When I think of “Financial Freedom,” a multitude of ideas come into my mind. Some people interpret financial freedom as being debt-free. Others in the FIRE Community characterize it as being able to retire early due to being financially independent.
So, which is it, and how do you achieve financial freedom?
What Is The Meaning Of Financial Freedom?
The meaning of financial freedom begins to blur the line between personal finance and the traditional meaning of proper money management.
However, a general meaning of financial freedom means being able to live and maintain the lifestyle you desire without being restricted by financial obligations or a lack of income.
Financial freedom differs for each person and walks the line between personal finance and traditional money management opinion.
How Do You Get Financial Freedom?
For this article, I am going to focus on the personal finance definition of financial freedom. No one will argue that financial freedom means you have accumulated enough money that you can live the life you want without stressing about money.
Based on that definition, how do we achieve this lofty goal?
To make it painfully simple, we need to ensure we have more money coming in than cash going out. We can achieve this through several different strategies.
Decrease your spending and financial obligations (bills) until they are lower than your monthly income. (Easier said than done)
Increase your income until it is higher than your monthly financial obligations. Again, easier said than done.
Focus on both increasing income and decreasing expenses at the same time. This is the fastest strategy to achieve your goal of reaching financial freedom faster.
How Do You Get Financial Freedom In 5 Years?
Giving yourself a time limit to achieve your financial goals is one of the best ways to hold yourself accountable and to form a plan to accomplish them. Again, financial freedom is hugely personal and must be clearly defined if you expect to achieve it.
What is financial freedom to you? Figure out which of these options defines your financial goals:
- Be debt-free, not including your home mortgage
- Be debt-free, including a paid-off house
- Have enough passive income to live from without having to work
- Increase your income more than your financial obligations
- Decrease your financial obligations to be less than your income
- A combination of all of the above?
Once you have your definition of financial freedom, it’s time to make a plan. Your plan should clearly define your goal, how you’re going to get there, and how long it’s going to take.
To make a financial plan, ensure you are using the S.M.A.R.T. goal planning method.
Your goals must be:
S – Specific
General goals are ambiguous and are difficult to measure when we cross the finish line. Make sure each financial goal you set for yourself is specific. (i.e., no credit card debt, house paid off in 5 years, increase passive income to $5,000 a month, etc.)
M – Measurable
Each goal should be able to track progress. If you said I want to make more money as your goal, what does that mean?
Give yourself a specific goal so you can measure progress to tell if you are actually on track to meet that goal. Vague goals, such as pay down debt, don’t mean anything.
A – Attainable
We all would love to be millionaires tomorrow, but we need to be realistic. If you set goals for yourself that are impossible, you run the risk of feeling defeated or frustrated by the process.
On the flip side, be sure to challenge yourself. Set goals that will be difficult to achieve but are attainable.
R – Relevant
Your financial goals should be similar. By focusing on too much at once, you have a chance of becoming overwhelmed. Set goals that complement and support each other. One goal should help you achieve another one.
T – Time-Based
This is probably one of the most important descriptors of a great goal. Without giving yourself a time frame, you have a chance of forever chasing and not achieving the goal.
Give yourself a set amount of time to achieve a goal and then do everything in your power to make it happen.
What Is The Difference Between Financial Freedom and Financial Independence?
We previously described financial freedom as being able to live the life you desire without the stress of your income, not meeting your financial obligations. If that is financial freedom, what is financial independence?
Again, the lines between these terms can blur depending on whom you ask.
What It Means To Be Financially Independent
Financial freedom can involve still needing to work, but financial independence means you no longer rely on others to provide you with income.
Financial independence means you have enough passive income or a large enough nest egg that you no longer need to work for money, and you can live off of your own money for the rest of your life.
The primary difference between financial freedom and financial independence is the need to work and rely on others to maintain your desired lifestyle.
What Is A Financial Freedom Number?
In the age of the internet, we get constantly bombarded by new terms and ideas. A financial freedom number is a relatively new term coined to describe a combination of financial freedom and financial independence.
A financial freedom number also varies depending on which article you read. However, the end goal remains the same. The idea is the number represents the total amount you need to cover all of your expenses without having to ever work for income again.
Here is where the line gets blurred between freedom and independence.
Calculating Your Financial Freedom Number
To find your number, you need to determine how much money you need to live on each month. Some things to consider are:
Do you expect your bills to decrease in the future?
Will your income increase in the future?
How long do you expect to live?
Some of these questions are easier to answer than others. To avoid getting too complicated, find a monthly amount of money you would need to live the life you desire. Once you have that amount, multiply it by 12 to give you how much you need to earn each year.
Using the 4% Rule To Find Your Financial Freedom Number
Most experts agree that drawing 4% from your investment accounts is the safest way to ensure you do not run out of money in retirement. This is because the annual return of the stock market is about 7.9%.
So, if we use that theory, let’s assume you make $50,000 a year and want to retire today, making the same amount.
To generate enough passive income from your investments to live for the rest of your life without the worry of running out of money, we need to divide your annual needed income ($50,000) by 4%.
With this example, you would need a nest egg of 1.25 million to safely draw $50,000 a year from it.
Your financial freedom number would be 1.25 million with these figures.
So, What Is True Financial Freedom?
Financial freedom is an idea that you have reached a point in your life where you no longer are worried about money or being able to pay your bills. It is a core component in personal finance – something that is seemingly lost in our world of opinions.
To achieve financial freedom, give yourself the ability to dream. Dream about how much money you would need and the spending habits you need to create to make money an afterthought in your life.
Give yourself the ability to not only dream but to achieve a financial position that allows you to live your life to the fullest while using money to help create that vision.
Remember, financial freedom is not what others tell you it is, but what you believe it to be for your situation.