Most people think that financial freedom or financial independence is impossible to achieve. But for plenty of people it is certainly possible, it just takes discipline and following some steps.
Our personal finance situation is different for each of us. Some financial journeys will take longer than others due to individual circumstances, earnings or other factors.
But for anyone that wants to achieve financial freedom, I think they just need to follow these three steps:
Decide on your financial freedom goal
Financial freedom might mean different things to different people. To some it might mean saving up enough cash (eg $20,000) to have enough of a safety net to leave a current role and go for something that would make more money and/or be much more fulfilling.
For me it would mean making enough passive income to be able to afford my current lifestyle (or desired lifestyle) if I were to stop working. That doesn’t mean I must stop working, but it can give me the freedom to do what I want to do without needing a full time job to do it. But I love doing what I do, so I doubt I’d stop even when I reach my goal.
How much do you realistically need for financial freedom? Well, the ASFA Retirement Standard for a comfortable couple in retirement (and assumes you own your own home) is $60,264 per year. So, with a 4% dividend yield that would require a portfolio worth $1.5 million. That’s also probably assuming, on top of that 4% yield, you’re receiving some franking credits to offset any tax owed to the ATO.
A ‘modest’ couple needs $39,353 in retirement and a comfortable single needs $42,764 according to AFSA.
How are you going to get there?
Unless you inherit a big chunk of money or win the lottery, you’re going to have to grow your financial freedom fund yourself. How are you going to get there?
Well there’s two stages. The first is that you want to shovel as much money into your freedom fund as possible whilst not unduly sacrificing your life in the short-term. We are still living our lives, it’s not as though life only starts after being financially free. So make sure you spend a bit of money enjoying yourself.
In reality, you need to live below your means. In other words, spend less than you earn and invest the difference. There are plenty of elements to bulking up your budget savings, but it comes down to earning more, spending less or both.
You need to put the money to work once you’ve started saving. The two most popular options for Australians are shares and property. I’m not sure about property’s future prospective returns, but I do think shares are the best way to grow your money.
If you re-invest your dividends your financial freedom fund will grow even quicker.
There are plenty of good quality share investment options like individual businesses like A2 Milk Company Ltd (ASX: A2M), Webjet Limited (ASX: WEB) and Altium Limited (ASX: ALU), to listed investment companies (LICs) like WAM Microcap Limited (ASX: WMI) & MFF Capital Investments Ltd (ASX: MFF) and exchange traded funds (ETFs) such as the iShares S&P 500 ETF (ASX: IVV).
Focus on your goal and track it
Both Warren Buffett and Bill Gates say that ‘focus’ is the key to being successful. It’s extremely easy to lose sight of financial goals. A few monthly expenses or regular “one-off” expenses can derail financial plans, sometimes it’s unavoidable, but sometimes it just requires good focus. As long as you are tracking well towards your goal then it’s okay to occasionally spend a little.
If $1.5 million by 50 years old is your goal then you need to try to stay on target and have a plan. It could be a wise idea to track how you’re going on an Excel spreadsheet, Google spreadsheet or any other wealth tracking tool. Seeing your progress could be motivating for you.
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Motley Fool contributor Tristan Harrison owns shares of Altium, Magellan Flagship Fund Ltd, and WAM MICRO FPO. The Motley Fool Australia owns shares of A2 Milk and Altium. The Motley Fool Australia has recommended Webjet Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.