We all aspire to be financially free but what does the phrase actually mean and what does it entail. I find out.
Financial freedom is one of life’s biggest aspirations, however most of us feel like it can be almost impossible to scale this peak. If you happen to ask some people who have reached this coveted status, you may receive some story you may not relate to, such as a huge inheritance or another scenario which is so wild that you end up feeling like reaching financial freedom is even further than you originally anticipated. Don’t believe these stories. While they may have helped those people reach financial freedom in some way, they are really just one-off scenarios and honestly, they just got lucky. More of a right-place-right-time situation. Having said that though, I can tell you for a fact everyone has the potential to reach financial freedom that doesn’t involve super drastic measures but instead some careful planning and dedicated execution. But what the heck is financial freedom?
What is financial freedom
Financial freedom is loosely defined as being able to live your life without ever stressing out about money or time. Now I say the word “loosely” because everyone has their own definition of how they stress out about money. For example, we have people who live paycheck to paycheck and count every penny to make ends meet, and then you have people who make a lot more money than the average American and still find little room in their budget for savings or what have you. In reality, financial freedom is approached in different ways for different people but, as I will continue to explain, the premise is the same regardless. Most people think the driving force of financial freedom is simply having more money than what they do now, and that more money will help them out, but the fact is the amount of money usually isn’t the driving factor. It’s actually way more important to monitor yourself and know how much you bring in, what financial commitments you have and have a goal/idea of what financial freedom looks like for you. And it doesn’t have to match your friend’s goals or your parents’ goal, it can be shaped for you. Let me describe a few different ways to attain financial freedom.
The various paths to financial freedom
1. Make so much money to never worry about it again
This is usually the hardest type of freedom to reach when to comes to tracking financial freedom, but people do aspire to this. I happen to be in this boat. But again, there are certain things you need to remember. If you already make so much money that after all your financial obligations are paid, such as a mortgage, car payments, credit cards, etc., you still have so much money that it can still reasonable do whatever you want, chances are that comes from earned income. If you think about that though, if you happened to get fired tomorrow that income would stop, and past due bills would start piling up quickly. This actually means you are still tied down and not really financially free. So, for this example what I mean is, you simply make more than you could ever spend to the point where you run out of things to spend money on. Do I feel like people have the ability to reach this level? Yes, but In reality, many people simply don’t possess the drive to get to this level. If you want examples of people who reach this level simply head over to the list of billionaires on Forbes.com and you’ll find them.
2. Create multiple streams of income to continue paying for the lifestyle you have
This method is the one I really talk about the most amongst my family and friends. What I usually recommend to people is to first explore options outside of your earned income, A.K.A. build income/wealth from assets you acquire versus going to work every day and getting a paycheck. The goal with this method is to first assess what you spend money on and how much you feel like you can reasonably live on. This step requires you to be critical of yourself and be brutally honest too. When coming up with this figure, factor in everything you want to spend money on, have to spend money on and then add an additional 20% margin to it and then you will have your monthly figure in hand. Your task now becomes working hard to collect enough revenue generating assets so that it exceeds by a healthy margin every month.
For example, if you feel you need $20k a month and that is comfortable for you, focus on how you can bring in $24-25k every month from your collection of assets so you can retire from your job and live happily with your asset income stream. The crux to this scenario however, is that the assumption we made with estimating our monthly cash requirement is that we would never increase this lifestyle status beyond that point. As in, your lifestyle status is now fixed. The only way to ever alter this status quo would be to cut expenses or collect more assets to pay for your increased life requirements.
3. Have enough to retire at a desired age
This last method is what I tend to call a more traditional method. This involves you saving money and doing whatever you have to do to retire at a certain age. This method is a little different than the last in that it usually doesn’t heavily involve asset-based income and usually comes from a retirement account or enough cash just saved up in a bank account. The method, again, requires you to estimate your cash requirements either monthly or annually from the day you retire until you die and have enough saved up between your accounts to allow you to live what you deem a comfortable life without having to work at all. It’s vitally important that you decide what a comfortable living is for yourself, since that will in turn help decide the amount of cash you require for your foreseeable life and that will literally be all the money you have. Like the previous example, it usually locks you in to a particular lifestyle status and it will be hard to grow away from that if desired later on.
The common denominators of financial freedom
Being financially free will take work and regardless of what path you take to get there, there are some guidelines I would follow to make sure you can maximize being financially free. In the examples above I mention a few times to calculate your cash requirements on monthly basis and I want to elaborate on that. When you find this figure, it should really just be recurring payments that are not liabilities (A.K.A debts). Since the goal is financial freedom, we want to make sure all our liabilities are tackled before we take the leap and quit our day jobs or officially retire. I say this because while you have liabilities such as car payments, credit card payments or mortgages to worry about you will never truly be free. Like I said being financially free means not stressing about money or time, so if you have to worry about not being able to make a loan payment that kind of defeats the whole purpose. Your priority with reaching financial freedom is to tackle your debts aggressively and also assess your expenses and see what you don’t need anymore. You want to be able to keep your situation simple but if you feel like you need the stuff you want/need, minus any payments on loans, just make sure you factor that into your cash requirements.
The biggest items to be mindful of is your spending and, if you opt to proceed with method 2, creating and cultivating your avenues of income. Sometimes you can feel pressured or may want to buy things impulsively and it does happen; that’s why we build in the extra miscellaneous fund into our cash requirements just in case something comes up, but my purpose for highlighting this point is to avoid going out and purchasing things with loans or liabilities. Use cash and pay for things in full. While I know the 0% interest can sounds enticing, we want to build healthy habits and not purchase things by making payments. With your avenues of income/asset income, cultivating them is some work you will have to put in. Whether it be real estate, stocks, bonds or what have you, it's important that you keep up with those assets to make sure you are maximizing their potential. Remember you have these assets to pay for your lifestyle and keep you from going back to work, so taking care of them will be your priority. Good news is this is easily done with money managers and financial planners.
Like I said at the beginning, financial freedom is attainable for anyone. It just takes some time, reflection and proper execution to help you reach the top. Dave Ramsey has this quote that I relate to and I think summarizes this post well. “Live like no one else, so you can live like no one else.”