Financial Freedom: What Does it Mean to You?

Financial Freedom Personal Financial Planning

From a young age, individuals in the developed world are instructed to get an education and then a job. After landing a solid job, the recommendation is to save a small percentage of each paycheck for 40+ years until retirement.

The underlying assumption is that we should all follow the same linear path from childhood until death, spending the majority of each day at work, trying to climb the ladder, to get a raise, to buy a bigger house, to fill it with an abundance of unnecessary possessions that provide very little satisfaction. Only after retiring is there freedom to explore, relax, or spend time with the people we love and cherish.

You might call it the time-money paradox. Most Americans trade the majority of their available time for a paycheck, and then spend the majority of each paycheck on depreciating material possessions. As the spending snowballs, many individuals desire a larger paycheck, which requires even longer hours and more responsibilities at work, leaving even less time to enjoy the income or possessions. It’s a vicious cycle that often continues in perpetuity until retirement or death.

I can’t speak for you or anyone else, but this type of lifestyle doesn’t work for me. Instead of material possessions, I would rather have financial freedom that allows me to change careers, start a business, travel the world, or spend time with loved ones.

What is Financial Freedom?

Being free, financially, means you can maintain your desired lifestyle without a regular paycheck. In other words, financial freedom is the 21st-century definition of retirement.

Instead of defining financial freedom as a single point in time, I like to break the concept down into four stages.

Stage 1) No Freedom

Everyone begins the journey by finding employment and exchanging time for a regular paycheck. At this stage, a job and reliable income stream are required to pay the bills each month.

Stage 2) Temporary Freedom

To graduate into the temporary stage of financial freedom, you must spend less money than you earn and create a pool of savings. Otherwise, you will be forced to continue working indefinitely because your lifestyle depends on your employment income. As you begin to save a portion of your income, you might invest your savings in a diversified investment portfolio to produce a regular stream of income. Or, you might start a passion business on the side, creating another stream of income.

Your freedom grows alongside your savings. Eventually, you will have enough money saved to feel comfortable switching jobs, starting a business, returning to school, traveling for a year, or any number of other activities that are impossible to achieve without savings. This stage of financial freedom might include major life changes, but they are not permanent. Your freedom is temporary because your savings will be depleted over time, forcing you to find other sources of income again.

Stage 3) Permanent Freedom

At this stage, your total non-employment income exceeds your total expenses and you no longer require a steady paycheck from your employer. You likely have a reliable side business and/or a large investment portfolio producing a substantial amount of income.

Yes, a side business is still labor income. You are trading your time for money. However, my assumption is that your side hustle represents your passion. It’s something that you enjoy doing. Something that you find fulfilling or meaningful.

Fulfillment is the entire point of this article. Financial freedom does not require that you retire early to a life of leisure (unless that is your desire). It’s about having autonomy and independence in your daily routine, allowing you to design a better life while spending your time, money, and energy in a more meaningful way. If that includes starting a new business, great! Doing meaningful work while getting paid is my definition of a win-win.

Stage 4) Luxurious Freedom

This last stage is a concept that is rarely discussed or achieved. While I define permanent freedom as the point at which your income exceeds your expenses, such a definition is shallow and full of important assumptions. For example, if you know that you require $1,500/month to live a barebones lifestyle, and you can safely withdraw between $1,500-$1,600/month from your investment portfolio, you have technically achieved financial freedom. But have you?

What if a budget of $2,000/month would provide a significant increase in satisfaction? Perhaps the additional $500/month could be used for hobbies, entertainment, and travel, all of which make you far happier in your life. But $2000/month in expenses is more than your portfolio can support, which means you’re headed in the wrong direction (back to temporary freedom).

The tradeoff in this scenario is clear. You can continue working to build a bigger pool of savings, which will provide additional income and flexibility for the remainder of your life. Or, you can leave your job as soon as possible and hope that a smaller portfolio will provide sufficient income. It’s all about finding the right balance given your personal situation.

When you have enough passive income to spend freely, that is what I call luxurious freedom. It’s the point at which your income exceeds your expenses by a comfortable margin, allowing you to increase or decrease your spending given your desired lifestyle. You might call it financial freedom 2.0.

