Financial freedom isn’t the same as being rich. Although people often confuse the two, they are completely separate goals. One person could be completely financially free earning $15,000 per year. Another person could be trapped, even with millions of dollars.
Last week, I touched on the topic of financial freedom. I wrote about my goal to build an emergency fund with a year’s worth of living expenses in savings. This would give me the freedom to make drastic career or business moves without feeling the effect on my bank account for an entire year. But this is just a first step towards financial freedom.
What is Financial Freedom?
I define financial freedom as not needing to worry about money. Money shouldn’t be a dominating force in making decisions in your personal or professional life.
A good way to view financial freedom is another type of freedom most people in the Western world enjoy: freedom from hunger. As a human being, I need to eat to survive. But the relative abundance of food in my life has meant hunger is never a driving force in my decisions. If food were scarce, getting enough to eat would probably occupy all of my thoughts.
Being financially free, is the same as being free from hunger. Money will always play a role in your life. But you are free when it no longer becomes the dominating influence on your goals.
Financial Freedom is More Important than Wealth
With food, there is an upper limit to the amount you can consume. Once you reach a minimum threshold, freedom from hunger is basically guaranteed. But there is no upper limit for spending money. That’s probably why there are far more people free from hunger, than those free from money.
Wealth is only part of the picture. If your spending outpaces your income, it doesn’t matter whether you are rich or poor: you aren’t financially free. Pursuing wealth is a noble goal, providing you do it by contributing value. But it doesn’t guarantee the peace of mind and satisfaction associated with financial freedom.
Originally all of the financial goals I set were strictly income or savings goals. Have $__ by a certain date. Now I realize that this isn’t enough. Earning more money won’t bring me closer to financial freedom unless I also make progress in the other elements of financial freedom.
There are three main elements to financial freedom:
- Automatic income to sustain yourself without needing to work
- Higher income than spending
- A low poverty threshold
1) Automatic Income: Not Needing to Work
Complete financial freedom would mean your income is automatic: either through interest on savings, passive income or a business. If you stopped working for an extended period of time, your life wouldn’t make a noticeable turn for the worse.
Of course, this is an extremely difficult goal to achieve. However, you don’t need to achieve 100% financial freedom to enjoy the benefits. Making progress towards any of the three elements will improve your life.
Building an emergency fund with one year of income is a large positive step towards this first element. If I’m living paycheck to paycheck, I’m forced to work to survive. With a large enough emergency threshold, I have at least a one year buffer before being forced to work.
In a perfect world, material wealth would vastly outstrip needs so that people pursued work entirely for the joy of creating and a professional mission. That’s not reality, but you can be another step closer by having enough automatic income or savings to create a buffer between you and the need to work.
2) Greater Income Than Spending
It’s amazing that in one of the wealthiest countries in the world, we have so much consumer debt. Some debt is an investment. Student loans or borrowing money to launch a business are often necessary to reach more important goals.
But much of today’s debt has nothing to do with investing in the future. It’s excess spending on credit cards. Buying bigger cars and bigger homes in excess of our means. Consuming for today at the price of tomorrow.
In this point, the difference between wealth and financial freedom is most noticeable. Persons earning six-figure salaries are often burdened by consumer debt. If your expenses outpace your income, you can’t be financially free. You are always sitting on the knife’s edge of your ability to spend, so money must be a constant factor in your life.
The goal, of course, isn’t just to eliminate debt, but to be actively saving. When you have the ability to put away 10%, 30% or 50% of your income into savings, you have increased freedom. Now, there is another level separating you from the chains of money. Instead of wondering whether you’ll have enough food to eat, you always have an excess in your cupboard.
3) A Low Poverty Threshold
The poverty threshold is a term I use to describe the minimum amount of money you need to enjoy a comfortable life. Some people require $70,000 per year for comfort. Other people need less than $10,000.
A low poverty threshold means you could be perfectly content with a bare minimum of material conveniences. If all your savings were stripped from you, and your income was reduced by 80%, could you still enjoy yourself? Or would you be miserable having to adjust to a lower level of income.
Your poverty threshold is psychological. It’s not about actually having to survive poverty. Having a low threshold simply means you’d be willing to sacrifice more to make bigger changes. For example, iimagine your poverty threshold was roughly $50,000 per year. If you had the opportunity to switch to a more exciting career, but the starting pay was only $40,000, you wouldn’t be able to make the switch. A lower threshold is freedom.
