Ask a dozen people what financial freedom looks like, and you’re likely to get a dozen different answers. That’s because financial freedom is completely subjective – we each view it in our own personal way. But I’m going to attempt to form a loose definition that will likely apply to the largest number of people.
Let’s start by dispelling the common extreme views of financial freedom. For some people, financial freedom is achieved at a certain monetary level. It could mean attaining a six figure income, or becoming a millionaire. For others, it could mean never having to work another day in their lives.
I want to discard these definitions up front, if only because few people will attain them (especially never having to work another day your life), but also because the effort to reach those goals can often be completely arbitrary. You could achieve financial freedom without ever reaching any of those goals.
With that in mind, let’s try to objectively define financial freedom in a way that will be both relevant and doable to the largest number of people.
Having more than enough income to pay your bills each month
It’s not an exaggeration to say that the majority of people today are struggling just to pay their bills every month. Getting out of this trap alone would represent financial freedom to millions people. But financial freedom goes beyond simply being able to pay your bills.
This is usually achieved by either increasing your income, or reducing your basic living expenses, but more typically with some combination of both. This is where financial freedom begins – creating the extra in your budget to allow you to improve your finances.
Call it learning to live within your means. Financial freedom will be virtually unattainable without taking this step first.
Having enough money saved that you can sleep peacefully
Nothing is possible in life without first getting a good night’s sleep. But financial pressures can interfere with sleep. Living within your means is the first step to eliminating that stress from your life. But a well-stocked emergency fund is even better.
If you can get to the point where you have enough money in your emergency fund to live for a few months – even if you were to completely lose your income – most of your financial worries would probably disappear.
Freedom from financial worry is a fundamental part of financial freedom in general. It frees you up to focus on making constructive improvements in your financial situation, rather than worrying about past mistakes.
There’s some debate on this topic. Some financial advisors believe that some amount of debt is necessary. Some even believe it’s perfectly acceptable if you can, say, borrow money at 5%, and invest it for a 10% return.
I completely disagree. Being debt free is fundamental to financial freedom.
Carrying debt is paying yesterday’s obligations today. That’s a burden, not a benefit. That could leave you unable to change jobs, to lose a job, to start your own business, or to participate in activities that you truly enjoy. There is no freedom in any of that.
Imagine your life with no debt. Enough said.
Being able to do work that you actually like
It’s an all too common scenario for people to work in jobs that they hate because they “can’t afford to live without them“. That’s a lifetime of working for money, while ignoring personal preferences.
If your financial situation were strong enough, you could leave a miserable job or occupation that is a pure money play, to do work that you actually like. This is more important than we generally think. The work that you do is a major part of your life and how you live it. You have financial freedom when you’re in a position to take a lower paying – but more satisfying – occupation, rather than being a slave to a paycheck.
You don’t need to be a millionaire to have this kind of financial freedom. It’s more a matter of being able to live within your means – whatever those means are – having money put away, and being debt free.
Having enough money that you can take some time off of work
Earlier we mentioned that some people consider financial freedom to be never having to work another day in their lives. I suppose this would make some people completely happy, but I doubt it would work for the majority of us. Work gives our lives meaning, relevance, and value to others.
Most of us don’t need to quit working, but sometimes we may need to take some time off. It may be to prepare for a career change, to start a new business, to deal with a crisis in our lives, or just to clear our heads.
You have financial freedom if your finances are strong enough to enable you to take off for as long as is necessary. For most of us, I suspect that the ability to take off for just a few months would be plenty.
By expanding your emergency fund, from being able to cover three months of living expenses, to a full year’s worth, you can achieve this kind of freedom.
Even if you never take that much time off, simply knowing that you have the ability to do it will give you a strong sense of financial freedom.
Being on track with your long-term financial goals
We all need to have financial plans that extend beyond immediate needs and concerns. The point is to have the financial resources available when the future arrives. Many of those resources will need to be developed over years or decades. Examples include paying off your mortgage, preparing for your children’s college education, and of course, your own retirement.
It’s not possible – or even necessary – to have all of these goals fully funded right now. You can achieve financial freedom simply by being on track with them. That means that the money you have accumulated now is reasonably consistent with the ultimate goal. If it is, you’ll have a sense of financial freedom just in that fact alone.
For example, you don’t need to retire right now in order to have financial freedom. Simply knowing that there is a reasonable likelihood that you will be there at some point in the future is all you need.
I realize that most of these steps seem incredibly basic – maybe even too much so to satisfy some people’s idea of financial freedom. Still, financial freedom is (and should be) an attainable goal, even if you have to work for the rest of your life or never become a millionaire.
Most people can reach that kind of freedom. It’s less of a goal, and more of a lifestyle – but one that you have to chose in order to make it a reality. That's what financial freedom looks like to me.
What does financial freedom look like to you, and how can you best achieve it?