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Our definition of financial freedom is to achieve your preferred work-free lifestyle by creating passive streams of income.
Thousands of people successfully achieve this goal. There’s a new generation dominating the workforce, and it’s dead serious to defy the system.
Millennials and some forward-thinking Generation Zers are stepping off the 9-to-5 path that would keep them in bondage until their prime is in the rearview mirror.
They are determined to build a life they can enjoy NOW (or in the near future) with an income that doesn’t depend on clocking in on a day-to-day basis.
Common practices of financial freedom include:
- Saving money to pay off debts quickly = more money to invest
- Invest in stocks – including dividend stocks with regular cash payments
- Maximize savings on retirement accounts – especially Roth IRAs
- Capitalize out of 401 (k) savings plans with corresponding employer dollars
- Owning real estate – think rents generate monthly income
- Secondary employment with passive sources of income
Financial independence vs. financial freedom
Financial independence is the step before financial freedom. When you are financially independent, your passive sources of income can cover all of your expenses, so you can quit your 9-to-5 job if you want.
Let’s compare that to the definition of financial freedom. When you have achieved financial freedom, money no longer matters and you can live the life of your choice.
The difference between independence and freedom is that the former allows you to distance yourself from compulsory work, while the latter allows you to dream and enjoy big.
Why is financial independence important?
Before you can walk, as the saying goes, you have to crawl.
If you or I want to live life entirely on our terms, we must do some preliminary work first.
It would be pretty hard to travel the world and still have an employer, wouldn’t it? Achieving financial independence is therefore a necessary part of the money-free journey.
Achieving the goal of financing one’s life without traditional work is an important task in itself. It will prove that you have what it takes to move into 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 you work, where you live, etc.
- Peace of mind and relief from money stress
- Opportunity to engage with your family now and create memories
- Not spending the prime of your life under the thumb of an employer
- Freedom to serve your passions and learn something new
- Time to serve people or get involved in a cause that is close to your heart
Are there any disadvantages to being free of money?
The downsides or challenges aren’t many, but there are a few to be aware of. Often the biggest obstacle is health insurance.
There is one thing that employers are particularly good at: offering health insurance. If you decide to give up a typical job, you need to come up with a health care plan.
Another challenge can be the judgment of friends and family. Since we are following different paths than generations before us, our decisions can sometimes lead to friction.
Don’t be discouraged if the family casts shadows on you. Just go by. Seriously, work on developing thick skin and good boundaries. You have that!
Formula for financial freedom
There is a magic formula that is usually used to figure out what you need for an actual life without a job. 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 is your savings goal.
This amount can be used to withdraw around 4% annually to cover your annual living expenses. It can create financial independence and lead to early retirement, but not necessarily money free.
An extra step may be required to live the life you want. You need to increase this savings goal until it supports this lifestyle.
Some people take a minimalist view of complete financial security and freedom and are most satisfied with a simple life. In that case, this magic formula can be exactly what you need to have real financial freedom.
Financial Freedom Plan
It is fair to say that no one can attain financial freedom without setting goals and making a plan. So these are the first points of contact.
Create your plan
Planning takes time to evaluate what is important. This also includes going through your finances carefully to see where things are and what you need to change.
Much of this can be done by yourself or with your partner, but it would be a smart move to involve a financial planner in the process. They see things that we often don’t see.
- Set some real parameters of what your dream life will be like. Write down the must-haves and the maybes.
- Thoroughly evaluate your financial situation: expenses, savings, income, emergency funds, retirement accounts (or lack thereof), etc. – and take notes on things that need attention.
- Decide when to go for a job using the financial freedom formula.
- Assess how much money it would cost to lead the life you want. It’s usually a step beyond paying your regular monthly expenses.
- Create a step-by-step plan for achieving smaller, steady goals to reach the finish line of your goal of financial freedom.
Set financial goals
There is a philosophy around goal setting called SMART goals.
Definitely worth applying in your pursuit of financial independence and freedom.
How do you write a SMART goal?
- Specific: Really narrow the goal down so it’s very clear.
- Measurable: Develop a way to measure progress so you know if you are on the right track or need to readjust part of the plan.
- Available: Is this goal realistic within a certain timeframe? Your entire savings goal may not seem attainable at first, but we’re evaluating the steps into smaller goals here.
- Relevant: Is the goal closely related to what you want to achieve in this part of your life?
- Time based: The way it sounds. You need a deadline to complete this planned step.
In the quest for freedom from job and money, you will need a number of goals over a long period of time. This SMART goal system is a great way to set those up.
Achieve financial freedom
Here are some tools to help you file for divorce from monetary tyranny and forced labor. The trial will take a while … but at least you don’t need a lawyer.
After reading some of these actionable steps, you will be surprised how many things you can do with your money and your financial decisions.
Reconsider the way you think
A successful money-free path has as much to do with the way you think as it does with the money decisions you make. Here are some things to keep in mind:
- Practice putting experiences and people above things.
- Spend plenty of time on personal finance literacy – reading podcasts, listening to podcasts, and spending some time gathering information and facts about what can get you there.
- Be brutally honest with yourself about how much the status symbol mindset plays a role in your lifestyle and your money decisions.
- Realize that the money you make is not really yours when you are in debt.
- Are you ready to do part time jobs for extra cash flow? Buying clearance items in stores and selling them on eBay can add up and help pay off debts.
- Think: do you have a good support group on your path to financial freedom?
- Squash aspirations like “I deserve it” and learn to live more simply.
- As your salary goes up, watch out for lifestyle sneaking.
- Practice being grateful.
- Live in a cheaper location if that’s an option.
- Instead of traveling elsewhere, choose to stay.
- Don’t buy new / expensive cars.
- Have a pizza and game night with friends instead of expensive drinks in the pub. A good belly laugh can cure all types of stress – financially too.
- Do you live in a place where you can do without a car? You can save on a package by using public transport and the occasional ride sharing.
- Wear used clothing for a year. ThredUP and Poshmark make this really easy.
Let your money grow
- Consider real estate investments which can make great passive income that can be invested after the job or used for monthly expenses.
- Use only a high yield savings account with good interest rates.
- Open a Roth IRA and maximize annual deposits.
- Practice numerous retirement strategies to maximize growth and savings.
- Investments like dividend stocks can provide additional residual income.
- Use compound interest. Increase your investment income by putting money in mutual funds that earn interest, which in turn generate interest.
- Maximize your 401 (k) at work – most have employer matching.
- Automate your savings and investments so you never see them in your bank account.
frequently asked Questions
Do you still have questions about the definition of financial freedom? 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 with this. Just make sure you pay off high interest rates like your credit card and build an emergency fund.
How much money do you need to be financially free?
How much money you need for financial freedom depends entirely on what that means for you.
Once you know what life you want and can invest a dollar amount on it, you can use the formula of financial freedom as a foundation. Then from there, build on an amount that supports your desired lifestyle.
How long does it take to achieve financial freedom?
Like the amount of money that is needed, the time it takes to get there is very individual. Here are some factors to consider:
- How much money do you need to achieve independence and freedom.
- What are your sources of income and can you maintain them?
- How Much Of Your Paycheck Can You Save?
- What investments do you have and how long will they have to grow to add to the financial freedom you need?
The bottom line
Hope you are really excited about the prospect of financial freedom. With planning, dedication, and a great mindset, you can say goodbye to job and money related stress!