Your definition of financial freedom might not be the same as the definition held by your neighbour, coworker, or family member. Broadly, the consensus is that being “financially free” means being able to live the life you desire, without carrying the burden of financial stress.
It’s important to note that achieving financial freedom can require a great deal of dedication, hard work, and sacrifice. However, with the right strategic approach, it could be an achievable goal for you.
Below, we’ll dive into the concept of financial freedom (also known as financial independence) and explore how you can begin charting your course towards it today.
Achieving financial independence is a personal journey with goals set for your needs
Typically, being financially independent means having enough to live comfortably without financial stress.
This concept is often associated with the FIRE movement, standing for, “Financially Independent, Retire Early”. This lifestyle choice advocates for aggressive saving and investing with the goal of retiring before the traditional age. Often, individuals following FIRE will aim to save 50% of their income in one way or another.
However, your personal journey to financial independence doesn’t need to conform to a specific movement or a rigid set of predefined goals. Rather, it’s about building a financial reality that aligns with your aspirations and values.
Your motivations for pursuing financial independence are likely to be deeply personal, but there are some common and compelling reasons to seek this goal.
- Enhanced flexibility. Having the freedom to spend time with your loved ones, take extended sabbaticals, or transition to part-time work before retirement may be a tempting reason to pursue financial freedom.
- Future security. Building a robust financial foundation can offer peace of mind, as you’ll know you’re well-prepared for life’s unexpected twists and turns.
- Time for passions. With your financial stresses alleviated, you could gain the ability to pursue hobbies and interests and dedicate more time to your loved ones.
Remember, while the pursuit of financial independence often asks for short-term sacrifices, the long-term rewards may be worth the work.
How to estimate your “number” for financial freedom, based on your personal circumstances
The exact sum you’d need to be financially independent will depend on your lifestyle and needs, and could benefit from a personalised illustration from a professional planner. That said, you can still apply some fundamental principles to start with.
- Work out your expenses. Consider the lifestyle you’re aiming to sustain and calculate your annual expenses accordingly. This could include household bills, travel costs, and projected expenses for new hobbies and interests.
- Apply the 4% rule (and add a buffer). Investopedia notes that if you were to withdraw 4% of your savings in the first year of “retirement”, followed by the same amount adjusted for inflation, then, theoretically, you should be able to live comfortably off your savings. However, this may not work for those who retire early, or if markets are volatile, so be sure to add in a buffer as needed.
- Choose a timeline and work out how much you need to save. Decide at what age you would like to become financially independent. This will allow you to calculate the amount you need to save each year to reach your goals.
A financial planner can utilise cashflow modelling software in order to gain an accurate illustration of your “number” and help you achieve your goals.
Prioritising financial discipline could be more effective than simply earning a high sum
You could support your journey to financial independence by taking a highly disciplined approach.
To start, remember that your foundation will remain strong if it’s built on consistency and diligence.
Remember, plenty of people earn a huge amount and still wouldn’t consider themselves financially free, because instead of saving and investing consistently, they succumb to lifestyle creep. In other words, their outgoings creep up as they earn more.
While pursuing high earnings may be important to you, it’s worth remaining focused on disciplined effort applied over the long term.
So, once you’ve set your goals, stick to them and consider using the following strategies to help support their growth:
- Streamline your finances by automating your savings and bill payments. This hands-off approach could make saving money a background process.
- Invest strategically by planning for long-term growth. Speak to your financial planner for practical ways to do this.
- Adopt frugal habits and make conscious choices about your spending. You don’t need to deprive yourself, but it can help to prioritise your long-term goals over any immediate wants.
- Take full advantage of any tax-efficient options available to you. This could involve contributing more to accounts such as ISAs or exploring other alternative investment strategies.
- Become the master of your expenses and regularly review your spending. Identify areas where you can cut back without compromising on your quality of life.
Ultimately, financial independence is an intentional journey, built on thoughtful choices and persistence.
By clearly defining what it means for you and applying sound financial principles to your plan, you could pave your way to a future where your time and choices are truly your own.
This is something we can help with.
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Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The value of your investments (and any income from them) can go down as well as up, and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
The Financial Conduct Authority does not regulate cashflow planning or tax planning.
