Financial freedom can mean many things to many people.
While the specifics vary from person to person, the underlying idea is to have enough security to live the life you want and achieve your goals without being concerned about money.
Read on to find out more about financial freedom and how you can reach it.
Start by defining what financial freedom looks like for you
Before you can work towards financial freedom, you need to understand what it actually means for you.
Imagine that money was no longer a constraint. How would your life change?
Perhaps you would retire and spend time travelling the world. Or you might want to help your children or grandchildren financially, pursue hobbies without worrying about the cost, or simply continue your life normally while knowing that your work is a choice rather than a necessity.
The key is to identify what “enough” looks like. Financial planners sometimes refer to this as finding “your number”.
Your number represents the amount of wealth you would need to support your desired lifestyle both now and in the future without any financial worries.
To find your number, you should consider the following expenses:
- Regular expenditure – This includes all essential costs, such as bills, groceries, mortgage repayments, and debts.
- Discretionary spending – This includes any expenses that are luxuries, such as expensive holidays or dining out.
- Care costs – Social care can be very expensive, so it’s important to make plans for funding it if needed in the future.
- Legacy plans – As well as your immediate and future needs, you should consider what you want to leave for your beneficiaries, as this is key to determining how much you need to achieve your goals.
A financial planner can help you find targets for each of these based on your goals. They can also use cashflow modelling to show how other factors, such as inflation or market downturns, could affect these costs over time. This can help you find a figure, or a range of figures, that represent your number and your target for achieving financial freedom.
It’s important to understand your current standing
Once you have a clear idea of your long-term target, the next step is to assess your current financial position.
Start by reviewing your pensions, including workplace schemes, personal pensions, and your expected State Pension. Pensions are often the foundation of a retirement plan, so it’s important to understand what income they are likely to provide.
Next, assess your existing savings, investments, and other assets. Looking at your finances together can provide a clearer picture of your overall standing than focusing on individual accounts.
Once you’ve finished your financial assessment, you may find that you’re closer to financial freedom than you realised, or even that you’ve already reached your target. Or, if you’re still some way off, you now know exactly how big the gap is, which is key for taking the next steps to bridge it.
A financial planner can help you conduct a full financial assessment to give you a clear picture of your current situation.
Taking action can help you get to your goal more quickly
If there is a gap between where you are and where you want to be, there are several steps you can take to help close it.
This may involve:
- Reducing your discretionary spending
- Downsizing or selling a second home
- Rebalancing your savings and investments to ensure your wealth is growing in the long term
- Making full use of your available allowances, such as ISAs and pensions
- Automating your savings and investment contributions to ensure they are prioritised
Of course, some of these may not be appropriate for your circumstances, but there may be quick changes you can make to your plan that could bring you considerably closer to financial freedom.
It’s important to be aware of the risks along the way
Achieving financial freedom is also about ensuring that your wealth can continue to support your lifestyle despite unexpected challenges.
As such, it’s important to be aware of the risks you may encounter along the way. These might include:
- Inflation – This is one of the biggest long-term risks because it can gradually reduce the real value of your wealth over time, so it’s important to plan for it.
- Market volatility – While markets have historically rewarded patience and discipline over the long term, periods of volatility can affect your portfolio. They can also lead to sequencing risk, where losses are locked in when you draw from your pension. Overcoming this requires careful planning.
- Life changes – Health issues, changes in family circumstances, or unexpected personal events may change your financial goals and the resources you need to achieve them.
Because of these risks, it’s a good idea to view financial planning as an ongoing process rather than a one-off exercise. Regular reviews can help ensure that your plans remain aligned with your goals, life circumstances, and the wider economic environment.
To speak to a financial planner, get in touch.
Email us at hello@vwmwealth.com or call us on 0141 229 4004.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
