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Our financial freedom definition is achieving your work-optional lifestyle of choice by creating passive income streams.
People by the thousands are successfully reaching this goal. There’s a new generation dominating the workforce, and it’s dead serious about bucking the system.
Millennials and some forward-thinking Gen Zers are abandoning the 9-to-5 path that would keep them in bondage until their prime years are in the rearview mirror.
They’re determined to carve out a life they can enjoy NOW (or in the near future) with income that doesn’t depend on clocking in day after day.
Common financial freedom practices include:
- Saving money to pay off debt quickly = more money to invest
- Investing in stocks — including dividend stocks with regular cash payouts
- Maxing out retirement account savings — especially Roth IRAs
- Capitalizing on 401(k) savings plans with matching employer dollars
- Real estate ownership — think rentals generating monthly income
- Side hustles with passive income streams
Financial Independence vs. Financial Freedom
Financial independence is the step before financial freedom. When you’re financially independent, your passive income streams can cover all of your expenses, so you can shed that 9-to-5 job if you choose.
Let’s compare that to the financial freedom definition. When you’ve achieved financial freedom, money is no object and you can live the life of your choice.
The difference between independence and freedom is that the former allows you to step away from mandatory work, while the latter allows you to dream big and enjoy.
Why is Financial Independence Important?
Before you can walk you must crawl, as the saying goes.
If you or I want to live life completely on our terms, we have to do some groundwork first.
It would be pretty hard to travel the world and still have an employer, right? So achieving financial independence is a necessary part of the money-freedom journey.
Reaching the goal of financing your life without traditional work is an important feat of its own. It’ll prove that you’ve got what it takes to keep moving forward to total freedom.
The Benefits of Financial Freedom
- Time to do whatever you want
- Travel options
- Daily freedom to live life on your terms
- Choices — whether to work, where you live, etc.
- Peace of mind and relief from money stress
- Ability to engage with your family and create memories now
- Not spending the prime of your life under an employer’s thumb
- Freedom to serve your passions and learn something new
- Time to serve people or volunteer for causes close to your heart
Are There Any Downsides to Money Freedom?
The downsides or challenges aren’t many, but there are a few to consider. The biggest obstacle is often health insurance.
Employers are especially good at that one thing: providing health insurance. If you decide to forgo a typical job, you’ll need to figure out a plan for healthcare.
Another challenge may be the judgment of friends and family. As we follow different paths than generations before us, our choices can cause some friction at times.
Don’t be discouraged if the fam throws shade at you. Just walk on by. Seriously, work on developing thick skin and good boundaries. You’ve got this!
Financial Freedom Formula
There’s a magic formula that’s typically used to figure out what you’ll need for actual work-optional living. It’s called the 4% rule, and it’s very simple.
Take the amount of money you spend each year and multiply it by 25. This will be your savings goal.
This amount allows you to withdraw around 4% annually to support your yearly living expenses. It can create financial independence and lead to early retirement, but not necessarily freedom from money.
An extra step may be needed to live the life you want. You’ll have to add to this savings goal until it supports that lifestyle.
Some people view complete financial security and freedom in a minimalistic way and are most satisfied with simple living. In that case, this magic formula may be exactly what they need to have true financial freedom.
Financial Freedom Plan
It’s fair to say that no one can get to financial freedom without setting goals and making a plan. So those are the first places to start.
Creating your plan
Planning takes time to evaluate what’s important. It also involves going over your finances carefully to see where things stand and what you need to change.
A lot of this can be done by yourself or with your partner, but a wise step would be to involve a financial planner in the process. They see things we often don’t see.
- Put some real parameters on what your dream life looks like. Write down the must-haves and the maybes.
- Evaluate your financial situation: spending, savings, income, emergency funds, retirement accounts (or lack of), etc., thoroughly — and write notes on things that need attention.
- Decide when you’d like to aim for being job-independent using the financial freedom formula.
- Evaluate how much money it would take to live the life you want. It’s usually a step beyond paying for regular monthly expenses.
- Set up a step-by-step plan for reaching smaller, steady goals to get to the finish line of your financial freedom goal.
