Steps To Financial Independence Owes Big To Compounding Phenomenon
Table of Contents Show
“The key to fast-tracking financial freedom is to make and invest as much money as early and frequently as you can.”
Grant Sabatier, best selling author of Financial Freedom: A Proven Path to All the Money You Will Ever Need has a strategy. It sounds simple, doesn’t it?
Its one of the steps to attain financial freedom. Make money, invest, and multiply until you achieve financial freedom.
But now you must be asking how do I make money if I never have any left at the end of the month? My paycheck is only enough to cover my living costs. Sometimes I save, but it’s mostly a survival game till the next salary.
Well, nobody said financial freedom is easy. It’s a persistent struggle that requires sacrifice and staying focused on your goal. However, the rewards are immense, and the possibilities unlimited - no more work meetings or “yes boss”, no more penny-pinching to pay the bills, and no more delayed vacations.
If you want to live comfortably without working or not worry about bills, then you must be willing to work hard and be willing to put down the steps to financial freedom .
Think of it this way, you sow what you reap. So it’s not about starting with one dollar or a million - it’s about starting as early as possible to get as rich as you want to get to financial freedom.
Ready to unlock financial freedom? We’re going tp discuss the steps to financial freedom and help you get the financially independence journey started. Let’s get started.
A. What Does It Mean To Have Financial Freedom?
What Does it Mean To Have Financial Freedom?
“Money can’t buy happiness, but it can buy you freedom from worry, and that’s almost the same thing.”
That’s as simple as it gets. While financial freedom may differ for everyone, its core remains the same - no financial worries. Here are a 7 types of financial freedom:
1. Freedom From Paychecks
No more living on the edge, wondering if your next paycheck will stretch far enough. Financial freedom allows you to breathe easily, knowing your essential expenses are covered with room to spare. Unexpected costs become manageable hiccups, not financial emergencies.
For example, Lilah, a young graphic designer, used to work long hours at a demanding marketing agency, barely making ends meet. Her goal was to freelance, set her working hours, earn enough to cover her expenses and save comfortably.
She followed these steps of financial freedom to get to her goal:
Calculated her expenses and eliminated unnecessary items causing her to splurge, for example, fine dining and designer brands.
Made a budget, keeping 50% for survival (rent, grocery), 30% for essentials (clothes, salon), and 20% for savings and debt repayment.
Now that Lilah was living within her means and saving, she could cut down on long hours and create a strong portfolio.
Lilah landed freelance gigs and used money streams to save and invest in high-interest savings accounts and dividend stocks. This allowed her to save a comfortable amount, quit her job, and transition to a full-time freelancer.
Now, Lilah enjoys a comfortable living with a flexible schedule, working her preferred hours while traveling and pursuing personal interests.
7 Types of Financial Freedom
2. Freedom Of Choice
Financial freedom empowers you to pursue your passions, whether it's starting a business you've always dreamed of, going on a world adventure, or simply dedicating more time to hobbies or activities you love. The choice is yours, not dictated by your paycheck.
Natalie Sisson, a former marketing consultant, transitioned to a life of travel and entrepreneurship. She left her secure job and built a business traveling and living out of the suitcase for 5 years.
Natalie focused on building multiple income streams, investing her profits, and growing her business. She now lives her ideal lifestyle, coaching women, writing, traveling, and focusing on life experiences that make her happy - all while earning a six-figure income.
3. Freedom From Debt
Break free from the shackles of high-interest payments and the constant burden of debt. Financial freedom allows you to take control of your finances and experience the peace of mind that comes with knowing you're not chained to a cycle of debt.
After years of accumulating student loans and credit card debt, Michelle felt overwhelmed and trapped with her low salary as a marketing assistant. To get rid of the high-interest debts, Michelle followed these steps to financial freedom:
Embraced frugality, cutting down her expenses to the bare minimum to save aggressively
Took on a side hustle writing marketing blogs online for freelance clients.
With dedication and perseverance, she became debt-free and had significant savings to invest in an alternative income stream. This gave her the freedom to leave her side hustle and focus on growing her career while her savings grew from her investment profit and salary.
4. Freedom To Retire Early
Financial freedom allows you to leave the workforce whenever you choose, whether you want to take time off for a year or never have a 9 to 5 job again. You can spend quality time with your family, open a restaurant to follow your passion for cooking, or author your book.
Carl and Mindy, also known as the 1500 couple wanted to retire by 43 or 1500 days after starting their financial journey:
Here's how they achieved financial freedom:
Tracked Spending: They meticulously tracked every expense to understand their true cost of living.
Calculated their number: Based on their spending habits, they determined they needed $30,000 annually to retire comfortably.
Invested strategically: Using the 4% rule (withdraw 4% of their savings safely, adjusting for inflation to avoid running out of money over 30 years)), they calculated their target investment amount to sustain their desired lifestyle.
Saved Consistently: They committed to saving $2,000 per month towards investments, reaching their million-dollar target ahead of schedule.
Through dedication and smart planning, Carl and Mindy achieved financial freedom, allowing them to retire early and enjoy life on their terms.
