury cars. However, the most underrated power that money can bring is freedom: being able to wake up every morning and say “Today I can do whatever I want!”. When it comes to financial freedom, wealth is not what you see, but rather the intangible aspects that are not visible at a first glance.

Financial freedom means being able to live the life you desire without having to work for money ever again. It doesn’t mean you will not work, but you will no longer have to work for a set salary at the end of the month. You can pursue your passion and do work that you love and brings you joy. If this happens to bring you money, then all the better, though money is not the centerpiece.

In order to have financial freedom, you need to have enough savings, assets, investments, and cash on hand to afford the life you desire. Financial freedom should not be confused with living a frugal life. When you plan for financial freedom, you should think about the lifestyle you desire, and if frugal life is not it, then plan accordingly.

Many people achieve financial freedom when the time comes for them to retire. Though, financial freedom is achievable much sooner than that. To assess how long it might take you to reach financial freedom with your current personal finances, you can use Segmio’s Financial Freedom Calculator . It will give you a sense of where you are in terms of reaching financial freedom, and you can see what aspects of your personal finances can be improved to get there faster.

You can become financially free in many ways: saving more money and growing your savings, increasing your income, and/or spending less. We’ll go over each of them and explain what they mean to financial freedom.

Decreasing your expenses or spending less

We consider the topic of spending less or decreasing your expenses as being a sensitive one. Many people dismiss the idea of financial freedom because they think they must sacrifice evenings out with friends, dinners at a restaurant, and so on. This is not true, and you should not give up what makes you feel good.

Decreasing your expenses or spending less to achieve financial freedom is more about taking control over your expenses first and foremost by tracking them. Not all expenses are equally making you happy. Some are just wasteful spending habits. Tracking your expenses could help you identify such black holes in your pocket and zip them up.

Increasing your income

Don’t mistakenly understand increasing your income as changing your job for a better-paid one. Creating an income that derives from multiple income sources could provide you with the freedom that no job would in the long run.

Tom Corley did a five-year-long study on wealthy individuals , and, among many interesting things, he discovered that the most common seven sources of income are: earned income, business income, interest income, dividend income, rental income, capital gains, and royalty and licensing income.

Increase and grow your savings

Savings are the difference between income and expenses. They are the remaining money after you subtract all your expenses from your after-tax income. Your savings are a key element of your financial freedom. Your savings are the ones that will produce enough income to support your expenses and make you financially independent.

To grow your savings, besides your monthly contributions, you need to invest the saved money and generate a yearly return. You can use Segmio’s Savings Calculator to see how your savings can grow depending on the adjustments you make on monthly contributions and yearly returns.

Improve Yearly Returns on savings

In the early days of your journey to financial freedom, higher savings value more than the yearly return. If the amount of your current savings is low, then the money you receive as a yearly return will not be a large sum even with a high yearly return percentage.

Once you grow your savings, investment returns can make you wealthy, but whether an investment strategy will work or not, and how long it will work for, is always unpredictable and uncertain. Therefore, changes in yearly returns are hard to control. Higher returns often come with greater risks and less principal protection. After all, you don’t want to lose your hardly-made savings, right?

Usually, lower returns come with fewer risks and increased principal protection. Although the idea of low returns is not appealing, the power of compound interest should never be underestimated.

The path to financial freedom is sprinkled with a lot of benefits

You don’t have to reach financial freedom to start noticing its benefits. Once you start making some progress and increase your financial runway, you will immediately feel more in control of your time and you will be relieved of the constant stress caused by money. It might be the scary boss that you will now dare to face because you have a financial safety net; or a job you hate that you are now willing to change because you have enough money and time to quit and look for a job that you like instead of taking the first opportunity that comes in your way.

If you are not familiar with the term financial runway, you can check out Segmio’s Financial Runway Calculator .

The Bottom Line

The sooner you start planning for financial freedom, the more time you will have to enjoy it. Financial freedom is not obtainable overnight, but the benefits will come sooner.

It’s an initial effort to understand and learn the financial knowledge involved. Planning for financial freedom also requires discipline to change some of your spending habits and create new habits that work towards your goal of being financially free. Luckily, the benefits of a financially independent life outweigh the effort to get there by many times.

We only have one life to live, so why not live to the fullest by becoming financially free?