Setting Financial Goals
There’s a philosophy surrounding goal-setting that’s referred to as SMART goals.
It’s definitely worth applying to your aspirations for financial independence and freedom.
How do you write a SMART goal?
- Specific: Really narrow down the goal so it’s very clear.
- Measurable: Devise a way to measure progress so you’ll know if you’re on track or need to readjust part of the plan.
- Attainable: Is this goal realistic within a certain timeframe? Your total savings goal may not seem attainable at first, but breaking steps down into smaller goals is what we’re evaluating here.
- Relevant: Does the goal relate closely to what you’re trying to achieve in this part of your life?
- Time-based: Just as it sounds. You’ll want a deadline for accomplishing this step you’re planning.
In the quest for freedom from jobs and money, you’re going to need a series of goals over an extended period of time. This SMART goal system is a great way to set those in place.
How to Achieve Financial Freedom
Here’s where you’ll gain some tools to help you file for that divorce from money tyranny and forced employment. The proceedings will take a while… but at least you don’t need a lawyer.
When you read some of these actionable steps, you’ll be surprised to learn how many things you DO have power over with your money and financial choices.
Re-evaluate your mindset
A successful path to money freedom has just as much to do with the way you think as with the money decisions you make. Here are some things to think about:
- Practice putting experiences and people over things.
- Dump a lot of time into personal financial literacy — read, listen to podcasts, and invest some time into gathering info and facts about what can get you there.
- Be brutally honest with yourself about how much the status-symbol mindset plays a part in your lifestyle and money choices.
- Realize that when you have debt, the money you earn isn’t really yours.
- Are you willing to do side jobs for extra cash flow? Buying clearance items at stores and selling them on eBay can add up and help pay debt.
- Think: Do you have a good support group on your path to financial freedom?
- Squash entitlement thoughts such as “I deserve this” and learn to live more simply.
- As your pay goes up, watch out for lifestyle creep.
- Practice being grateful.
- Live in a cheaper place, if that’s an option.
- Opt for a staycation instead of traveling somewhere else.
- Don’t buy new/expensive cars.
- Have a pizza and game night with friends instead of pricey drinks at the pub. A good belly laugh can cure all kinds of stress — financial included.
- Do you live in a place where you can do without a car? You can save a bundle by using public transportation and the occasional rideshare service.
- Wear secondhand clothes for a year. ThredUP and Poshmark make this really easy.
Grow your money
- Consider real estate investing, which can yield a great passive income that can be invested or used for monthly expenses after you leave a job.
- Use only a high-yield savings account that pays good interest.
- Open a Roth IRA and max out the yearly deposits.
- Practice numerous retirement strategies to maximize growth and savings.
- Investments such as dividend stocks can provide extra passive income.
- Put compound interest to work. Raise your investment income by putting money into mutual funds that earn interest which will in turn earn interest on itself.
- Max out your 401(k) at work — most have employer matching.
- Automate your savings and investment deposits so you never see them in your bank account.
Still have questions about the financial freedom definition? Here are the most frequently asked questions.
How do you decide how to prioritize your financial goals?
Prioritizing your goals can be a very individual process. A certified financial advisor can definitely help you sort that out. Just make sure you’re prioritizing paying off high-interest debt, such as your credit card, and building an emergency fund.
How much money do you need to be financially free?
The amount of money you need for financial freedom depends entirely on what that means to you.
Once you’re aware of the life you’d like and can put a dollar amount on it, you can apply the financial freedom formula as your foundation. Then build up from there to an amount that will support your desired lifestyle.
How long does it take to achieve financial freedom?
Like the amount of money it takes, the time it takes to get there is highly individual. These are some factors to consider:
- How much money you need to achieve independence and freedom.
- What are your income streams, and can you maintain them?
- How much of your paycheck can you save?
- What investments do you have, and how long do they need to grow to contribute to your necessary financial freedom amount?
The Bottom Line
I hope you’re really excited about the prospect of achieving financial freedom. With planning, dedication, and a great mindset, you can kiss that job and money-dependent stress goodbye!