how to be financially free

Everyone wants to be rich. The good news is that we all can achieve this goal. The bad news is that most of us also harbor two misconceptions that actually get in our way of achieving this goal.

The first misconception is that we assume rich and wealthy mean the same thing. They don’t. Being rich means having a lot of money but no time to enjoy it. Being wealthy means having money AND the time to enjoy it.

The second misconception is that we assume being rich or wealthy is just a matter of luck. You become rich if you marry a rich person, sell your business for millions of dollars, get a sudden inheritance, or win a lottery.

But these are not the only paths towards wealth or financial freedom. In the rest of the post, I’ll discuss how you can achieve it systematically through simple ways.


What is Financial Freedom?

In simple words, financial freedom means being able to do what you want, when you want, and not having to trade your time for money. It means you have enough savings and investments to afford a comfortable lifestyle without having money worries.

How do you know when you’re financially free? When can you say, “I can choose to work now?” A simple metric is when you’ve saved 50X your annual family expense.

Achieving financial freedom is everyone’s birthright. But as mentioned earlier, we assume it’s possible only if we’re born rich or get lucky. If you’re none of the above, you’re resigned to slogging throughout your life.

But Bill Gates disagrees. He said:

“If you are born poor, it’s not your fault. If you die poor, it’s your fault.”

What he means is that no matter where you currently are in life, you can achieve financial freedom. All it takes is a simple 1-2-3 formula: Earn-Save-Invest.

Step 1: Expand Your Earning

“The best investment you can make is in yourself. The more you learn, the more you earn.” – Warren Buffett

All of us work to earn. But if the pandemic has taught us one important lesson, it’s that we must not just increase our earnings, but also our earnings trajectory.

Here’s what I mean.

For most of us, work is a means to get paid so that we can pay for our bread and butter. Hence, we do what our managers instruct us to do for nine hours a day, and then go home.

But along comes some crisis – for the company or the world – and we get stuck. We either stagnate, or we get laid off, and we have to settle for another job at a lesser pay though our expenses increase.

A better way to expand your earnings or not let your earnings get impacted is to invest in building new skills and abilities. In the passion-to-profession economy, you can offer your expertise to a global audience and make more money than you make from your paycheck at the workplace.

Sharpen your skills, create more value for your stakeholders, and work smart instead of working hard. Over time, the results will compound and you’ll get rewarded with increased earnings. This won’t just help you sustain in difficult times; it will also multiply to help you generate a substantial income.


Step 2: Save Before You Spend

In the age of consumerism, advertisements promise us that owning the latest phone or wearing the latest clothes and accessories will make us appear (and feel) better than the Sharmas.

So we splurge all our hard-earned money to enjoy the present moment. But in the process, we mortgage our future, when we should actually be doing the opposite. We should be prudent with our money in the present in order to build a better future. And one of the most important yet underrated actions to do this is to save money.

Saving money enabled our parents to build secure lifestyles and pay for our education without drowning in debt. It enabled them to enjoy their post-retirement days instead of becoming liabilities for us. It’s time we took a leaf out of their book.

This sounds easy, but it’s not. It requires the trait we struggle with as human beings – delayed gratification. Not just from you, but from your entire family. Like not visiting movie theaters and theme parks on weekends when the ticket prices are exorbitant. Like not taking two overseas vacations each year so that you can compete with your colleagues. Like not buying the latest smartphone if the one you use is just a year old.

So what should you do with all the money you save? Place it in a bank account, FD, or Postal Scheme? No. You should invest it.


Step 3: Invest in Long-Term Assets

“The best thing money can buy is more money.”

Being rich means having a lot of money, but always working for it. If you stop working, you can’t earn it. That’s not freedom, that’s slavery. Being wealthy means making money work for you, which happens when it grows even when you sleep.

You can become wealthy by investing in mutual funds, stocks, real estate, or any other avenue that offers you more returns than a savings account or Fixed Deposit scheme. And you don’t have to invest it all at once. You can stagger your investment in a planned, monthly format.

Knowing how much money you should invest is simply a matter of a few calculations. Let’s assume you need ₹5 crores to be financially free (50 times your current annual expense of ₹10 lakhs.) Now, you can make some Excel-based calculations to determine the annual investment you should make at a nominal rate of return, to go from where you are to where you want to be.

Based on these calculations, you can choose which avenues to invest in, and watch your funds compound over the long run to yield real freedom. (A financial advisor’s help is recommended for this.)

Appearing better than the Sharmas or owning more items than them is not being successful. Living your life on your own terms is.

Discipline and patience remain the key here. Warren Buffett would’ve been nothing even with his astute investing skills if he lacked discipline. He started investing when he was 13 but made 99 percent of his wealth after the age of 50, and 97 percent of it after he was 70.

The same holds true for every financially free person today. Discipline forces you to make tough choices in the short term. But in the long term, it eases your choices when everyone around you continues to struggle.


Summing Up

A single line that can sum up the lifestyles of all financially free people is: “Same car, same house, same spouse.”

In effect, they live below their means, make their money work for them, and enjoy rich dividends (literally) in the long-term. If you want to achieve financial freedom, just follow three steps:

  1. Expand your earnings. This doesn’t just mean increasing your earnings, but also your ability to earn. Invest in learning new skills and moving up the corporate ladder, or scaling up your business. Ensure your income keeps increasing.
  2. Save before you spend. Don’t try to compete with your colleagues and friends on possessions. Take a leaf out of your parents’ book and save more money. You don’t have to deprive yourself of things you enjoy in order to do this. Just exercise some prudence.
  3. Invest in long-term assets. You can only be financially free when your money works for you. Invest your savings in stocks, real estate, mutual funds, etc. Let the dividends, interest, and rent, compound over time until you finally reach the sum that lets you achieve financial freedom.

Financial freedom is your birthright. No one should deprive you of it. But you must work to achieve it. The best time to have done this is 20 years ago. The next best time is today. So start today.

How will you set out on the journey towards financial freedom? I would love to hear your thoughts.

By Manish Bansal

Manish is the Managing Director of SME Value Advisors, a platform that connects businesses with curated professionals who can deliver solutions. You can connect with him on manish@smevalueadvisors.com.

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