Building a low poverty threshold is about occasionally conditioning yourself to go without. Go an entire week without spending any money. Travel for a month and stay in hostels instead of nice hotels. Go without your car for a month.
Experiencing mild poverty in small doses allows you to lower your threshold. It’s just like dipping your feet in a lake to get used to the cold water. Occasional splashes keep you from being afraid to dive in when you need to.
I think this last element of financial freedom is the one most away from current advice being given today. It has nothing to do with money, but entirely your mental disposition towards money.
Isn’t Consumption Insatiable?
Economists make the assumption that people have unlimited wants. While that assumption may be useful for drawing graphs, the evidence is to the contrary. Studies of happiness have shown that, beyond a minimum level, money doesn’t directly contribute to your happiness.
There will always be material desires. But if you build enough financial freedom these desires shouldn’t dominate your life. More important desires like meaningful work, relationships and self-improvement should have a bigger influence on your decisions.
Isn’t Earning Wealth the Hard Part?
One discussion of financial freedom could argue that earning all the money is the hard part. Your mental disposition is relatively easy, once you have a high enough income and savings.
I disagree. I know many people who are unhappy, even though they have more material comforts than I do. I also know people who appear to be content, even though they have less. In fact, I’d say that earning the money is the relatively easy part. Your mental disposition is far more stubborn.
It’s easy to be seduced by competing for wealth, advertisements and getting too comfortable with your possessions. The struggle for financial freedom has to be waged on both fronts: earning enough money and building the mental discipline to keep that money from controlling you.
“The Stuff You Own, Ends Up Owning You”
That header is a quote from the book and movie, Fight Club. I think much of the popularity of the book stems from that single idea. That instead of rewriting the rules of the game, we’ve decided to play within them. Earning more money, without evolving our disposition towards it. Building ourselves a comfortable prison.
I'm a speed-reading, vegetarian, holistic learning, productivity hacking recent university graduate. And, for the last five years I've been experimenting to find out how to get more from life.
You’re correct that at a certain point, money doesn’t add to happiness. It’s not just about having enough, it’s about recognizing what having enough means. I know some people who are well-to-do, but sadly, perpetually unsatisfied. Consumption may be insatiable, but that doesn’t mean that it makes you happier.
It is most important to cultivate the person you are, the character of a wealthy person, and to provide the value that most weathy people provide. That way, the wealth comes naturally, as a by product, versus you straining toward it with a poverty mindset.
Scott-
Just wanted to drop you a comment. Dude, you have been crushing it recently. Every post has been excellent and very dense. Thank you and continue on!
Completely true, the idea free is you have to let go all your wantings and desire , then you’ll be peaceful.
While having financial freedom may not make you happy, it certainly gives you peace of mind and can help you sleep at night without the worry of how to pay the bills.
Your reality check on an individual’s poverty threshold is an interesting test and one that may bring surprising results – what we can really live without and what we absolutely must have to live ‘happily.’
dano,
“Crushing”? Is that what the kids are saying these days?
When I read the first sentence, I didn’t realize it was actually a compliment. Thanks!
-Scott
One aspect of wealth that you didn’t mention is that as your wealth increases it changes the opportunities that are available to you and therefore creates an added dimension of potentially exciting and satisfying ventures. You may not even be aware of these opportunities if you make enough money just to maintain a certain lifestyle.
Hi Scott,
Just ran into this site. I liked the idea of the speed reading. Thanks for the tips. Also, I liked what you said about being financially free. I have not thought about it as simply as that but that’s great! Thanks for being a great example. I know for sure that you have a plan and you are gonna get it done by just finding out about your goal and that you have a pretty high personal development.
Keep up the great work and God Bless!
Spesh,
That is also true. Having more wealth allows you do to even bigger and better things. Angel investing or starting philanthropic organizations require a large amount of personal resources.
-Scott
everyones goal in life is to have Financial Freedom that is why i am doing affiliate marketing and blog monetizing. i hope i could earn more money online.
my goal in life is to achieve Financial Freedom through making money online. I monetize my websites and blogs using Adsense and Adbrite. Hopefully, with more work and time i might just achieve financial freedom.
Financial Freedom is the goal of most people. i also work so hard and look for oppurtunities like make money online to attain my own personal financial freedom.
