Financial Freedom: What Does it Mean to You?

Financial Freedom Personal Financial Planning
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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.

User Generated Content Disclosure: Responses are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser’s responsibility to ensure all posts and/or questions are answered.

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Amit
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Amit

This is very good approach step by step how to achieve financial freedom.I am from India and already financially free.Though I learned about financial freedom at my late age.I also developed a passion over the time for Personal financial planning and decided to start my Independent Financial advisory service.Still I am in Job as per my commitment to my management.As I am financially totally free without any Debt & Liability,I can take a very bold decision in my present company which ultimately benefit company.I could gather this courage because I am financially free but other senior employees afraid as they… Read more »

Tooth guy
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Tooth guy

Great article, this should be introduced to every graduating college student…

Amanda
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Amanda

Fabulous article I have enough savings in the bank not to need to work and live well for the next 5 years but I want more freedom! So I am saving more over next 5 years to not have to work for then 10 years and build a freedom lifestyle with passive income. In the meantime my passion is travel I want to see every country in the world I am over a third of the way there. I still enjoy my travel and save loads but I have a great job too. But as soon as I hit 50… Read more »

Vanessa Lumby
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Vanessa Lumby

That is awesome, Amanda! Keep up the good work.

Reagan Byaruhanga
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Reagan Byaruhanga

Am actually committed to making sure that i step from Stage1 to 2 and 3 in the next five years.
I wish to say thanks for this motivating and building literature.

Rodney Allen Hampton
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Rodney Allen Hampton

Trying to move from Stage 2 to Stage 3 within the next 5 years.

Matt
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Matt

I’ve become absolutely obsessed with financial freedom. My wife and I fall in category 2. Financial freedom is literally at the forefront of everything I do. Almost debt free besides the house and cars. The next step is real estate. Really enjoyed this article as I find myself spinning my wheels with a lack of patience to achieve our ultimate goal…financial freedom.

Giancarlo Gasparin
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Giancarlo Gasparin

I would land in the second category and my wife would land in the 3rd. I’ve grown really interested in financial independence over the past few years, and I’m hoping that rubs off on her. Having 4 kids makes it difficult, but I’m encouraged to learn more about some strategies to make our money work for us and our family, so we won’t have to work forever. Appreciate all your doing with this site to help with that. Thank you!

renee
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renee

Financial Freedom / Financial Independence, to me, is a mindset as much as about assets. I think the three work stages you describe are a good start but I think there is another work concept that was true for me and, I think, for others. There was a point in my life in which it was important that I had the title, the office, that I was contributing to the family assets, my ego needed an external feeling of “importance” that had a lot to do with my concept of success at that time. Your Money or Your Life was… Read more »

jerry tubis
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jerry tubis

Useful information for us, as an employee..thanks jacob..

Kc wlllson
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Kc wlllson

Being free financlally is all i want

Miguel
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Miguel

I very much agree with your post, especially the concept of luxurious freedom. To me, financial freedom is very specific: to have enough money that I can invest it in safe, tax-free assets (mainly municipal bonds issued by fiscally responsible states, arranged in a bond ladder) and have enough income to afford a comfortable lifestyle. I would not fully quit working, but would reduce my workload by about 75%.

I’m still a ways away, but dreaming and striving!

saveinvestbecomefree
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saveinvestbecomefree

Nice post. I think a lot of people fall into category 2 (meh) with their jobs so they aren’t motivated to save a lot but they aren’t really fulfilled by their work either. This isn’t a great place to be, especially since #2 tends to shift to #3 over time, not #1! The best option is to figure out how to save a lot of your income by really understanding your personal spending vs happiness relationship. You’ll find a lot of spending is not making you happy and you can cut that. Then it’s easy to save, and you don’t… Read more »

Ben
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Ben

Hi,

I think that financial freedom means having no debts and having an investment portfolio which is 25 times annual expenses. Minimialist lifestyle is essential. This includes no car, property. Rent is the way to go.

Ben

Jordan
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Jordan

Even if I had unlimited financial freedom, I am definitely the kind of person that would still have to have a job. Even in retirement. I feel that part is huge struggle for retirees, needing a job to make you feel useful and like youre accomplishing something.

Rob
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Rob

Really enjoyed your post! It is a simple idea, income more than your expenses. We figured it out after reading some books, and associating with some mentors. It is not surprising that most people don’t realize that they can “retire” at any age because no one teaches this stuff. All they need is to generate the right kind of income. thanks for the article.

Kemo Barrow
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Kemo Barrow

Financial Freedom for me is to have the ability to produce passive income from my financial resources to cover my monthly expenses without hanging on to a 9-5 job.
I will also adequately purse my other goals without thinking about Money.