Do You Desire Financial Freedom?

Ask yourself these questions (and ask your spouse if you have one):

  • Are you happy with your existing lifestyle?
  • Have you found a meaningful life-work-freedom balance?
  • Do you enjoy your job and find purpose in the daily routine?

These can be difficult questions to answer, but they provide a great deal of information about your desire for financial freedom. In my experience, responses can be divided into three broad categories.

1) Work is meaningful

Individuals who find purpose and fulfillment in their career might never desire to stop working. That’s perfectly fine and respectable. You can continue working and be financially free – the two are not mutually exclusive.

Even if you have no desire to stop working, I still believe that financial freedom is beneficial. At the very least, saving enough to reach “temporary freedom” can provide peace of mind. There is always a possibility that your job could be eliminated, or your life circumstances change, or any number of concerns that might be partially remedied by financial freedom.

2) Work is meh, but necessary

Another group of individuals is somewhat indifferent about work. If you fall into this group, you probably don’t love work, and it’s not your burning passion, but it’s tolerable and it pays the bills. There are good days and bad days, but the overall trend might be described as neutral and necessary.

In this situation, your desire to achieve financial freedom should be inversely related to your disdain for work. If you find yourself increasingly unhappy at work, you should work harder to increase your saving rate because financial freedom will allow you to change careers or quit the rat race altogether.

3) Work is boring, terrible, and soul-crushing

If you find yourself in this group, financial freedom should be your highest priority. If you truly hate your job, you should be willing to make sacrifices to escape. That might include cutting unnecessary expenses, working a side-job, building your human capital, or moving somewhere with a much lower cost of living. You should be saving as much money as possible so that you can change careers as quickly as possible.

By focusing on financial freedom, your perspective can be transformed. You can go from sludging through 40 years of dreaded employment to designing the life that you desire. And you can find freedom quickly if you’ll devote your money, time, and energy toward that goal.

The point is this, time (not money) is your most valuable asset. If your time at work makes you miserable, save enough money to quit and go find a new job. Life is too short to be miserable on a daily basis.

Are you Pursuing Financial Freedom?

Given the various stages of financial freedom, and the differing opinions on work, I would love to know where you fall in the spectrum.

Is financial freedom a pressing desire? Or, would you rather continue working and spending your paycheck freely?

For Vanessa and I, financial freedom is our primary long-term financial goal. We appreciate the flexibility and freedom that accompanies a large pool of savings, and we would rather forego consumption than live dependent on a monthly paycheck. Although we haven’t yet achieved permanent (or luxurious) financial freedom, we are in a great position. We are completely debt-free, and have accumulated enough assets to purchase a prolonged period of freedom. And at this point, that’s all that we desire.

The media often portrays financial freedom as an insurmountable task that requires decades of saving and investing. That’s sometimes true, but it’s beneficial to focus on each victory along the way. For example, most people could pay off all non-mortgage debt, and accumulate enough savings to find a new career that is enjoyable. Those are huge accomplishments on the journey to financial freedom that should be celebrated.

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Sangaff
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Sangaff

Couragious post Jacob! It is a tool to people like me in the journey to financial freedom which means,to me, living to spend as you wish and not neccessarily working for survival. Sangaff

Trevor
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Trevor

Financial freedom is one helluva goal. I think everyone wants it, but most equate it with being wealthy. But like you say, if you’re stuck doing work in order to pay for all your unnecessary things, then you aren’t financially free. You aren’t really free at all. I don’t need a lot of stuff. I don’t need a lot of money. I just want to do the things I love and make enough money from them to take a little time here and there. When I want. For whatever reason I want. No vacation requests required. To me, that’s financial… Read more »

Rorschach
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Rorschach

“Life is about more than living paycheck to paycheck, or looking forward to retirement at age 70.” — Thou speakest truth. Exactly what Timothy Ferriss says; retirement should be the worst-case scenario and not the primary goal of our short lives. Great article.

