Financial freedom: A comprehensive guide to achieving true financial independence

In a world where financial stability plays a crucial role in our wellbeing and future aspirations, the concept of financial freedom stands out as a beacon of empowerment.

Financial freedom is the ability to make life choices without being constrained by money considerations. It goes beyond just having a comfortable income; it embodies the power to live life on your own terms, pursuing dreams, and finding peace of mind through a secure financial foundation.

To understand how the post-pandemic, high-inflation environment had impacted the nation’s thinking around financial freedom, MLC commissioned research to explore the aspirations of Australians across generations, genders, and demographics, with more than 2,500 people surveyed.

Released in May 2023, the Financial Freedom Report ¹ uncovered the aspirations of modern Australia.

As the most common aspiration held by Australians was financial independence, with 55% of people surveyed sharing that goal, this guide gives you a broader understanding of what financial freedom is and how to best go about achieving it.

DEFINING FINANCIAL FREEDOM

Financial freedom is a state where your passive income (from investments, savings, or other sources) covers your essential expenses, allowing you to sustain your desired lifestyle without being reliant on a traditional 9-to-5 job.

It’s about breaking free from the shackles of living paycheck to paycheck and transcending the cycle of debt. This state enables you to allocate more time and energy towards your passions, personal growth, and meaningful experiences.

Why financial freedom is important?

• Reduced stress and anxiety – Achieving financial freedom provides a sense of security, allowing you to focus on more fulfilling aspects of life.
• Pursuit of passions – Whether it’s starting a new business, traveling the world, or engaging in creative endeavours, it enables you to explore avenues that bring genuine joy and satisfaction.
• Enhanced decision making – Based on what aligns with your values and long-term goals, rather than making choices driven solely by monetary considerations.
• Flexibility and work-life balance – It might involve pursuing part-time work, taking sabbaticals, or even early retirement.
• Generational wealth and legacy – By wisely managing resources and making informed investment choices, you can leave a lasting legacy for your children and grandchildren.
• Emergency preparedness – Having a robust financial foundation allows you to weather financial storms with greater ease and confidence.

The journey to financial freedom

Attaining financial freedom requires careful planning, disciplined saving, and strategic investing.

UNDERSTANDING YOUR FINANCES

Understanding key concepts such as calculating your net worth, tracking your spending, and creating a budget can significantly enhance your financial wellbeing.

To calculate your net worth, follow these steps:

• Make a comprehensive list of all your assets and their corresponding values.

• List all your liabilities, including credit card debts, student loans, mortgages, and any other outstanding loans.

• Subtract your total liabilities from your total assets to calculate your net worth.

Tracking your spending allows you to identify patterns, cut unnecessary expenses, and allocate resources more efficiently.

• Record all expenses
• Categorise your expenses
• Analyse and adjust

A budget helps you allocate your income wisely, avoid overspending, and build a solid foundation for your financial future. To create an effective budget:

• Determine your total monthly income including your salary, freelance work, rental income, and investments.
• Identify your essential fixed expenses, such as rent or mortgage payments, utility bills, insurance premiums, and loan payments.
• Dedicate a portion of your income to savings, investments, and specific financial goals, such as an emergency fund or holiday.
• Place a cap on discretionary spending categories like dining out, entertainment, and shopping.
• Regularly review your budget to track your progress and make adjustments as needed.

DEBT MANAGEMENT

One of the most significant aspects of financial wellbeing is effective debt management.

Understanding the distinction between good and bad debt is essential for making informed financial decisions. While debt is generally seen as something to be avoided, there are instances where it can be beneficial.

Good debt

Good debt is an investment in your future. It typically involves borrowing money for assets that have the potential to increase in value or generate income over time. For example, education loans, mortgages and business loans.

Bad debt

Bad debt is money borrowed for items that do not appreciate in value and can lead to financial stress. For example, credit card debt, consumer loans and payday loans. Paying off debt requires a combination of discipline, planning, and commitment. Here are some effective strategies to help you become debt-free:

• Start by paying off your smallest debt while making minimum payments on other debts.
• Focus on paying off debts with the highest interest rates first.
• Create a realistic budget that allocates a portion of your income towards debt repayment.
• Explore ways to boost your income, such as taking on a part-time job or freelancing.

Debt consolidation is a strategy that involves combining multiple debts into a single, more manageable loan. It can simplify your financial life and potentially lower your interest rates.

SAVING AND INVESTING

Building an emergency fund

Life is unpredictable, and unforeseen circumstances can wreak havoc on your financial stability. This is where an emergency fund comes to the rescue.

