Do you want a strong financial base and retire with a stable income? What is the formula for financial freedom? and why successful investors care.
What is the formula for financial freedom? How to manage finances effectively.
Financial freedom is defined in many ways, such as reaching a state of no financial worries, or having enough money to meet all your needs for 25 years after retirement. A simpler way is the ability to spend without looking at the price tag. When you achieve financial freedom, you will be able to make choices and decisions freely, without being controlled by financial pressure.
The interesting thing is that financial freedom does not depend on age, time or intelligence, but on the ability to manage and control cash flow. Once you have achieved a stable income, you are free to enjoy life without depending on anyone.
Many people still mistakenly believe that financial freedom requires a large amount of money. In fact, it is not like that. It is not necessary to own a huge amount of assets or luxury cars, but the key is the balance between income and spending. So how much does it take to achieve financial freedom?
Financial freedom can be divided into two types: Freedom in terms of assets and freedom in terms of thinking. The level of this freedom will vary depending on each person's needs. People with a high-class lifestyle will need a higher level of finance than those living at a middle-class level. The first thing is to clearly identify personal financial needs and build a specific cash flow plan. Ask yourself: How much do you need to save? How much do you spend? How much do you have now?
Personal financial management formula according to the 50/30/20 method
The 50/30/20 personal finance management method helps to regulate spending habits and keep personal finances in balance. This method suggests dividing income in the following proportions: 50% for essential needs, 30% for personal desires and 20% for savings.
In fact, Americans are notorious for their low savings awareness, leading to a huge debt situation, with the total debt in 2020 reaching $14.3 trillion. According to an Investopedia report, only 7.61 TP3T of Americans have personal savings. To solve this problem, Senator Elizabeth Warren introduced the 50/30/20 formula, which was widely accepted and published in a book titled “All Your Worth: The Ultimate Lifetime Money Plan”. She asserted that, with the right allocation, you can live comfortably on just 501 TP3T of income.
Specifically, Ms. Warren recommends allocating after-tax income as follows:
- 50% for essential needs
These are the essential expenses required to maintain life, such as rent, food, health care, electricity, water, and internet bills.
- 30% for personal wishes
These are expenses that serve entertainment needs and improve quality of life, such as Netflix service costs, shopping for clothes, or participating in activities such as going to the gym or going to coffee shops.
- 20% for saving and investing
This 20% savings will give you at least three months of income as a reserve fund. Once you have accumulated enough, you can invest this amount in retirement funds or other personal investment channels to increase your assets.
What is the formula for calculating financial freedom?
To calculate your level of financial freedom, you first need to determine a specific method for estimating expenses. First, calculate your monthly living expenses, including necessary expenses such as rent, food, and recurring and non-recurring expenses. Once you have your total monthly expenses, the next step is to estimate the passive income you need to maintain your desired standard of living without having to depend on a job. For example, if your monthly expenses are about 10 million VND, you will need about 120 million VND in passive income per year to achieve financial freedom. This is an important factor for you to achieve financial independence.
In addition, personal financial management needs to follow basic principles, such as always balancing income and expenses. To build a solid financial foundation, income needs to be greater than expenses so that you can save and invest regularly. This will help you get closer to your long-term financial goals. To create stability, build an emergency fund for unforeseen situations, usually equivalent to 3 to 6 months of living expenses. At the same time, invest in safe and stable yield channels such as index funds or bonds to grow assets sustainably.
What is the formula for calculating financial freedom?
To manage finances effectively, diversifying your income sources is a way to minimize risks. Having multiple sources of passive income not only helps you accumulate assets quickly but also helps reduce financial pressure from your main job. Saving and investing wisely are also important strategies. This requires careful consideration when allocating capital to appropriate investment channels, helping to optimize profits in the long run.
Other ways to manage personal finances to reduce risk and increase wealth
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What is personal financial management: Personal finance management includes many important items such as budgeting, saving for retirement, and managing credit effectively. By mastering the basic principles of personal finance, you can avoid many difficulties in your daily life and at the same time create a solid financial foundation for the future.
Build a reasonable spending plan: An important step in financial management is to identify specific monthly expenses and try to stay within the set range. Planning will help you control your budget, avoid overspending, and easily allocate to long-term financial goals.
Increase income from different sources: In addition to your main income, you can look for opportunities to earn money from many secondary sources such as investing, small businesses, or doing extra work. These sources of income will not only help increase your savings ability but also assist in achieving your personal financial goals faster.
Invest wisely: Investment channels such as stocks, real estate, or open-end funds all have the potential to generate passive income, helping you accumulate assets sustainably. By choosing the right investment forms, you can increase the value of your assets and optimize future cash flow.
Monitor and adjust your financial plan: Regularly reviewing and adjusting your personal financial plan is an essential step. Regular reviews will help you identify any changes that may be needed to ensure that your financial plan remains relevant to your goals and current situation.
Diversify your income sources to reduce financial risk: To avoid depending on a single source of income, you can diversify by investing in stocks, real estate, or personal business projects. This method not only increases your income but also helps you accumulate assets steadily over time.
Conclude
Formula for financial freedom and personal finance management is a journey that requires perseverance and commitment. Applying these financial principles will help you get closer to your goal of financial freedom, building a stable and comfortable life.
Start today, plan and accumulate assets to make your financial dreams come true. Especially sustainable profitable investments like in HVA Group can bring stable profits in the long term, helping you go further in your journey of accumulating assets. Effective investing not only helps you increase your assets but also contributes to creating a source of passive income - an important factor for future financial freedom.
Managing your personal finances is not just about controlling your spending, it is about building a solid financial foundation for your future. By implementing effective personal financial management techniques such as budgeting, investing wisely, and diversifying your income sources, you will minimize financial risks and increase your assets in a sustainable way. Start today to move towards a financially free and stable future.
