What is Financial Freedom and How to Achieve It: An Australian Guide
15 May 2023
According to recent studies, only 38% of Australians have enough savings to cover their basic living expenses for at least three months1. This means that the majority of Australians are not financially free and are at risk of falling into debt or financial hardship in the event of unexpected expenses.
Financial Freedom vs Financial Independence
Many people use “financial freedom” and “financial independence” interchangeably, but they mean different things.
Financial independence is often defined as having enough savings, investments, and other sources of passive income to cover your living expenses without needing to work. This means you no longer have to rely on a traditional job or “9 to 5” to support yourself financially.
Financial freedom, on the other hand, is a broader concept that includes financial independence but extends beyond that. Meaning that you have enough money and resources to live the life you want without being constrained by financial limitations. You have the ability to pursue your life goals, take risks, try new experiences and pursue passions without money as a barrier or concern.
What is Financial Freedom?
Financial freedom ultimately means being able to afford the lifestyle you want without worrying about money. It also means that you are not stressed about your finances because you are financially prepared for what life brings. In other words, you are in control of your finances instead of being controlled by them.
Some people equate financial freedom with not having to work, others associate it with retirement. But did you know that you don’t have to wait until retirement to be financially free?
The definition of financial freedom is unique to each person and can look like being able to travel the world, take care of your health and wellbeing, buy your dream home, pursuing your passion, quitting a 9-to-5 job to spend time with your kids, or supporting your partner while they work, study or pursue their passion. Just to name a few!
Typically financially free people have a few common traits and habits: they have money in the bank, do not have bad-debt, and are actively investing for the future.
How can you achieve it?
Achieving financial freedom takes time, patience and discipline. It also requires smart financial planning, goal setting, and positive financial habits that move you towards saving and investing rather than spending and accumulating.
One tip to achieving financial freedom is to educate yourself. Stay informed about personal finance and investing best practices. Work with a financial coach, attend seminars, read books and blogs, and seek advice from financial experts and financial advisors. As you expand your knowledge and skills you can implement these into your finances.
Passive income streams is a way to create financial freedom by boosting your income and removing the need to trade time for money (work). There are many ways to generate passive income, such as investin in dividend-paying stocks, rental properties, or creating an online business. You can check out the Blossom Guide to Passive Income, for other ideas.
5 Steps to help you Reach Financial Freedom
It's essential to take control of your money and actively manage your finances if you want to reach financial freedom. This involves setting financial goals, creating a budget, paying off debt, and saving and investing wisely.
1. Set Financial Targets
Everybody dreams about achieving financial freedom but a dream without a plan is just a wish. Turning a wish into a plan means setting financial goals—like getting out of debt or investing for passive income.
Financial targets create a guide for the actions to take towards creating financial freedom and provides specific goals to work towards. In setting financial targets remember to make the goals specific, measurable and time-bound (i.e. give yourself a deadline).
2. Create a Budget
As the saying goes “Tell your money where to go, or you’ll wonder where it went”. When you budget you give every dollar an assignment before the month begins and track your spending throughout the month. It is the first step to building wealth on purpose and becoming more intentional about how you earn and spend.
When creating a budget, start by tracking your income and expenses to create a realistic picture of your financial situation and what you can afford to spend and save. Identify areas where you can cut back and redirect that money towards savings.
There are many great tools, spreadsheets, apps and trackers that you can use to help you with this budgeting process. Check out our guide here.
3. Live Below Your Means
This might seem obvious, but one key to building wealth is to live below your means. In other words, live on less than you make. Being mindful of your current lifestyle and finding ways to save money, whether it's by using a budget calculator or a budget app, or simply being more conscious of your spending habits.
To reach financial freedom, you need self-discipline and a willingness to say “No” to things that are not a priority. Living below your means doesn't mean sacrificing your quality of life. It means making conscious choices about your spending and prioritizing your long-term financial goals over short-term pleasures. Ultimately a decision to save is a decision not to spend that money on something else.
4. Pay Off Debt
High-interest debt, such as credit card debt, can be a roadblock to creating wealth. If you have debt, create a plan to pay it off as quickly as possible. One way to build momentum is to use the snowball method to pay off your smallest debt first, then start paying down the next debt with the money saved on the smallest debt’s monthly payments.
5. Save and Invest
A general rule of thumb is often to establish three to six month’s worth of savings as an emergency fund which would be capable of covering your living costs in the event of a sudden income loss to major medical issues - or any of those other life events that pop up and take us by surprise.
Once you have that set-aside, you can concentrate on building wealth through other savings and investing. You may seek to invest in things that generate additional sources of income, such as investing in a rental property, a share portfolio, your retirement savings accounts or a side hustle.
Be sure to review your investment philosophy and investment strategies for your managed investments or long-term investments to maximize your returns and minimise risk. As there are a range of options available to achieve this, it can pay to seek professional advice to ensure you have a sound financial plan and appropriate investment options for your goals and situation.
Achieving financial freedom is a journey, not a destination. There isn’t one proven path. It will be a personal journey for you that requires discipline, patience, and a long-term mindset. By setting clear financial goals, creating a budget, paying off debt, saving and investing, and living below your means, you can experience true financial freedom and live the life you want.
This article contains general information only and does not take into account your personal circumstances, financial situation or needs. Before making a financial decision, you should read the relevant Product Disclosure Statement and Target Market Determination of the specific financial product and consider whether the product is right for you and whether you should obtain advice from a financial adviser.
1Australian Bureauof Statistics (ABS) report titled "Household Income and Wealth, Australia, 2019-20" which was released on June 24, 2021.