5. Freedom To Give Back
Financial security allows you to focus on giving back to your community and the causes you care about. Whether it's supporting loved ones, donating to charities, or setting up a secure future for future generations, financial freedom empowers you to give freely from what you have.
Jane, a former accountant who left her job to take care of her autistic son craved the financial security she used to have with her job. She wanted the financial freedom to take care of her son and meet the challenges that came with his special needs without worrying about money.
As Jane learned how to meet her beloved son’s needs, overcoming obstacles so many parents face with special needs children. This gave her the idea of writing a blog series to help others in the same boat as her.
Jane had no idea her blog would help so many others and become such a success.
Her blog began generating her revenue and eventually motivated her to write a bestselling book. As her money grew with savings and smart investments, she started a charitable organization for autistic children who could not afford professional help.
6. Freedom Of Savings
Financial freedom doesn't mean eliminating all financial challenges, but it does mean approaching them with confidence. Unexpected expenses become manageable bumps in the road, not roadblocks or disasters. You can ride the financial storms comfortably without drowning.
For example, there are two friends, Hugh and Calvin. Hugh earns well as a marketing executive for a multinational and loves to live beyond his means, splurging on expensive cars, designer brands, and five-star restaurants.
Calvin earns an average income but has automated part of his salary to go into savings every month and invests the profit in shares.
One day, Hugh loses his job because the company he works for is downsizing due to an expected recall of its leading brands. He has no savings to pay for his mortgage, kids' school expenses, and daily living expenses. Hugh has to sell off his assets and start over with his family.
Whereas Calvin who was earning far lower than him is in a stable condition because of savings and smart investments.
7. Freedom To Fulfill Desires
Financial freedom is ultimately about creating a life that feels truly yours. It's the freedom to make choices that align with your values and goals, without being constantly restricted by financial scarcity. This allows you to focus on what truly matters, living a life filled with purpose and fulfillment.
Self-made millionaire, Barbara Corcoran worked 22 jobs before turning 23. She borrowed $1 K and opened a real estate company with her boyfriend. After 7 years, she opened her firm, The Corcoran Group, which she later sold for $66 million, all starting from the $ 1 K loan.
Barbara now lives doing what she wants, whether it’s business, TV shows, or being a motivational speaker to guide others on the path to financial freedom.
Now that we've explored the rewards unlocked by financial freedom, let's delve into the powerful tool that fuels it all: Compounding.
We can see above how individuals achieve their goals faster by leveraging the power of compounding. This financial principle allows your money to grow exponentially over time, where your investments generate enough income to cover your living costs, essentially putting your money to work for you.
Let’s explore the magic of compounding in detail and how it can lead you to financial freedom by growing your wealth fast!
B. Compounding Is Pivotal in Steps To Financial Independence
Imagine you have a snowball rolling down a snowy hill. The more it rolls, the bigger it gets, right? Compounding works similarly for your money!
Here's the basic idea:
Earn interest on your money: Let's say you invest $100 and earn 5% interest per year. That means you get an extra $5 each year.
The magic of compounding: In the next year, you don't just earn interest on your original $100. You also earn interest on the $5 you earned earlier!
It grows faster: So, in year two, you might earn $5.25 (a little more because of the interest on the interest). Over time, this keeps happening, making your money grow faster and faster, picking momentum as the original (principal) amount grows!
Here's a breakdown to make it even clearer:
Year 1:
Starting amount: $100
Interest earned: $5 (5% of $100)
Total amount: $105
Year 2:
Interest earned: $5.25 (5% of $105) (the interest is slightly higher than year 1)
Total amount: $110.25
The longer you invest and the more frequently you earn interest (compounding), the faster your money grows!
Compounding works best when you start investing early and let your money grow over a long period. The higher the interest rate, the faster your money will grow.
Now think if you have saved $10K instead of $100. You will be earning $500 per month. At the end of the year, you will have $6K of profit on your original amount, making it to $16K. This amount can further be invested for a higher interest to get more profit and maintain a cycle of consistent but increasing income.
C. Compounding Accelerates Financial Freedom
“Compound interest is the eighth wonder of the world. He who understands it earns it. He who doesn’t pays it.”
Compounding the essence of financial independence - achieving a level of wealth where passive income takes care of your expenses, freeing you to pursue your passions and live a life free of financial worries.
Here are a few ways you can grow your wealth with the beauty of compounding:
1. Saving Accounts
Savings accounts are a great way to kick off your savings. Whether you’re 18 and have just opened your bank account or are a homemaker who’s been strictly budgeting and shaving corners, these will give you interest on the amount you save.
They're a safe place to stash your cash and watch it grow slowly with interest. Think of it as the cash you stash away for emergencies or rainy days, but with one main benefit - you get a bonus on the amount that increases every time you add a dollar. It could be $1 per month for every $100 or $5 for $1k.
The money is easily accessible when you need it but the downside is the interest rate is typically low. This makes them a good option for short-term savings goals or emergency funds.
You can also opt for a high-yield savings account. This is a level up from the regular savings accounts and deposits.
As your savings increase, you can deposit them into an account. They give a higher interest rate allowing your money to grow faster. However, these may require a higher savings amount to get started with some restrictions on when you can access it.
