Ever dream of walking out of your job, free to pursue a project you’ve always dreamed of starting? Or going back to school without taking out student loans? Or having the financial freedom to leave an unhealthy relationship or location?
What about the option to retire at age 45 or 50 instead of at age 65 (or 80)? And upon retiring, dedicating your life to humanitarian work, raising your family, or tucking yourself away in your mountain cabin with hundreds of books?
Each of these opportunities could be afforded with financial freedom. Just as it sounds, financial freedom is typically defined as having the resources to do exactly as you please.
(It’s important to mention that not only does everyone’s definition of financial freedom differ, but that the time it takes to achieve it, and ways you may go about achieving it, will be unique to you.
The following are just some tips to achieving your goals, are in no way exhaustive, and may not work for you. You should always consult a licensed financial advisor.)
Is financial freedom your goal?
See how SoFi Invest®
can help you create a plan.
What is Financial Freedom?
While everyone’s financial freedom definition will be slightly different, it’s generally understood as being in the financial position to step away from traditional work. This is usually done by creating income streams from investments or a business.
Essentially, the notion of financial freedom implies that the person has the financial independence to live for the entirety of their life without traditional income.
Currently, there is a movement that is gaining in popularity called FIRE, which stands for “financial independence, retire early.” Self-proclaimed members of the FIRE movement often dedicate a great deal of energy to creating the terms of their financial freedom.
Whether or not you associate with the FIRE movement, the idea of financial freedom is useful for anyone who is curious in ditching the 9-5, who wants to stop living paycheck-to-paycheck, or who wants to step up their money game.
Even those who simply want a traditional retirement will probably want to become familiar with the concepts of financial freedom, as most people will be investing for their retirements themselves.
Financial freedom is generally achieved through amassing income-producing assets or creating income streams to cover your cost of living expenses. Another word for this is “passive income,” or income that is generated without you having to exchange your time for that dollar. The goal is to stop trading your time for money.
While it is feasible to save enough money simply to live off that cash into perpetuity, this means saving an incredible amount of money—and not running out. While you can aim for this, you may feel more comfortable building out one or more income streams, especially as you take into consideration the erosive powers of inflation.
Achieving Financial Freedom
Achieving financial freedom will not happen overnight. It is certainly possible and it is within your capability, but it requires putting together a financial freedom plan.
A good first step is to determine how much money you’ll likely need to cover your costs once you achieve financial independence.
Once you determine what you need, which in and of itself can feel like a moving target, you can think about ways to create new streams of income or how you might rearrange your financial life to make it possible.
Next, you could consider exploring ways to create those income streams. There are many ways to do it, and no one way is right for everyone, but here are some popular methods for your consideration:
Investing in the Stock Market
Whether you own individual stocks or stock funds (mutual funds or exchange-traded funds), the stock market can be used to generate passive income. It helps to understand that a stock can make money in two ways.
First, through price appreciation, which is a stock growing in value over time. Second is through dividend payments, which are cash payments made by some (but not all) stocks and funds.
Both trimming gains—various means of alleviating capital gains taxes, such as using the “year and a day rule” or selling some other assets to generate a loss—off the top of securities (such as stocks and bonds) that have grown in value and collecting dividend payouts are methods for creating income from securities such as stock market investments.
As with many of the methods of creating passive income sources discussed below, investing in the stock market can be unpredictable. Though stocks have experienced a high historical rate of return, stock market returns are notoriously volatile, so you may want to gain some comfort before diving in headfirst as a strategy for financial freedom—whether through your own research or by consulting a licensed financial advisor.
Other Investment Securities
In addition to the stock market, there are investments such as bonds and REITs that can be used to create income and potentially diversify away from the stock market.
Bonds are fixed investments in the debt of a corporation or government, whether federal or local. You are essentially loaning them your money, and they pay you a stated rate of return, called interest, to use that money.
How much you earn in a bond will likely depend on interest rates in the prevailing economy.
A REIT, or Real Estate Investment Trust, is a way to invest in real estate within your portfolios without having to actually own the real estate itself.
REITs are investment companies that manage rental properties like malls, office buildings, and apartment complexes. They pay out dividends when profits are earned.
