Mastering Personal Finance: Practical Tips to Achieve Financial Freedom

Updated: August 3, 2023

Financial freedom is a goal of personal finance many aspire to achieve. Everyone strives to make their ability to master personal finance a reality to achieve financial freedom.

The achievement of financial freedom means having enough cash, savings, and investments to afford the type of lifestyle you want.

However, you may be wondering how you can master your personal finance to achieve your financial freedom. This article details practical tips to achieve financial freedom.

Practical Tips to Achieve Financial Freedom

Creating financial freedom is an ongoing act. People talk about the usual tips, such as setting goals, budgeting, or saving an emergency fund. However, the key tips for financial freedom are:

  • Earn active and passive income
  • Seek financial education
  • Set clear financial goals
  • Create a budget
  • Save and invest
  • Protect your income

Earn passive and active income

Before you spend anything, you must earn it. There are two ways to earn: active income and passive income.

Active income includes having a job or being self-employed and other income through direct and active participation. It requires your time, skills, and effort to generate income. Examples are:

  • Salary from a full-time or part-time job
  • Income from self-employment or running a business
  • Professional fees earned by doctors, lawyers, or consultants

Passive income refers to earnings that require less active involvement once the initial effort has been made. It involves setting up income streams that generate money with minimal ongoing effort. Examples are:

  • Rental income from real estate
  • Income from cryptocurrency trading. For instance, the Dogecoin price has left both seasoned traders and newcomers on the edge of their seats due to price fluctuations
  • Dividends and royalties from investments in stocks, mutual funds, and intellectual property

Educate Yourself About Personal Finance

To achieve financial freedom, you must first take deliberate steps to learn about personal finance. This includes learning about personal finance concepts like financial goals, budgeting, investing, managing debt, living styles, and more. The more informed you are about personal finance, the better financial decisions you can make.

Set Clear Financial Goals

To attain financial freedom, you need to become specific about your objectives, amounts, and deadlines. Specific goals are clever and easier to achieve, whether saving for an emergency fund, paying off debt, buying a home, or investing for retirement.

Create a Budget

You need a household and investment budget for effective money management. Develop a comprehensive monthly budget that outlines your income and expenses and helps track your bills, spending, savings, and investments and achieve these five key things:

  • Track your spending and where your money is going
  • Avoid overspending and identify areas to cut back to save or invest more
  • Track and reinforce your goals
  • Remove the temptation to splurge
  • Live within your means

Save and Invest Money

Through basic budgeting, you can know how much money you should use for needs, how much you can put in savings, and how much you can invest. The typical rule is:

  • Use 50% to settle needs
  • Use 30% to settle wants
  • Use 20% to pay debts and savings

Protect Your Income

There are different ways to protect your income:

  • Save for emergencies: Ideally, you need a fund to give you three to six months of comfortable living expenses. For instance, if your phone breaks and you need to replace it, you’ll have somewhere to get funds rather than borrowing.
  • Reduce or pay off your debts: High-interest debts, like credit card balances, can be a significant roadblock to financial freedom. Pay off your debts systematically, starting with the ones with the highest interest rates.
  • Diversify your investment portfolio: Never put all your investments in one basket. Diversify your investment portfolio to spread risk and potentially increase returns. Consider a mix of real estate, stocks, bonds, and other investment vehicles.

Endnote

Achieving financial freedom is a gradual process that requires discipline, patience, and consistent effort. Implementing these practical tips and staying committed to your financial goals can pave the way toward a more secure and prosperous future.

This article is contributed by Patricia Lee.

What to do next: Click here to start your financial journey with IMG Wealth Academy

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