Financial Freedom - part 1

What is Financial Freedom ?

In the simplest terms financial freedom can be best defined as the independence you get when you do not have to worry about money ever again. It is accumulating/obtaining that monetary figure through which you can live the life of your choice for the remainder of your days. This monetary figure buys you freedom to do anything you want – explore new careers or hobbies or simply retire on a beach.

The ability to do what you want, when you want, with who you want, for as long as you want, is priceless.’ ― Morgan Housel

Your goal to achieving financial freedom is to ensure that over a period of time through one or more income sources you manage to accumulate enough wealth that it can feed your cash flow requirements for the remainder of your life.

Now two questions arise, how would you know if you have accumulated enough money. What is the right number to aim for and what are some good habits to help you achieve your goal ?

Calculating this number is a topic which merits its own discussion and I will cover this in detail in an upcoming post but for now lets look at some of the best practices we can use to get ahead in these inflationary times.

5 steps to Financial Freedom

Manage your Cash Inflow

To get anywhere in life a simple rule must prevail in your life, your Income should be greater than your Expenses. If this is not the case today then take a long hard look at your expenses and cut any expense you can (see next point). If you can't cut anything then simply upskill. There is no other way out, upskilling will take time so steal time wherever you can and learn a new skill which you can monetize and then keep working till you monetize it.

I understand this is easier said then done, but the first step of this journey is to have a surplus cash every month.

Manage Cash Outflow

‘A penny saved is a penny earned’ - Benjamin Franklin

The only way to improve something is to measure it. We want to work on our expenses so lets start tracking them.

Yes, its boring, repetitive and at times painful but most often its the boring things which make money.

Tracking Expenses

1. Track your expenses on a weekly manner, add a reminder in your phone . Few things to note

2. Excel helps

3. Create categories like, Mortgage/Rent, Groceries… etc in excel. Define maximum limits for each category for ex. if the budget to eat out in a month is $100 then it better not exceed $100 and if it does, reduce the eating out budget next month by that amount. Yes, adults need punishment too to behave in a disciplined manner

4. Input numbers on a weekly manner in the excel, this is not something you will ever stop doing, its part of your life. You can miss a week but not more.

Build an Emergency Fund

1. Once you have monthly surplus cash then the next step is building an emergency fund.

2. What’s an emergency fund you say ? - Well imagine this not so fun scenario where you got laid-off today and so did you partner, bills are piling up and the job market is not great anymore. Who’s paying the bills because maxing out credit cards is a sure fire way to financial ruin.

3. Emergency fund is for such rainy days because such days are bad enough without the financial pressure but with the financial pressure they are down right cruel. Only 2 questions should be asked regarding the emergency fund - How many months can it support us when one of us looses their job ? and how many months can it support us when both of us loose our jobs ?

Manage your Investments

‘Make thy gold multiply’ - Richest Man in Babylon

1. Alright we have our emergency fund and we are climbing the ladder slowly and steadily. Onwards and upwards.

2. Now we talk about taking steps to build some wealth. Prudent investing is a time tested method to increase your capital. Find ways to grow your investments at a rate of growth much higher than the rate of inflation.

3. Various approaches have been highlighted but the one recommended again and again by experts in the investing space is that if you do not know much about stock markets and don’t have the time teach yourself then go for passive index investing. Index investing is basically taking a bet on the economy and being invested in an economy for a 10 year or longer period ensures your wealth grows without the taxman interfering.

4. Other avenues like real estate might be a little illiquid and require a more hands on approach but offer higher risk does offer higher return (mostly)

5. The key is to beat inflation in the long run and let your gold(dollars) multiple in the long run

Manage your Net Worth

1. Managing net worth means finding your financial net worth and keeping a track of it. This is essentially your netfinancial assets in the world. It could be a $1000 or $1,000,000. Its good to know what you are worth especially if you are focused on increasing your net worth

2. We do this through financial statements. A financial statement depicts the financial health of a company. Its best to create something similar but much less complicated for ourselves

3. Create an excel file where you simply create an Assets column and list down all your assets (house, car, cash, investments) and create a liabilities column which lists down any liability (outstanding mortgage, car loan etc.) you have. The Asset - Liability figure is called your Net Worth. This is the number you track every month to see how you are doing.

4. If tracking it every month is a bit much then atleast note down the cash and investments you have at the end of every month and track that. This should give you an approximate sense of how your wealth is increasing on a month on month basis

And there we have it, a 5 step process towards achieving financial freedom. These principles have been stated across resources countless times and if you would like to go through one such resource then spend some time with this classic book - The Richest Man in Babylon, its a wonderful read.