Everyone longs to have financial stability at some point in their lives. However, for many, this stability is usually a stepping stone towards attaining financial independence and/or financial freedom.
These terms are often used interchangeably, but there are distinct differences between the two.
Let’s take a closer look at financial independence and financial freedom and why you should strive towards them.
What is financial independence?
People typically spend the first two decades of their lives being dependent on their parents and relying on them for resources. However, once they are on their own, they are expected to manage their own finances and take care of their own needs.
Your first few years on your own can be challenging, as you struggle to make ends meet on a regular basis. In addition to working low-paying positions, many young people are burdened by student debt. This debt can be a major stressor that keeps you from taking risks and investing in your passions. At this stage of life, you are most likely living paycheck to paycheck.
Even though you are no longer dependent on your parents, a portion of your finances will still be tied up with paying back your debt. In this scenario, you may not be considered financially independent until your debt has been paid off.
For many women, their debt burden often carries over until they are in their 40s or even their 50s. However, once it has been paid off, they may finally be able to live the comfortable life they have always dreamt of having. They no longer need to set money aside for debt payments. They have at least a six-month savings into an emergency fund to cover living expenses should something happen with their current job status. They’re starting to think more seriously about putting more into retirements accounts, or retirement savings.
People who are financially independent are in a stable position where they can maintain their current lifestyle until retirement, and with enough savings to keep them going for several years after.
What is financial freedom?
Financial independence is usually viewed as a stepping stone towards the eventual goal of financial freedom. While the former refers to the idea of liberating yourself from your debt and burdens, financial freedom refers to the concept of setting up mechanisms that provide you with passive income for the rest of your life.
With financial freedom, a sense of financial security comes. You understand the importance of making money work for you, your net worth has increased and you have learned to build wealth. This allows you to enjoy more than the bare minimum in life, allowing you the ability to enjoy your passions and helping others.
Every woman should strive to attain financial freedom before retirement. After all, your golden years can be spent exploring the things that are most important. If you do decide to downsize, it will be because you choose to, and not because you have to.
How to gain financial independence
Many people are financially dependent on their spouses for a large portion of their lives. Relying on someone else to support the family lifestyle can create its own challenges, as it makes you less likely to take the steps you can to help achieve financial freedom. During the years that you are financially dependent on a spouse, it is wise to invest in life insurance.
If you have recently begun living on your own or have become the primary breadwinner in your household, gaining financial independence can seem like a daunting task. However, it is still possible to do it, even at a later age.
Some methods for improving your chances of gaining financial independence include:
Budgeting is a practice that should be followed by everyone, regardless of their income level. However, proper budgeting is especially critical, if you wish to accrue enough savings for a comfortable retirement and be financially free.
It is possible to start budgeting at any time in your life. However, it is best to start while you still have a steady income stream. All budgets can be broken down into three primary components: needs, wants, and savings.
One of the most effective budgeting techniques is the 50/30/20 rule. In this budget, you allocate 50% of your income towards essential needs, such as food, rent, and electricity. Then, 30% of your income can go towards your wants, which are non-essential expenditures, such as eating at restaurants, purchasing gifts, or going to the movies. The remaining 20% of your income should be set aside for retirement.
However, if you have outstanding debts that need to be taken care of, you may need to spend a smaller portion on wants and savings. This will be a temporary measure until your debts have been repaid. Once you have crossed this hurdle, your savings can start going towards your retirement.
There are a number of different budgeting techniques you can use, but hopefully, you will put one into practice, or update the one you’ve been using for a while.
Additional income streams
Finding a secondary source of income can help boost your savings for retirement. It’s not uncommon for people to take on “side-hustles” in their free time. These are usually flexible, part-time jobs that provide them with extra cash. Think about hobbies you have that you can turn into a profit by selling online. Some other ideas include:
- Instructing yoga or exercise classes
- Managing social media accounts for others
- Airbnb hosting
How to gain financial freedom
Attaining financial freedom can seem like a distant dream for many women. Saving up enough money for retirement is already a challenge, so how can you expect to overcome that hurdle and still have money left over for new hobbies and travelling?
As mentioned earlier, the key to attaining financial freedom is to have sources of passive income in your retirement. These income sources may be from your earlier investments, as your goal should be to get your money to work for you.
Some investment strategies include:
- Buying stocks when they are cheap and selling when they have appreciated in value. However, knowing when to buy and sell takes experience and knowledge.
- Purchasing a diverse range of stocks. For example, if you are investing in stocks for renewable energy companies, you may also want to invest in stocks from traditional energy companies.
- Purchasing real estate in up-and-coming areas, as they are likely to appreciate in value
- If you have the time and talent purchasing a fixer-upper and then flipping it can provide returns.
Your journey towards financial independence and eventually financial freedom won’t be an easy one. However, with enough effort and perseverance, it is possible to accrue enough savings and passive income sources to live financially free.
When you are at a point where you are ready to buckle down and get serious about building wealth you may want to find a well respected financial advisor that you can trust.
I always advocate trust but verify. This is your financial future. You have worked hard. It makes financial sense that you understand the aspects of investing, consequences on taking on debit for investments, rate of returns, probabilities, tax consequences, etc.