Investing in rental real estate—such as single-family homes and multi-family units—is another way to create a stream of income. Generally, the goal with rental property investing is to collect rent payments that create cash flow beyond what is needed to cover all of the costs of owning a home, like a mortgage and property taxes.
This method of generating passive income generally relies on leveraging your financial position—taking on debt in order to generate a profit on borrowed money.
In this way, rental properties can be a risky endeavor and require plenty of research into the process, best practices, and into finding the right properties.
Passive Business Income
Though passive income has become a catchall for all sorts of different income streams, it can also be used specifically to describe income that is generated from a business venture that you’ve created on your own. Generally, the more passive the income stream the better—otherwise, it’s just another job.
Many of these passive income streams have been created thanks to the far reach of the internet, which has unlocked the possibility of tapping into all sorts of different markets. Passive income can be created by selling physical products, downloads, online courses, and so on.
When creating passive business income, there is generally a start-up period that requires work to establish the business, create the processes, and deploy capital.
Because there is always some risk involved in establishing a new business—mistakes will be made, that’s how we learn—folks may find it helpful to do this step while they are earning a steady income through traditional employment.
What’s Holding You Back from Financial Freedom?
As with achieving any money-related goal, you may experience some setbacks on the route to financial freedom. Here are some pitfalls to avoid (or at least, to minimize as best you can) as you pursue financial independence.
If you can’t envision yourself untethered from traditional employment, you certainly aren’t alone. This is not something that we are taught in schools or even by our parents.
One of the first steps in your journey towards financial freedom may be to explore your beliefs about money and work. This may mean digging deep and learning about your relationship with concepts like worth, scarcity, and abundance.
A bunch of debt can make it very hard to become financially free. Debt not only reduces your overall net worth by the amount you’ve got in loans or lines of credit outstanding but also increases your monthly expenses.
To reduce debt, you may want to focus on expediting your payment of high-interest sources like credit cards and student loans. To make the process move faster, you can try to get a lower interest rate on your debts.
It’s worth noting that, typically, a lower interest rate may mean that your loan term will be extended. With student loans or a home loan, you could look into options like refinancing. For instance, with credit card debt, it may be possible to lower your interest rate by calling your credit card company.
Additionally, you’ll likely want to take on any new debt strategically. Debt can certainly be a useful tool for a future goal of building wealth, like using loans to finance an education in order to get a higher paying job or as an outlay on a business. But debt can also be misused, so be careful not to take out more debt than you absolutely need.
You can clip coupons all you want, but if you’re not earning enough to cover your bills, you aren’t going to be able to save enough to retire early and pursue your passions. For many people, figuring out how to earn more money in order to increase savings will be a crucial step in the journey towards financial freedom.
There are many ways to increase your income. First, you might want to think about ways to get paid more for the job that you’re already doing.
Many ask for a raise or more responsibility at work, or have a conversation with managers about establishing a path towards a higher salary. Second, you could consider picking up a “side hustle” or another way to earn money outside of work.
Third, you could consider establishing a passive income stream via your own business, as discussed above. This may require more work upfront but could be beneficial as you’re ultimately trying to create income streams independent from your traditional employment, anyway. It may also be a useful tool to get in the mindset of separating the idea of creating income from that of having a traditional 9-5 job.
It can feel hard to get in the groove of budgeting. In fact, there are people at every level of income that struggle to keep a budget on track and end up living paycheck to paycheck. But spending less—and potentially a lot less—than you earn is essential to achieving financial freedom. For most, budgeting is an absolute necessity.
Start by simply tracking your cash flow. How much is coming in versus how much is going out? You can’t set a budget that you can reasonably expect to stick to if you don’t even know how much you’re spending in each category.
Budgeting may take some trial and error as well as experimenting to find what works for you. If what you’re doing right now isn’t working, it may be time to try something different.
You could look into doing pen and paper tracking, the cash envelope method, or using finally getting used to tracking expenses in a spreadsheet.
Working With SoFi Invest
Do you need help creating a plan to achieve financial freedom? SoFi Invest® gives you access to complimentary financial planners. You can speak one-on-one with a financial planner to set your financial goals and create a plan of action to help achieve those goals.
Whether you’re saving for retirement, a down payment, or just investing for later, SoFi can help you make a plan to tackle multiple goals.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Third Party Trademarks: Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.