Financial freedom is a concept that most people aspire to, but which few people understand and even fewer people achieve. The term financial freedom means different things to different people. For some, it means being free of debt, for others it means having a comfortable lifestyle without having to worry about money, but usually it means having enough investment assets to live on without working. The idea is that the income from the investment assets is enough to cover your living expenses, whatever they may be. Clearly the lower your living expenses are, the easier it is to achieve financial freedom.
Getting to the point where you no longer have to work to cover your living expenses is a journey which starts with achieving financial stability. If you have financial stability:
- You are spending less than you earn
- You contribute to a retirement savings scheme such as KiwiSaver
- You have no short term debt and you pay off your credit card every month
- You have access to funds through a savings account or line of credit sufficient to cover your living expenses for three months
While you can continue for some time in a state of financial stability, you are not financially secure. To achieve financial security you should consider:
- Buying a property to live in or rent and paying off the mortgage
- Protecting your assets by taking out insurance on your property, life and health and by attending to legal matters such as a will, enduring power of attorney and an agreement with your partner as to how your property should be divided in the event that your relationship ends.
Having achieved financial security, you are now in a solid, secure position from which you can invest your savings to create the wealth that will ultimately lead to financial freedom.