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Profitus news Financial freedom: how to achieve it?

2024-05-15 12:00:00


Financial freedom: how to achieve it?

Financial freedom is the ability to stop thinking about money, to stop living paycheck to paycheck, and to afford whatever you want. Sounds great, right? Financial freedom is an aspiration for many people. We all dream of going to the shops to buy what we like and want, of going on holiday abroad several times a year and at least once in Lithuania, of pampering our bodies with beauty and health treatments at weekends, of sending our children to private schools and the best clubs. This life is possible for everyone, but you need to know the path to financial freedom and how to travel it.


What is financial freedom?

Financial freedom is a dream that everyone thinks about. There is no specific definition of financial freedom - everyone understands it differently. For some, it is the ability to work in a job they love without looking at their salary, for others it is the absence of debt, for others it is the pursuit of a passive income that would allow them to avoid being employed, and for others, it is simply the ability to be able to not have to think about expenses. Financial independence can only be achieved by following this path with purpose and discipline, with a disciplined approach to achieving the goal. Financial freedom can be both personal and family. To achieve financial freedom within the family, it is essential to discuss the subject with all members of the household and to establish a common


How to achieve financial freedom?

Wondering how to achieve financial freedom? It starts when you have a stable and regular income. Whether you are seeking personal or family financial freedom, it is essential to properly assess, identify and even create new sources of income. Income can come from employment, self-employment, small or larger businesses, and investments. Unfortunately, one source of income is often not enough to achieve financial independence, so it is often necessary to look for other additional income opportunities. In addition to having sources of income, it is important to consider other aspects of financial freedom.


Assessing your current financial situation

The path to financial freedom must be deliberate and based on facts. First of all, it is very important to carefully assess the current financial situation: to list, analyse and summarise all income, expenses, debts, and savings. A clear assessment of the current situation can help to identify areas where changes can be made more quickly, for example by reducing expenses, refinancing loans, or creating an additional source of income, which would significantly alter the current situation.


Setting clear financial targets

The path to financial freedom must have clearly defined goals. If you are aiming for financial independence within the family, then you should talk about it with the whole family. Discuss your goal, your vision, and your aspirations. Detail what financial freedom means to you: getting out of debt, not having to count your spending or having more income. Identify your ambitions and the milestones you want to reach. 




Tracking income and expenditure

Controlling your income and expenses is crucial to financial freedom. The first step is to analyse your current habits. Only if you have a clear list of your income and expenses will you be able to see your habits: where you spend the most, where you can save or, perhaps, increase your spending. We therefore recommend that you start keeping a monthly income and expenditure diary. This can be either in a notebook or in a dedicated notebook, or in various calculation software such as Microsoft Excel, or by downloading a template for an income and expenditure journal created by others.


We recommend that you record all sources of income in this journal: salaries, maternity or paternity allowances, child's money, passive income from investments, etc. Making a list will help you to see all your income and see if you can increase it in any way.


We would recommend dividing your expenses into separate categories according to their type: loans, utilities, subscriptions, food, toiletries, transport, children, health goods and services, clothing and footwear, pet care, entertainment and beauty, other small expenses, and saving for a "rainy day". Tracking your spending in this way will allow you to get to know your habits and more quickly identify where you can save.


Establishing and implementing the revenue and expenditure plan

Once you have analysed your habits and identified where savings can be made, the next step is to make a plan. A separate table should be used to forecast future income and to allocate planned expenditure accordingly. You can make it easier to allocate them by using the 50-30-20 or 6-jar rule.

The 50-30-20 is a budget allocation formula recommended by financial management experts, where half of the total income is allocated to necessary expenses (loans, utilities, food, other essential goods or services), 30 percent is allocated to other non-essential expenses (entertainment, leisure, beauty treatments, etc.) and the remaining 20 percent is set aside for savings. Of course, if you have a loan, the proportions may be slightly different, but remember that the pursuit of financial freedom should not prohibit you from enjoying life and indulging in entertainment or hobbies! Giving up the pleasures will make the journey exhausting and eventually, you will want to give it all up.

The 6-jar model is slightly different. It suggests that all income should be divided into 6 parts. 55% of the income should be spent on daily expenses, 10% on investments, education, entertainment, and long-term purchases. The remaining 5 percent should be spent on good deeds and charity. There are many such models around the world, so you can find the one that suits you best, or use them to create your unique model that works best for your family or you.




