The Missing Piece of Financial Freedom
You just got your first paycheck. A million ideas run through your mind on what to do with the earnings. No sooner than you start looking through the options, “financial freedom” pops up. Almost every other person would recommend you to start investing for your future. But is it actually worth it in the longer run? Let’s find out.
Financial Freedom: a quick definition
What is financial freedom?
According to the popular finance platform ETMoney,
Financial freedom is having enough residual income to cover your living expenses. It is not about being rich and having tons of money, but having enough to cover your expenses so that you can spend your precious time doing what you like rather than doing things just to earn money.
This is a pretty simple definition, without presenting any sort of technicality to the reader. Financial freedom is basically guaranteeing that your expenses are covered, even if you do not have any additional income. But this definition also leaves us with more questions than we started with.
- How much annual expense is covered?
- For how many years do we plan our financial freedom?
- If it is supposedly easy, why aren’t more people being financially independent?
Since these questions do not have any correct answer, it all depends on the perception of the person. The first two questions are easy to answer, since they are relatively intuitive. A lavish lifestyle will require higher amount of savings in comparison to a humble one. If an early retirement is the goal, like the FIRE Movement, you’ll need to start planning earlier and save more.
Most financial planners and advisors can draw a plethora of graphs and recite multiple formulae which makes the financial freedom a realistic dream. However, beyond the reaches of this economic and mathematic world, there’s a far more important force at play: the human psychology, which often gets ignored. And there lies the answer to our third question as well.
The human psychology
Each person is unique, in terms of their preferences, ambitions, risk appetite and so on. This is a pretty simple observation, but most financial advisors just ignore this fact. There is no single financial advice that would be ideal for each person, simply because everybody is leading different lives. Knowing oneself is far more important than knowing the markets and the world. To illustrate this, let’s go through a few questions that one should ask themselves:
- Is it important to be rich, or financially independent?
Absolutely not. Being rich or financially independent isn’t mandatory in any part of the world. Some ambitious people want certain luxuries that might cost a fortune, so they need to amass enough wealth. Conversely, there are many people living humble lives without any extraordinary wealth, and they’re happy with it. Money can’t buy happiness, it is a means to an end. One should know important is money in their lives.
- How comfortable am I with risk?
Risk is a fundamental part of investing and growing money. Since nothing in life is certain, everything carries a certain element of risk. As an example, bonds are considered relatively safe if they’re backed by the government, since the odds of a government collapsing are very low. But since that is not impossible, there is always a risk that the bond payment might default. No form of investment, whether short or long term, is free of risk. So being comfortable with risk is a huge ask.
- Can I be patient with my investments?
Financial freedom relies on one virtue for most people: patience. The power of compounding, coupled with patient investing, allows a generous amount of money to accumulate over time. Seeing the markets sway, it is easy for an investor to panic and withdraw their investment, which only causes them a loss. For long term gains, impatience is a vice to be avoided at all costs.
- Can I hold my nerve during tough times?
The markets are constantly moving. Every few years, there is a noticeable slipup in the market, when a lot of value if wiped off. Famous examples include the Housing Market crash of 2008 and the technology bubble burst in the early 2000’s. Seeing your investments take a tumble isn’t a pleasant sight, but seasoned investors are mentally prepared for it and they weather the storm. However, this can induce stress in a lot of casual investors, causing them to give in to the widespread panic. Mentral strength is a crucial factor for the investments to bear good fruit.
Take a moment, and carefully figure out the answers to these questions. It should help you decide if you actually want to take on the seemingly uphill task of investing and saving for the longer run.
Conclusion
Financial Freedom is a great concept, theoretically. There is an extensive world of economics and mathematics that backs most concepts. However, on a finer level, success has more to do with the person themselves. Depositing all money in savings account to get some minimal return is also not a bad option, it is a matter of perspective and choice.
There might be millions of people who say being financially independent is easy, as long as you stick to the “important rules”. But the psychological factors listed above are as important as the economic ones. The viability of making investments in the longer run can only be gauged by one’s own aptitude. They might give great financial returns, but make sure you’re ready to put in the required amount of mental effort as well.
After all, every thing is a trade-off. In this case, you will need to maintain your composure at all times, and regularly monitor your investments as well. It is all about trading mental and physical efforts for financial freedom, in the long run.