The key is to start generating money. It doesn’t matter how little, it grows over time as you increase your savings. As author Margo Vader says, “Small amounts saved daily add up to huge investments in the end.”
Savings Is A Step To Financial Independence
2. Certificates Of Deposit (CDs)
CDs are fixed-term deposits with a guaranteed interest rate. But instead of stashing the cash in a jar or a drawer, the drawer is locked and the key cannot be found for a fixed period, for example, 3 months, 5 years, or anything in between, They're like locking your money away in a time capsule for a set period (usually 3 months to 5 years).
In exchange for your commitment, you earn a higher interest rate than a regular savings account.
The longer you lock your money away, the bigger the reward! But there's a catch - you can't withdraw your money without penalty during the CD term. This makes them a good option for saving for a specific future goal, but not ideal for emergency funds.
It’s wise to invest the money you know you will not need for 3 or 5 years, whatever the time you are using the certificate for. The longer you lock your money away, the higher the interest rate is and the faster your money grows.
3. Employee Benefit Plans
These are goldmines for those with regular jobs. A portion of your paycheck is automatically saved before taxes, growing steadily over time.
This automatic deduction ensures the money never comes with your salary, automating your savings and multiplying them.
Remember the Orbeez kids love playing with? You put them in water and they keep growing bigger? This same way money disappears from your paycheck but reappears as a big chunk later, when you retire or leave the company.
These plans often come with matching contributions from your employer, essentially free money that boosts your savings!
4. Peer to Peer Lending
Have extra cash sitting idle like a forgotten gym membership? Why not put it to work? Platforms allow you to lend money directly to others, earning interest in return. You’re a mini-bank, lending your money to individuals or businesses in exchange for interest payments.
The benefit of lending money directly is getting a higher interest (profit) on your money. There’s no one in the middle taking a commission to connect you to borrowers.
However, this can also be risky. The borrower can take your money and run, so it's better to choose a reputable platform to lend your money, thoroughly researching the platform and individual borrowers before investing your money.
5. Bonds
Think of bonds as loans you give to governments or big companies. They borrow your money for a set period (3 to 10 years or more) and promise to pay you back with interest in regular installments. It's like giving a friend a loan and they agree to pay you back with a little extra on top!
Here's the beauty of bonds: they are generally considered less risky than stocks. Since you're loaning money to established entities, you're more likely to get your money back in full, along with the promised interest. This makes them a good option for those seeking a steady, predictable stream of income with lower risk.
The downside? The interest rates on bonds are typically lower than what you might earn with stocks. But for those who prioritize stability and a guaranteed return on their investment, bonds can be a solid foundation for your passive income strategy.
Bond Investment Is A Step To Financial Independence
“Invest for the long haul. Don’t get too greedy and don’t get too scared.”
6. Stocks
Stock investments are like owning a part of your favorite clothing brand. As the company does well and sells more clothes, they might share some of their profits with you through dividends ( a portion of a company's profits) – like a mini bonus!
These payouts can happen quarterly, giving you a regular stream of income. The longer you hold onto those shares, the more dividends you can potentially earn. Of course, there's always a chance the company might not do well, so do your research before diving in!
Look for companies that are financially strong with a history of paying consistent dividends. The longer you hold the stock, the more dividends you'll receive over time.
The profit from these shares can be used to buy more shares, or invested in some of the other passive income streams mentioned here.
“In the short run, the market is a voting machine. In the long run, it is a weighing machine.”
7. Real Estate
This is the classic way to build wealth through passive income, increasing both ownership and income. For example, building a vintage baseball card collection and selling at a higher price to collectors, or renting out your cards for events.
Here are two ways you can grow your wealth with real estate investments:
Rental Properties: You buy a property and rent it out for a steady income stream. If the property value goes up over time, you can also make a profit when you eventually sell. There's more responsibility involved here (think repairs and tenant management), for example, the car you get serviced regularly to keep it in good condition.
If you sell a car that works and looks great, you get a better price for it. Similarly, if your property is well maintained, the price only goes up, especially with the market rates increasing over time.
REITs (Real Estate Investment Trusts): Want real estate investment without the hassle of managing properties? REITs are like buying shares in a collection of properties.
They trade on the stock market, offering you a piece of the rental income and potential property value growth, without the landlord’s duties. This is a more hands-off approach, but it may offer lower returns than directly owning rental properties.
D.Decyz POV On Steps To Financial Freedom
Steps To Financial Independence
“Money is usually attracted, not pursued.”
At Decyz we recognize the power of attracting money with savings and earnings. That’s how the magic of compounding happens, whether it’s with the first $1 K like Barbara Corcoran did or gradually building like Calvin’s investments.
The key is making it happen by focusing on financial freedom and mapping out a plan to get there by multiplying your money. As Canadian-American motivational speaker Brian Traey says:
“Financial security and independence are like a three-legged stool resting on savings, insurance, and investments.”
You need to act on all three legs of the stool to begin multiplying your money - how you get there is your decision. But start now to benefit from the beauty of compounding and live life liberated from worries for a future that’s secure with financial freedom.