[...] Financial Freedom – One of my life goals is to earn/save enough money that I don’t need to work for money. Does that mean I don’t want to work? Of course not. I just want to decouple the money I need to live from the meaning I draw from my work. Material success can enable the pursuit of higher values. [...]
My ultimate goal in life is to have Financial Freedom where i also have lots of extra time for leisure. Financial freedom does not come easily without lots of hard work and positive thinking.
i would love to have Financial Freedom by owning a real estate related business. my dream business is to own several unit of apartment for rental.
we can have Financial Freedom as long as we work very hard and become focused on making money. nowadays we can also make money online and it is a good deal to earn money.
Scott,
What you said really hit me! I really like the way you explain financial freedom. I think I’m going to start trying to save a years worth of finances. You gave the best definition of financial freedom I have ever heard! Thanks for the wonderful suggestion!
Sincerly,
Joseph W
I like the terms and vocabulary you used here. Financial freedom is a reality for a lot of people, it’s great to see others like yourself spread the wealth of information.
i wish to have Financial Freedom in the next 5 years or so. i was able to establish a small internet retail store last year. i am hoping to gain enough profit from this store.
i am hopping that with very hard work on Affiliate marketing, maybe i would be able to achieve Financial Freedom in 2 years time.`’~
i wish to have Financial Freedom in the next 5 years or so. i was able to establish a small internet retail store last year. i am hoping to gain enough profit from this store.
Love the Fight Club quote – very true!
da Vinci has been quoted with “Simplicity is the ultimate sophistication.” That’s a phrase I’ve applied to my financial thinking for many years; works wonders for keeping goals in focus and overall peace of mind.
Cheers on the great post.
Thanks a million.I have just had many “things” reaffirmed & the action will start Now. Javez khan, Bradford, England.
This is great article. I am also writing articles about financial freedom. If you may allow, I am posting a link (you can remove it if it is not ok with you):
http://www.gayward-concepts.com/your-allies-to-financial-freedom/
This article is all about our “Allies to Financial Freedom”.
Thank you in advance! I hope you will allow my post. More power to your site.
Great article. My first step to financial freedom, no more consumer debt. I pay cash for everything. Second step, written monthly budget. Give every dollar a name. I redo my budget every month. It is amazing how much money just sifts through your fingers without you knowing it. If you do those two things you will find yourself with a “raise” without increasing your actual income. The stress relief of not having to worry about paying off debt is amazing!
I can see that this was written a while ago but the idea is timeless. Another way of looking at it is envoking the standards and philosophy of being a minimalist. Such an idea would help to break free of the notion that more material things are needed, thus making it easier to live at a much lower poverty threshold.
Financial freedom recipe
Start/set-up
1. separate real needs from mere wants (excel chart it!)
2. determine minimum cost of living (know your bottom line clearly!)
3. add 10-20% to #2 for savings & retirement
4. accept an occupation in the field of your dreams that pays at/above #3
5. save a liquid emergency cushion (6mos. minimum (#2×6+ mos.))
Maintainance/on-going
1. put away the 10-20% for retirement (no questions!)
2. have & stick to a budget (absolutely no buts, ifs, or maybes!!!)
3. don’t touch the emergency fund unless it’s a true emergency (hlthcare/job loss) & replenish ASAP!!!
4. be a star at your dream job (secures promotions & raises)
Investment options (in order of risk factor)
CDs, Money Markets, Mutual funds, bonds, Stocks
Investing in financial products
Depending on risk tolerance factors (age, earning power, etc.), have a diversified portfolio of large, mid., & small cap.s in a well balanced commodities & service industry sectors.
If there is 2-3 year retirement plan instead of 45 plan and make you financial freedom, would you like to try it??
I’m a grad student married to a post doc. Despite the fact that we’re young, came from lower middle class families, live in California, put off real work for years to pursue advanced degrees, and earn just an average income, we’ve managed to save a little more than $60,000 so far, which is way more than we need to keep us going for a year or two of unemployment, illness, etc.
To save, you really have to be committed to it. We have no consumer debt, and no car loans or leases. We have a real budget in place; we set aside *something* for every category each month, including those expenses that only materialize once or twice a year (e.g., vet bills, car registration and repairs, travel expenses to see our families). At this point, just about anything could befall us–car accident, death in the family, job loss–and we’re prepared to cover it without worry. Having that little stash o’ cash in the bank really does make you feel FREE!