South Africans celebrate political freedom on 27 April every year, but too many of us still feel trapped because we don’t have the money to live the life we want. So, let’s talk about financial freedom and what it means.
The first thing to know about financial freedom is what it is NOT:
- Financial freedom is not about an amount of money in the bank; it is about the life you want to live.
- Financial freedom is not the same for you as it is for me. You have to understand what it means to you.
It helps to look at financial freedom through two lenses: the first is what your money situation looks like and the second is how that makes you feel.
When you are financially free, you have enough money to:
- Live comfortably, which means having enough income to cover essential expenses such as housing, food, utilities, healthcare and education. It also includes the ability to have some fun, do things you love and treat yourself without worrying about paying your bills next month.
- Live securely, which means your household has a safety net so that you can handle
unexpected expenses (like car repairs or medical emergencies) without going into debt. You have savings, an emergency fund, and insurance to protect you against life’s shocks. - Not drown in debt. Instead, you are managing your debts and paying off loans and credit cards without struggling.
When you are financially free you feel:
- That you have options. You can make choices that support your values and goals, be it
further studies or starting a business. When you are truly free, you can even choose to stop working and live off your investments. - At peace. You’re not constantly worried about bills, payday-to-payday living or unexpected expenses. Instead, you can focus on enjoying life.
There are 7 stages of financial freedom, each requiring you to take specific steps to make progress.
- Dependency: you need help to pay your bills, either in the form of debt or loans from family members.
If you are here, you need to put the important basics in place:
a. Track your expenses so you understand where your money goes.
b. Get your credit report to understand how much debt you have and how best to deal with it.
c. Check your bank statements to get a full picture of all your expenses.
d. Draw up a budget – and stick to it.
e. Ask for help if you need it. - Self-sufficiency: you can pay your own bills without help. Saving is not yet possible, but you are in charge of your finances. Keep up the good habits you started in phase 1 to keep moving forward.
- Stability: you no longer live from payday to payday and can start saving. Make it a priority to start building your emergency fund so you don’t have to go into debt every time something happens.
- Security: now you start making your life more secure by paying off debt and building up enough savings to cover at least three months of expenses, in case you lose your job.
- Flexibility: with your safety net in place (three months of living expenses in a savings account) you now put your money in investments that earn you interest and allow your money to grow.
- Independence: in this stage you can choose to stop working and live off the returns on your investments – as long as you don’t touch your capital.
- Abundance: you can now live as glamorously as you want because you have more money than you can spend.
If you are in stage 1, it can seem impossible to ever reach stage 7, but remember that every journey starts with the first step. The same is true for financial freedom. Start with the basics and persevere and your finances will improve.
