Financial freedom generally means having sufficient money to easily support yourself and your family, but it can also have a different meaning and purpose from person to person. US News shared that apart from retiring early, some people want financial independence because they want to step away from the stress of a 9-to-5 job. Some desire financial freedom to prepare for unforeseen circumstances so they can bounce back from any adversities quickly. It is outlined in ‘Finding Your Financial Freedom’ that this freedom should be about finding happiness and living the life you want. It is explained that people must change their attitude about money and see it as an enabler of their freedom and happiness instead of being a survival tool. This way, one can be truly free instead of just being financially stable.
Whatever your reason may be, having financial freedom will require you to practice saving or investing.
What’s the Difference Between Saving and Investing?
Although saving and investing are both important to help you financially, they are two different concepts you need to understand. Saving means putting aside a part of your income in your bank account after paying for your monthly necessities. Since the savings are secured in a bank, they are accessible to you anytime in case of emergencies.
On the other hand, investing means using part of your savings to purchase financial products such as mutual funds, stocks, bonds, or even real estate properties, which can bring higher returns in the future. However, investing in market-linked financial products like stocks or mutual funds involves risk due to the fluctuating stock market. In this case, the higher the risk, the higher the rewards.
But if you’re looking for long-term options that will allow you more financial freedom, it’s often better to invest your money in secure and legal financial institutions and markets.
Why Investing Gives You More Financial Freedom?
Investing can help you reach financial freedom because it can be a passive income stream. This means that you make money without spending a considerable amount of time, energy, or additional money. A great example is investing in rental properties because this ensures that cash flows into your account every month. Moreover, the value of properties appreciates over time. If you decide to sell the property in the future, there’s a high chance that you’ll be able to sell it for more than the price you paid for it. Compared to simply keeping your money in a savings account with low-interest rates, you can make better use of your money by investing.
Apart from passive income streams, investing allows you to earn more money through higher and more varied returns on investments (ROI). With ROI, you can gauge how well your investment is performing over time and make the necessary financial decisions.
FXCM outlines three types of ROI you should know as an investor. Total return refers to how much your investment has produced over a given time in nominal money amount, such as figures in monetary value. Meanwhile, the percentage return shows how well your strategy has worked. This helps you understand how well your investment has done in relation to the original amount you’ve invested. And the final variation for analyzing ROI is using an average annual return, which indicates how well your investment is doing in relation to how long you’ve had your investment. This is useful in determining the profitability of your long-term investments because they optimize long-run performance. If your investment only yields less than 10% a year after five years, you might want to reconsider your investments.
Finally, investing allows you to earn money in more ways than one, allowing you to achieve financial freedom faster. Property investor Todd Baldwin shared that by investing in real estate, he was able to earn $1.5 million from property sales, wholesale deals, and rental income alone. Apart from real estate investments, he also invests his money in the stock market. Because of this, Baldwin confidently left his 9-to-5 job and achieved financial freedom at 35 years old.
While saving money may seem like the more natural, and safer, option to take, it doesn’t provide you with a passive income. Investing is riskier, but if you want true financial freedom it is the only way to achieve this.