Accumulating emergency savings

Savings are essential for full financial independence. It gives you a sense of security, and helps you to avoid additional stress and worry in the event of unexpected and crucial expenses, serious life changes such as illness, job loss, etc. Money saved for such events is also known as a financial cushion. It usually amounts to 3-6 months of income, which means that if you have saved 3 months of income, you will be assured that even if you lose your main source of income, you will be able to live in the same rhythm for 3 months without changing anything. During this time, the situation is likely to change. It is up to you to decide how big your financial cushion will be. It may also be one of your financial goals.


Debt repayment

Businesses and individuals can achieve financial freedom even if they are in debt! Taking out a loan to buy a new car doesn't mean you are not financially independent! A loan is about being able to use the item you want to buy sooner, not about having no finances. With a good income distribution and timely payments, the loan will slowly decrease and you can continue to use the money you have left. Of course, not all debts can allow financial freedom. If you are in debt to a neighbor, or an uncle, or have utility or communication debts that will only grow if not paid on time, you will not achieve financial independence with these debts. In this case, the first thing you should do is to make a plan to pay off your debts efficiently and reduce your burden. If you have a large number of different debts, even debt refinancing can be a great solution - this way you have one debt in one place, and you can save money by refinancing your debts too!


Investing in the future

Investing is a great way to create another additional source of income. By investing in certain assets, you can earn extra and protect your savings from inflation. The question arises, where and how to invest so that you can also earn from it? After all, investing can be diverse.


  • Shares, bonds, and funds are a great way to invest and many are attracted by their high liquidity, i.e. i.e. opportunities to quickly sell the property and recover the invested money. However, to earn a solid amount, you need to know how to invest in shares, bonds, and funds, what to pay attention to when choosing, and what possible threats await you.
  • Precious metals (e.g. gold), and raw materials are also a great investment, only here there are storage and storage problems, so this method is chosen extremely rarely.
  • Investing in real estate can seem very attractive, but it often requires a larger sum, regular maintenance of the property, and communication with tenants. How to invest in real estate? It's not complicated: you just need to purchase a specific real estate unit (apartment, plot of land, house) and rent it out. The rental income you receive will become your investment return and such property will be considered investment property.
  • Another cool way to invest is through investment platforms. When investing in investment platforms, it is not necessary to have a lot of savings - it can be done with just a few hundred euros, and most importantly, you can invest for several months, which means you can earn faster! Some investment platforms are protected by real estate or other assets, so such investments are safe and reliable. Want to know how much you can earn by investing your savings? You can calculate the profit using the investment calculator.


Generating passive income

Money earned from shares, bonds, funds, real estate, and investment platforms is classified as passive income. Passive income is income that is earned with little effort, e.g. from investing. There are several types of passive income: passive businesses, rental of real estate and movable property, royalties, stocks, bonds, crowdfunding, etc. Passive income allows you to increase your capital without investing a lot of time and is therefore an excellent additional source of income on the road to financial independence.


Developing financial literacy

Developing a general understanding of financial management - saving, investing, credit, insurance, and other financial aspects - is essential for financial freedom. In other words, investing time in developing financial literacy. Financial literacy can be compared to computer literacy, which is a competence that helps to facilitate the management of certain processes and tools, in this case, money. Improving one's knowledge is not only good for personal reasons but also the financial well-being of the state, and should be done by both adults and their children.


Financial literacy education for adults

Learning financial literacy develops the ability to manage money well. This means learning to increase sources of income, to create new, often passive, income to help achieve financial freedom, to track spending and identify unnecessary spending, to spot opportunities for savings, plan for larger purchases, and to set long-term or short-term financial goals. This skill can be learned on your own or by attending professional courses or training.


Financial literacy education for children

As you may have already realized, financial literacy is the ability to manage money. Let's face it, money is an integral part of life, even for little ones. We teach young children the value of money, and older children how to use it consciously, and how to save or plan. This is what financial literacy is all about. Unfortunately, this skill is still not taught at school, so the onus is on parents. In the article, "Financial literacy: the basics and why it matters", you can even find a few tips and a game on how to teach your children to be money-conscious and how to lay the right foundations for their future financial freedom.