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.

Editorial Disclaimer: The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author’s alone.

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Donald
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Donald

Nice post, an inspired one. but what if your job is not giving you anough income that could sustain you and your family let alone saving, like in the case of developing country where unemployment rate is high,what would you do? Or the principle is for developed countries alone. advice.

Jason
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Jason

Hi Jacob, Thanks for the inspirational post! Financial freedom has been a goal of mine since my early twenties. I always knew that if I were to achieve it I would have to do things differently to my friends. I graduated with a PhD in physical chemistry when I was 25 and instead of getting a normal job I began writing educational textbooks. I figured that creating intellectual property was a good way of creating passive income. In the early days of my writing career I actually worked on a building site, which paid well and meant I could spend… Read more »

Hailey Adams
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Hailey Adams

Awesome post and well done! You are a very inspiring couple. I’m also working on my financial freedom. My father taught me how to always diversify and stop waiting for the retirement years to do what I want and love.

Jess
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Jess

My husband and I started working towards financial independence after we found a really inspiring blog a few years ago. We have both always been great savers and really interested in budgeting and retirement planning. At first, we made small changes and it was mostly something that was fun to talk about. But, as time progresses we find that we are more and more committed and now are well on our way. Not there yet, but it’s pretty exciting!

Deacon
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Deacon

We are definitely moving toward financial freedom. I have a business that I am eventually going to pay someone to run which will provide passive income and we are planning on paying off our mortgage in the next 4 years. Between the two of these, we should be on track to be financially free in the next 8 years!

Matthew
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Matthew

Financial freedom is something I’ve always aspired in youth and adulthood. I read a lot about it (books on the subject are many) and I came to the conclusion that financial freedom should not be the ultimate goal in life. You have to ask yourself what lies behind the desire for financial freedom. I think that in life people usually want to be happy, have a loving family, etc., and achieving financial freedom does not guarantee that. If you do in life what you love, and make money dealing with this, what more do you want?

Thad
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Thad

Financial freedom is not just desirable, it’s totally doable.

Not that we are there yet, but if you are young and avoid debt (harder to do than most realize) you can achieve financial freedom! And faster than you think too!

Great post!

Brittney
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Brittney

This is something my husband and I have started to focus on and give serious thought. Sadly, I don’t think that very many people believe financial freedom is possible. We used to think that way as well. But I have found that if you don’t believe it, then you won’t go for it. Debt doesn’t have to last forever and you can build up your reserves. Through hard work and focus, we are getting there. We firmly believe that it’s not about how much you make, but rather how you control your finances.

Brian
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Brian

You guys are crazy awesome….

Our spending makes us look like drunken congressman by comparison, even though we do our best to live modestly compared to most people in our income/area.

You guys are inspiring, keep going strong, your blog is a lot of fun to follow!

Even Steven
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Even Steven

Financial Freedom or Financial Independence is one of my main focuses with money, which works nicely with finishing paying off my student loan debt. I think it puts you in a place to make choices independent of debt, which for many of us is how decisions are influenced. I actually started a page that includes my Financial Independence date, I would love to know what you guys have planned as a FI Day?

Meg
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Meg

I do think about financial freedom daily, and I update my net worth daily as well. It does help me stay motivated, but what is harder is trying to figure out what exactly I would want to do differently when I retire (other than just not have to go to work of course). It would help if/when my husband and I can nail down a vision as to how we want to spend our time. Currently we aren’t even sure if we want kids or not which obviously would have a huge impact on our future goals and financial needs!

Chris Smith
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Chris Smith

Bravo! One of my all-time favorite Cash Cow Couple posts – captures the big “why” behind all of the “whats” and “hows” that you also teach, which are necessary to achieve it. As far I’m concerned, the word “retirement” belongs back in the 20th century, in the land of employer pensions and (virtually) guaranteed home equities. (Unfortunately, most financial services providers still haven’t gotten the idea, and insist on continuing to try to get young people interested in “saving for retirement” – and the predictable result is the aforementioned blank stare!) Today, switching from 100% work to 100% leisure at… Read more »

Emma
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Emma

I’m writing my own post on defining financial freedom right now. It’s certainly got me thinking. For me, the ability to earn an income from anywhere (mainly from real estate rental income) and spend that income in a cheaper country so it goes a lot further seems to be a way to get there sooner.
One things for sure – you have to be prepared for hard work to get there. And for people to think you are crazy. It seems to scare people when you tell them you are doing something different to the norm.

Steven
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Steven

Enjoyed your article Jacob, couldn’t be any truer! Time is the most important asset of all and if we want to achieve finacial freedom we simply need to live below our means and cut back on the expenses. I got married less than 1 year ago and was obliged to cut back on expenses and I’m happy with my lifestyle. Not easy initially (not referring to the marriage but cutting back on the expenses…lol) but surely possible!

Leslie Tayne
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Leslie Tayne

Great post! Financial freedom is about enjoying a lifestyle within one’s means. Communicating with one’s spouse is key to mitigating potential financial conflicts. Determine what your wants are and what your needs are. Once you figure this out, you will be better able to see where you are spending most of your money and if it is worth the cost. You may find certain expenses are not worth it. You can save money and be happier!