What is Financial Freedom and How to Achieve It – A Quick Guide

“The money you have gives you freedom; the money you pursue enslaves you” ~Jean-Jacques Rousseau

“The lack of money is the root of all evil” ~ Mark Twain

Most people get confused when thinking about money.  Confusions and diverse opinions surround things like:

Saving and Spending: Some friends ask you to save for the future, as all of us need to prepare for a rainy day. Some others would prod you to live the moment. Life is uncertain. So spend now to live every moment of life and enjoy.

Income: We all study hard to get that most coveted educational degree, which is a passport to a career, which ultimately promises us a hefty income. Along the way, we may encounter some people who ask us this question “how much is enough wealth”.

So what is the right approach to money.

Welcome to Satvik Money’s structured approach towards happiness. Financial Freedom is the second step towards this goal. Let’s re-cap:

Happiness can be achieved by following a simple three tiered approach.

Step 1: Start with Financial Literacy, i.e., education yourself about the key money concepts.

Step 2: Once you are familiar with money concepts and good practices, you start your journey towards Financial Freedom. This is what we discuss in this post.

Step 3: Identify your purpose in life and follow it with passion. You can do this only if you are free from “working for money” and have achieved financial freedom.

Selflessly pursuing your purpose in life will give you durable and long lasting happiness.

What is Financial Freedom

Wikipedia defines Financial Freedom or Financial independence as the status of having enough income to pay for one’s living expenses for the rest of one’s life without having to be employed or dependent on others.

Financial freedom is achieved when you have enough passive income to take care of your money needs. Income earned without having to physically or mentally work for money, is commonly referred to as passive income.

The concept of financial independence seems quite an intuitive and realistic financial goal for everyone joining the workforce. However, paradoxically, it is actually pursued by a fraction of population. This unpopularity of the financial independence as a concept is due to some of the myths surrounding wealth, the perpetual halo of advertising induced consumption and our experiences.

Financial Freedom is not about a lazy, retired life. If absolutely does not mean that you spend away your time painting or gardening. It simply means that you don’t ‘work for money’. Money is a by-product of working towards your purpose or passion. For example, Let’s say you like to act in Theatre or Drama. You then pursue an education in acting, interact with like-minded people, act in some plays even for free, as you love doing it. You can only do this if you do not have any worries regarding payments of your electricity bill, grocery bills, house rent etc.

How to Achieve Financial Freedom

There are two inter-linked approaches to Financial Independence. 1) increasing income through wealth building and 2) expense reduction. Both these are necessary and interlinked steps towards achieving the ultimate goal of Financial Independence

Wealth Building:

Wealth building is accumulating money over a period of time by systematically saving and investing earned income. Systematic wealth creation is essential to achieve financial freedom.

Wealth building is the pathway to Financial Freedom. Wealth is more of an absolute concept, not a relative one. It is not measured by how much more money you earn compared to your colleague, cousin or friend. It is measured by how much passive income it generates to cover for your expenses.

Earning money or building wealth is not and end in itself, but a means to an end. The ultimate objective is leading a happy, satisfied, fulfilling and an enriched life, which is the goal of all the Satvik Money tribesmen.

If we make money an end in itself, we shall end up being like a rat running on Hamster wheel. The faster we run, higher is the speed of the wheel. Higher the speed of the hamster wheel, the faster we need to run. The same happens to us in our careers. The harder and smarter we work, the better will be our income. This leads us to spend more as consumptions ‘appears’ to give us happiness. The higher spend lifestyle forces us to earn more to keep living the ‘good life’. This appears like a virtuous cycle. But it soon turns into a hamster wheel (or a vicious cycle), because we do not know when or how to slow down.

This leads us towards the next step in achieving Financial Freedom.

Expense Control:

Expenses or Consumption gets equated to happiness. Most businesses want us to spend more, as our spending is their income. Most advertisements prod us to spend more, making spending or shopping a feel good exercise.  It’s true that spending on needs and essential wants can improve our happiness and living standards up to a limit. However, beyond a point, the incremental happiness is limited for higher levels of spending. In fact, at times, spending can be counter-productive and can induce anxiety.

Regular savings can inculcate discipline and can result in a balanced approach to consumption. One of the best hacks to expense control is to not let your standard of living increase at the same pace as your income. Learn to live frugally – significantly below your means. Lower expenses have twin benefits – 1) they increase your savings and 2) reduce the required corpus for financial independence.

So how do reduce your expenses. By penny pinching, by living like a miser! Absolutely not. You reduce your expenses by spending carefully on wants (differentiating them from needs), not spending to please others, not spending on ‘status symbols’, not spending on toys like expensive cars or beyond-your-need houses, frequent vacations at expensive locations, etc. Once you follow some of the above, you will notice a significant reduction in expenses, without impacting your routine lifestyle or happiness. As you reduce the dependence on material stuff for deriving happiness, you start appreciating the real and lasting source of satisfaction, like helping others, pursuing your passion, enjoying nature, etc.

Summary:

Thus, the simple formula for Financial Freedom is – Focus on generating more income, control expenses, invest your savings which will generate more income. Repeat.