First, the most important thing about financial freedom is about goal setting and objectives. You must think about your life and what you want out of life. What does financial freedom really mean, to you, personally? If you want a luxurious life full of fast cars and fanciful toys, then clearly the passive income you need from investments would be much larger and harder to achieve compared to someone who wants a simple life with occasional luxuries.
Clearly there are many myriad possibilities - so plan first your financial goals and objectives.
Why? It should be clear that different people have different goals and objectives, but the idea is to make sure you know why you are doing what you are doing. "Why" is often more important than "what", since it means that you will be motivated, inspired, and able to achieve what you want.
Personally, I want to have the freedom and time to pursue the many hobbies I have, and so having the financial means to do so without worrying about my paycheck is a strong incentive.
This is important: you have to spend less than you earn. Simple: keep your spending lower than your earnings and always live beneath your means.
In fact, if need be, take up extra jobs or work harder in your current job to gain additional income.
With money you save from spending less than you earn, invest the money. The idea is simple - don't let money accumulate under your bed and certainly do not have all your money only in your savings account; invest and grow your wealth.
On this note, many suggest gaining passive income, for instance, through investment in stocks for dividends, and bonds for interest, and, for the more conservative amongst us, placing money into long term bank fixed deposits to gain interest might be a good idea. In short, invest your money.
Make sure you pay off your debts. Many people say, however, don't borrow; try not to get into debts at all; and debts are bad. One famous saying I usually tell my students is that Shakespeare says, "Neither a borrower nor lender be." On the other hand, I would say instead that it really depends on what your debt is about. If you borrow money to spend on consumption, such as borrowing for a new TV set, then that might not be a good idea. Try to pay those in full, because interest has this nasty habit of expanding and expanding. You always end up paying much more than you expect due to "effective interest rates".
If, however, you borrow money to spend on assets, such as a house (which is an asset as it can be rented out, or sold for capital gains) or to spend on machinery for your business if you are an entrepreneur, it is rather different from borrowing for consumption.
I would say, in my opinion, try to reduce "bad debt" and try to pay off "good debts". If you can pay for things in full, it would be better - but in my view if you have to borrow, try to borrow for the right reasons.
Personally, I keep records of how much I spend and how much I earn, and this accounting keeps me disciplined. Make sure you know how much you spend, and how much you earn, and this will make sure you have the knowledge to cut in the right places.
Set a budget and spend within the budget.
One of the recent National Economics and Financial Management Challenge 2014 FaceBook post questions in the competition was about comparing dollar cost averaging and asset allocation.
One of the financial ideas that is definitely useful here is dynamic asset allocation. You could allocate your resources across various classes of assets, like stocks, cash, bond, REITs, and insurance, as this diversification of investments helps you ensure that you build up your wealth while reducing company-specific and other associated risks drastically.
Once you do the above steps in your journey to financial freedom, build up an emergency fund for a rainy day just in case you need the funds quickly. Many people say that an emergency fund should be 3 to 6 months of your income.Do this last because paying off existing debts and investing for long term dividend and capital gains should be your main priorities.
JC Economics Essays - This simple finance article is my personal sharing about the path to financial freedom and financial independence. Thank you for reading my sharing on economics and finance ideas and knowledge, and hopefully it is helpful for economics students competing in the National Economics and Financial Management Challenge 2014, NUS, Singapore. Thanks for reading and cheers.