Before we dive into this topic, it’s important to clarify the difference between Financial Independence and Financial Freedom, which are often confused. A person is financially independent when the passive income from their investments covers their monthly expenses. Financial Freedom goes further. A person is financially free when, beyond having passive income that covers monthly expenses, that income also gives them the freedom to choose whether to work or not, and what to do with their most precious asset: time.
But how do you achieve Financial Freedom? Well, as mentioned in this blog’s first post, it was precisely my career as a salaried employee that made it possible. Of course, my discipline in spending less than I earned over the years, and making good investment choices, were essential for me to reach Financial Independence and, years later, Financial Freedom.
If I can leave a few tips for those still on the road to Financial Freedom, here they are:
Have an emergency fund: first and foremost, make sure you have an emergency fund. That money can and should be invested, but choose highly liquid investments so it can be withdrawn as soon as needed. It’s recommended that your emergency fund cover 6 to 12 months of your monthly expenses.
Start investing early and consistently: compound interest is a powerful ally in building wealth, especially for those who start early and invest consistently. If you started later, don’t worry. Compound interest is still your friend.
Diversify: nowadays there are countless, easily accessible investment options both in Brazil and abroad. There are many theories out there about good diversification strategies, but more important than which one you choose is having one and sticking to it. Diversification will protect your wealth whenever the Brazilian or global economy hits instability, which happens constantly.
Spend less than you earn: after years of hard work, you’ll surely get promoted and see your salary increase. That’s genuinely what I wish for you. When that happens, avoid immediately adjusting your lifestyle to match your new income level. Yes, you should enjoy life, but keep your standard of living a notch or two below what you could afford, and invest the difference.
In a future post, I’ll go into more detail about how I achieved Financial Freedom and the strategy I use to stay financially free.
Follow along for the next posts, and let’s go Reimagining the Route together!