A mindset for achieving financial freedom

Start with a Plan

It is ingrained in our nature to compare ourselves to others, and there is a tendency to equate financial success with the vehicles we drive, the places we live and the lifestyles we lead. However, true wealth lies in being able to control one’s time and make choices without financial stress.

Those who accumulate wealth over time understand the value of living within their means and prioritising savings. This simple shift in mindset can empower individuals to achieve long-term financial freedom.

Achieving financial freedom is not solely about increasing income or making the best investment decisions; it also involves understanding how our behaviours and thought processes shape our financial choices.

Pioneers in behavioural finance Amos Tversky and Daniel Kahneman have shown that humans do not always act rationally when it comes to making sound financial decisions. Their research reveals that cognitive biases, including loss aversion, mental accounting and the illusion of control, can lead us to make suboptimal financial decisions.

“Studying history makes you feel like you understand something. But until you’ve lived through it and personally felt its consequences, you may not understand it enough to change your behaviour.” – Morgan Housel

 

How to Achieve Financial Freedom

Reaching financial goals requires a long-term approach built on consistent application and discipline. Here are a few tips to guide you on this journey.

• Live within your means. Avoid unnecessary lifestyle expenses and prioritise savings over excessive spending.
  
  
• Invest early and consistently. Time in the market is more valuable than timing the market. Start saving as early as possible with a debit order every month, as this is a good way to create savings discipline.
  
  
• Avoid emotional financial decisions. Patience and discipline are crucial aspects when striving for financial freedom. Think before panic-selling during unfavourable market conditions or chasing trends to make a quick profit – stick to a well-thought-out plan.
  
  
• Build up emergency savings. Having an emergency fund ensures that unexpected expenses such as medical bills or a vehicle emergency don’t derail your long-term financial plan, and also provides you with peace of mind that you have funds available if such a need arises.
  
  
• Stay educated. Financial literacy is imperative to understanding the basic principles of investing, taxation and risk tolerance, empowering you to make better decisions.

 

Use Time to Your Advantage

Another key aspect to creating financial freedom is understanding the power of compounding and patience. Albert Einstein famously said, “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it”.

While many people chase quick returns and take unnecessary risks, the most successful investors understand that wealth grows exponentially over time through the power of compounding. Warren Buffett’s fortune, for example, is largely due to the decades he has spent in the market.

The key to achieving financial freedom is not just investing but staying invested. Developing a long-term perspective and resisting the urge to react emotionally to short-term market fluctuations can make a significant difference in building sustainable wealth.

 

Visualising the Power of Compound Interest

Compound interest is a powerful tool that can help you achieve your financial freedom, with its benefits becoming more pronounced over time. Regardless of your underlying investment choices, it’s important to reinvest your distributions, as this is one of the key drivers of the benefits of compounding. The most important thing when it comes to investing is to start, which is illustrated in the example below.

 

Source: PSG Wealth. Assumptions: Monthly debit order amount: R5 000, annual debit order increase: 6%, investment growth: 10% per year, investment period: 40 years.

 

Understand That There are Some Factors Beyond Your Control

Finally, financial freedom involves recognising the role of market unpredictability in one’s financial outcomes. Morgan Housel emphasises that some people become wealthy due to fortunate circumstances, while others make great financial decisions but face setbacks beyond their control. Instead of comparing yourself to others, focus on adopting consistent and disciplined financial habits.

 

Focus on What You Can Control

Achieving financial freedom is not only about making money. It also includes developing a mindset that supports and promotes long-term financial well-being. Humility, patience and discipline with money create a foundation for success. Embracing these psychological principles allows you to shift the focus from short-term gratification to long-term security, ultimately providing the pathway to financial freedom.