An emergency fund acts as a safety net, ensuring that you’re not forced to rely on high-interest loans, credit cards, or deplete your long-term investments to cover urgent expenses. To build an effective emergency fund aim to save three to six months’ worth of living expenses. This should cover essential costs like housing, utilities, groceries, and debt payments. Allocate a portion of your income each month towards your emergency fund and keep your emergency fund in easily accessible liquid assets such as a high-yield savings account or a money market account.

Investing for retirement (super): Securing your golden years

One of the most effective ways to ensure a comfortable retirement is by investing in retirement funds, more commonly referred to as superannuation or super.

The power of compounding

Superannuation harnesses the power of compounding. Compounding allows your investments to grow not only on your initial contributions but also on the returns generated over time.

Tips for successful retirement investing

• Start early – The earlier you begin contributing to your super, the more you’ll benefit from compounding. Even small contributions made consistently over time can yield significant results.

• Diversification – Diversify your super portfolio by investing in a mix of assets such as shares, bonds, and real estate. Diversification helps mitigate risks and enhances potential returns.

• Review and adjust – Regularly review your super portfolio to ensure it aligns with your retirement goals and risk tolerance. Adjust your investments as needed to stay on track.

Passive income: Rental income or dividends from investments

Generating passive income is a key strategy for achieving financial independence. Two popular avenues for passive income are rental properties and dividends from investments.

Rental properties can generate monthly rental income, which helps cover mortgage payments and expenses while leaving room for profit. Real estate properties have the potential to appreciate over time, providing the opportunity for capital gains in addition to rental income.

Dividends from investments

Investing in dividend-paying shares or funds can also yield passive income. Steady income and the option to reinvest dividends for compounding growth make dividends attractive.

Considerations for passive income

• Research and due diligence – Thoroughly research any investment opportunity before committing funds. Understand the market, potential risks, and expected returns.

• Long-term view – Both rental income and dividends require a long-term perspective. Patience and commitment are key qualities to possess if you want to make substantial gains.

INCREASING YOUR INCOME: STRATEGIES FOR FINANCIAL GROWTH

Here are three effective strategies for boosting your income:

Strategy 1: Negotiating a pay rise

Negotiating a pay rise can significantly impact financial wellbeing. Be sure to prepare thoroughly; choose the right time (e.g. after completing a successful project or during a performance review); communicate your accomplishments; and be prepared for negotiation.

Strategy 2: Starting a side hustle

In this era of digital connectivity and diverse opportunities, starting a side hustle has become an increasingly popular way to supplement your income.

A side hustle allows you to explore your passions, diversify your income streams, and potentially turn a hobby into a profitable venture.

Assess your skills, hobbies, and interests to pinpoint areas where you can offer value to others. Create a schedule that accommodates your full time job and side hustle commitments. Begin at a manageable scale and leverage online platforms and marketplaces to showcase your services or products.

Strategy 3: Investing in yourself

Investing in yourself is an invaluable step toward increasing your income potential and personal growth- a long-term strategy to achieve financial freedom. Whether through education, skill development, or networking, self-investment can yield significant returns over time.

ACHIEVING FINANCIAL FREEDOM

Achieving financial freedom requires more than just wishful thinking; it necessitates a strategic approach and consistent effort.

The journey to financial freedom begins with clearly defining your financial goals. Start by identifying both short-term and long-term objectives. Short-term goals might include building an emergency fund, paying off a high-interest debt, or saving for a holiday. Long-term goals could involve retirement planning, purchasing a home, or funding your children’s education.

Make your goals specific and measurable and rank them in order of priority to allocate your resources effectively.

With your goals set, the next step is to create a comprehensive plan to reach them. Start by assessing your current financial situation and create a budget. If you have outstanding debts, devise a plan to manage and eventually eliminate them.

Investing is a crucial aspect of achieving financial freedom. Research different investment options based on your risk tolerance and goals; and stay informed about personal finance, investments, and money management.

Embarking on the path to financial freedom requires dedication and perseverance. To stay motivated and accountable, consider the following strategies:

• Create visual reminders of your goals, e.g. a vision board.
• Set aside time at regular intervals to assess your progress.
• Share your financial goals with a trusted friend, family member, or mentor.
• Be willing to adjust your plan as needed while keeping your end goal in mind.

Reach out to the team at ADR Wealth if financial freedom is a priority for you.

¹ Insignia Financial – Uncovering the aspirations of modern Australia, Financial Freedom Report – May 2023 – McCrindle Research.

Source: MLC