7 Steps to Financial Freedom
What is this financial freedom?
First of all, let’s try to clarify. What is financial freedom?
In a nutshell, being financially free means being able to financially support a certain lifestyle without having to work. In other words, your investments are able to pay for your expenses and you don’t need to actively work.
It is essential to understand the following concept:
The more expensive the lifestyle you aspire to, the greater the value of the investments you will have to put to work, the more difficult and distant it is to achieve financial independence.
Track your expenses
Let’s start from the base… Start by slicing every single euro that comes out of your pocket. If you don’t know how much you spend, how do you know how much money you need to make a living?
Create a Budget
Budget. Once you have enough data, start creating an annual budget. Analyze your expenses and see if there are any items you can cut on.
Create an emergency fund Out of sight out of mind
Thanks to budgeting you should now be able to put some money aside. Create in a separate bank account where you can secure € 1000. I recommend, do not touch them unless there is an unexpected expense that is really a matter of life or death. Rather clear your regular account before accessing this money.
Pay your debts
Before starting to think about living on an income from your investments, it is necessary to free yourself from negative debts, which are all those that were used to buy the so-called Liabilities.
There is an exception to this: if you can find a way to secure investments with “certain” returns above interest it may make more sense to invest in these rather than pay off your debt. Be warned though, high-yielding investments are often tied to high risks. What happens to the yields drop? Or even worse, do they go negative? Your debt would still be there waiting for you.
Expand the Emergency Fund
Finally, you begin to see the light, to be on the “right side” of the chart “, and you can start building your emergency fund so that if something happens, you have a safety margin and are ready to face problems…
The masters of personal finance advise having aside from a nest egg equivalent to the expenses of 5-6 months.
Congratulations if you have reached this stage you are probably way ahead of all your friends. You are free from bad debt and have built an emergency fund that allows you to take some extra risk with your money.
The time has come to build an asset portfolio that allows you to generate more or less passive income.
If you are already in this phase I suggest you take a look at these articles:
Live on Annuity
The golden rule of financial freedom says that to live off your investments you must have invested at least 25 times your annual expenses. This rule is called the “4% rule” And says that you can use 4% of the returns on your investments to live without ever affecting your capital.