Tal Gur
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Tal Gur

Good job on this post jacob. My definition of financial freedom is a simple equation: monthly passive income greater than monthly expenses equals Financial Freedom. That’s what I did and i now live the life of my dreams. P.S spending under 12k during your first year of marriage is a great challenge. You definitely found the right wife 😉

Shannon
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Shannon

Love and agree wholeheartedly to your definition of financial freedom. For me – it’s means choices. Choices on how I want to spend my money, my time and my energy. Money is the tool I use to create the life I want for me and my family. It might not be the life you’d want or anyone else would, but that’s sort of the point. Financial Freedom gives us the ability to choose how we live for ourselves, not based on what others want or think we should do (that type of thinking is what lands most people in debt).… Read more »

Troy
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Troy

Financial freedom is simply the ability to do what I want to do, when I want to, and wherever I want to. It means that if I don’t feel like working for a month, I can, and can still feed myself! In short, it entails at least $10 million 😛

Pretired Nick
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Pretired Nick

There’s another word for your way of thinking: wisdom. So impressed you guys figured this out so young. I’d like to send you around to every high school in the nation to explain how this stuff works and get young people inspired to live happier, more free lives.

anna
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anna

I think as long as you’re able to live as you choose and be happy with it, that’s the epitome of freedom! Great post – it undoubtedly displays your enthusiasm for frugal living!

Kyle
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Kyle

“Frugal living is freedom” – AMEN

By living within (and often below) my means it allows my wife and I to sleep well at night knowing that the creditor won’t be calling and we still are able to plan and budget for fun trips for our kids. We just got back from Disneyland! Great blog, Glad I stumbled upon it.

Kendal
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Kendal

Inspiring post, Jacob. My husband and I were just talking about the prospect of hunkering down over the next several years to get our debt paid off (mortgage and car loan). We don’t carry credit card debt and we pay off big purchases immediately. The traditional “retire/have fun when you’re 70” makes little sense to me, especially since we’re in our prime right now and it seems wasteful to put off the best things in life. I’ll continue to mull over this idea — your post was well-timed. Thanks for sharing!

Chris
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Chris

AWESOME article. Great example of why I read everything you post. Bravo!

What is financial freedom to me? One word: CHOICES. I’ve achieved financial freedom, so today I’ve got choices. I make mine differently than others would (for sure!), and the future me will make them differently than the past me or the current me. But I don’t have to live with the consequences of choices made by creditors, bosses, or the Social Security Administration.

Ree
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Ree

I’m so amazed at how wise and willing to sacrifice you and your wife are at such a young age. My mentor, although much older now, was just like you. I was the spender. It took me until my early 30’s to “get it” and while I never was frugal to the level that you and my mentor are, I was still able to achieve a lot in 20 years (pay off the house, save a lot). While my goal of financial freedom is still looming I have a lot more freedom and CHOICE than ever before. That means for… Read more »

cj
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cj

Abso-freakin-lutely! Time and our time together trumps all else. Why sully up our time together with stuff and having to earn more for it?

Matt
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Matt

This a great definition of financial freedom. Money is a tool that gives you choices if you use it well. Not everyone will want to make the same choices, but wouldn’t you want the option to decide how you spend your time? You guys sound like you have an awesome mindset.

abby
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abby

My husband and I have definitely started to be more frugal since both of us left the corporate world about a year ago. He is doing what he loves and is passionate about, yet I am still floating around working random jobs, trying to start my own business. In the meantime, I have to worry about paying my credit card debt (and avoiding their calls!) and student loans (for that master’s degree I’m not using!) I am stressed out every day and am seriously considering cashing in my retirement (which would allow me to pay off all my credit card… Read more »

Tammy
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Tammy

Hello Abby, my husband and I were both public school teachers with credit card debt and student loans. We just paid them all off – even after leaving teaching to start our own businesses and decreasing our income. It can be done, so keep paying down that debt. We had many money meetings and stopped spending. We are happy and healthy and have never looked back. Don’t give up!!! @Jacob, a fine, fine post! We would like to be doing more of what we want to do and not what we have to do. I think loving what you do… Read more »