Financial freedom is a term that has been thrown around personal finance circles for a long time. For many people, it means being able to afford what you want and when you want. But sadly, this is a misguided view on what financial freedom really means and no one in the world will reach a point where they can just point at something and buy it. Not even billionaires will be willing to point at a building or franchise and decide to buy it on a whim. There are many different responsibilities and costs involved when making large purchases, and thinking that financial freedom means having all the money in the world is a very short-sighted view of the world.
What is financial freedom?
First, let’s demystify the term and give you a solid understanding of what financial freedom actually means.
Financial freedom implies that you have the freedom to do what you like and follow the path that you chose to. For instance, if you’re currently working at a dead-end job because there are no better options and you need to provide for your family, then your situation could be considered lacking financial freedom because of your mentality. You’re putting your family ahead of your own personal desires, and while this is the proper thing to do due to your responsibilities, it means you don’t have financial freedom. Being tied down to a job that you don’t like just to pay the bills is the complete opposite of financial freedom, and even if you’re making a ludicrous sum of money every paycheck, it doesn’t make you happy.
You may have noticed a small pattern already; financial freedom directly correlates with your happiness. If you want to be financially free, then you also need to become happy. It requires a change in not just your lifestyle, but also your mentality. That doesn’t mean you should leave your children to become someone else, but it doesn’t mean you should stay at a job you don’t like just to provide for your family. Reaching the status of financial freedom should trigger a sense of warmth and content in your mind, and it’s different for everyone due to different people wanting different things.
In short, you need to do some soul searching if you want to reach financial freedom. You need to understand what makes you happy in life and you need to learn about all the ups and downs of life in order to become the best version of yourself.
The illusion of money and freedom
Money and freedom are two things that everybody wants, but very few people can lift the veil to fully realise what it is they want. Money isn’t synonymous with happiness and it also doesn’t make you rich. In fact, many people realise that after they gain a larger salary, they often indulge in pleasures and buy new houses that cost, percentage wise, the same as their old lifestyle. Imagine moving from a 2-bedroom apartment with your family to a 6-bedroom mansion. The amount of money you pay for rent is going to be ludicrously high, but you’ll be able to afford it based on your new salary. However, as a percentage, you’re probably contributing the same or even more to your rent than you were before. This is just one of the examples of how having money doesn’t necessarily make you rich—it’s all about your mentality.
However, someone smart that knows what to do with their money will approach the situation differently. Think of it this way; someone makes a decent salary and pays roughly 20% of it in rent. Once they get a bigger salary, move jobs or grow their business, that salary suddenly becomes just 10% of their rent. Instead of moving to a large home just because they can afford it, someone that understands how money works will stick with their current home. As they improve their business or continue working hard, the amount of money they spend on their rent will continue to lower and thus they have more money to spend on other things.
The lesson learned here is that a rich and wealthy lifestyle comes with hard work, and having money doesn't mean you have freedom. Being rich often comes with many high-maintenance expenses, and unless you’re willing to cut down on those expenses or stick with your life before you gained an income boost, you’ll be spending the exact same percentage of your cash on your living maintenance and not be any steps closer to financial freedom.
The effect of credit rating
Having a good credit rating is key to obtaining financial freedom. It’s a sign that you’re capable of managing your money and it’s an indication that you know how to budget properly. Credit rating isn’t something that you should fear. Rather, it’s something you should embrace because of the benefits it offers. Think of it as your relationship with the banks. The better your credit rating, the better interest rates they’ll give you for things such as loans and mortgages in the future, and the higher the chance they’ll actually lend you money for your personal needs.
Many people start with bad credit rating because they’re too keen on living a lifestyle that they can’t keep up with. They might buy expensive food all the time, they might use their computers a little too much or they might subscribe to entertainment services they barely use. If you’re constantly paying too much for these types of luxuries, then you might find yourself with a poor credit rating and a lot of debt that you can’t seem to climb out of.
Building up a good credit history is the key to maintaining financial freedom, but you also need to understand the importance of taking out loans in order to actually build it. While many banks and services won’t be willing to give you money if your credit rating is low, there are some services that specifically target those with bad credit in order to help them build up a better credit rating.
To conclude this segment, make sure that your relationship with the banks (your credit rating) is solid. It’s crucial if you want to have the opportunity to buy a home in the future no matter how much income you make, and neglecting your credit rating is a quick way for you to be branded by everyone as having terrible money management.
Living within your limits
Financial freedom focuses on living within your limits. It was mentioned briefly in the previous section, but it’s difficult to live a life that you can’t afford because you’ll always end up with less money to spend. For instance, it was mentioned before that you should always aim to pay a low percentage of your entire salary as rent. If you live in a fancy house that you can afford, but you’re paying over 50% of your salary just to live in the home, then you’re probably living well beyond your means and it’s better to find a place that you can rent by paying roughly 20% of your salary or less. This means you’ll end up spending less on necessary expenses and have more money left over that is free to use however you see fit.
If you live outside of your limits, then it’s a quick path to debt and you might start living a delusional life. You might be hanging around with the wrong crowd, you might be buying things that you simply can’t afford, and trying to be in-the-know on the latest products with your friends can be incredibly costly. It seems childish, but it’s something that a lot of people unknowingly do. If you aren’t capable of paying your necessary expenses each month and still having money left over to do whatever you want with, then you might find yourself struggling to cope and you’ll live an unstable lifestyle that is hard to maintain.
In short, make sure that you’re living within your limits if you want to obtain financial freedom. Don’t be embarrassed and take a good look at your budget. If you’re constantly spending far too much money, then cut down on expenses. Leave those prestigious clubs with high subscription fees, get rid of those expensive foods in your diet and focus on cheaper options, and make sure your rent and utility bills aren’t costing you a fortune.
Summary
To conclude the entire article, financial freedom is all about your mentality towards money. Don’t overspend and live outside of your limits, build up that credit rating so people trust you with money, and don’t be disillusioned because you have money—if you aren’t careful, you might lose it all and plunge into debt within a matter of minutes. Climbing out of a financial pit can be difficult, but it’s certainly not a place anyone wants to be.
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