What is Financial Freedom?
I just realized. I’ve been writing a lot of things about financial freedom, and how to reach it. But I’ve never actually given a definition for what I mean by the term “financial freedom”.
A definition for Financial Freedom
If a person is 100% financially free, it means that person can support himself (and all his dependents) financially, without having to actively do anything to earn an income, for the rest of his life.
Financial Freedom is Progressive
I specifically said 100% financially free, because financial freedom is progressive. It is possible to have partial financial freedom.
If you cannot afford to skip a single month’s pay-cheque, you have 0% financial freedom. In this situation, you are completely dependent on your next pay-cheque. If you miss a single month, you won’t be able to pay your bills, buy your food, etc.
The in-between levels of financial freedom are a bit harder to nail down.
One way to think of it is like this: If you are 50% financially free, it means that you can support yourself (and all your dependents) financially, without actively earning an income, for half of your remaining life.
Another way to think of it is: If you are 50% financially free, it means that you can support yourself (and all your dependents) financially, and work half-as-hard (e.g. only two and a half workdays per week) for the rest of your life.
Financial Freedom in Real Life
In real life, being 100% financially free usually means you have made enough investments, and you are earning enough passive income from your investments, so that you never have to work again for the rest of your life.
In practice, if you are working towards 100% financial freedom, you will slowly gain more and more financial freedom.
The benefits of financial freedom keep getting better, the closer you get to 100% financial freedom. They include things like:
- less stress (you don’t have to bring home a set amount of money every month),
- freedom to take risks (e.g. start a business),
- freedom to do a job you like, rather than a job you hate that pays better,
- freedom to spend more time with your loved ones,
- freedom to tell your boss to go screw himself if he’s making unreasonable demands,
- freedom to do volunteer work,
- etc.
If you want to learn more about practical financial freedom, you can read these articles:
- Financial Freedom Quick Tips
- How to become Financially Free
- The Stages of Financial Freedom
- The Secret to Financial Freedom
July 17th, 2008 at 02:07 pm
love that definition. i got goose bumps thinking of that day where I will be 100% financially free. and since i never plan to stop working at something (thanks to my achiever’s drive) i got really excited about the possibilities—doing something i really want to do, not just something i need to do.
July 23rd, 2008 at 03:08 am
Great definition.
I can’t help but feel, that so, far your emphasis on financial freedom may give people images of a somewhat extreme path ahead. A arduous struggle for 10 or more years until they reach the magical milestone of 100% financial freedom.
I know how committed you are to this goal. To share just one example with everyone: When Francois and I shared a flat, he refused to buy a bed. Instead he chose to sleep on a rolled up blanket on the floor (occasionally he slept on the futon in the lounge). On the other hand, I bought (with my first few months paycheck and some savings) some new but reasonably priced furniture and appliances (obviously, without incurring additional debt). Even though I still had substantial study debt, I felt that it was important for me to have a comfortable place to live that felt like a home.
So here are some warnings against placing too strong a value on financial freedom. I’m not saying this is what you do, I’m just wary too much of a good thing.
Firstly, I can remember your reference to living ones life according to ones values and (if I may add) to ones dreams. To subjugate a dream (e.g. backpacking through Peru) or ones values (e.g. missing the first words of ones child) to the ideal of financial freedom seems like a misplaced value system. One would effectively be missing out on a life that may be lived now and that cannot be reclaimed.
Secondly, I’ve always thought of money as a tool or resource. Working hard for years without any tangible reward is not a great motivator. I have chosen to work hard (even if sometimes I do not enjoy it) so that I can earn money. Money that enabled me to do things in the present that bring me happiness and enrich my life.
After that really long post I guess my entire point could be summed up in one word: Balance.
To continue the metaphor, I view financial freedom as just one weight on the scale of my personal fulfillment.
(My apologies if this is a future Quick Tip)
July 23rd, 2008 at 01:02 pm
@Damian:
Your comment brought back a lot of memories for me. I’m sitting here feeling nostalgic and grinning from ear to ear. Those were tough times, but good nevertheless!
Firstly, you are absolutely right. I was a freak! I really did take it to the next level, and way beyond what I’d recommend to most people.
I was so focussed on achieving my financial goals, that to an extent I even neglected to take care of the most important things in life.
However, there are two things I should say here:
1. It’s not 10 or more years of no fun. Really, it’s not.
For the average Joe, to become financially free, it does NOT have to be an “arduous struggle for 10 or more years”, as you put it.
Most of the sacrifices one needs to make are during the initial stages, while you have to work hard to get out of debt, and save up a buffer. For the average person this period will last approximately two to three years.
Even if you only manage to get out of debt, save up a buffer, and then resume your previous life-style, being out of debt should allow you to now maintain your previous living standard without having to make debt again (you’re now just working one month ahead instead of one month behind).
I also wouldn’t expect anyone to go to the extremes that I went to. Most people also have families, and you need to take care of your family.
2. About sleeping on the floor…
I’m chuckling about this. Yes, for six months I did refuse to buy a bed and even a mattress.
However, I did not only do this because I was saving up to be able to quit my job to do freelance work.
I had some other reasons too. It was reminder to myself that many things we regard as necessities, and that we insist we can’t live without, are not really so necessary.
I figured if I can survive sleeping on the floor, I can survive a lot of other stuff too.
I was also intrigued by the fact that some cultures (e.g. traditional Japanese samurai) slept on the floor. I found this to be a strange act of discipline and self-denial, but at the same time somehow purifying.
Lastly, sleeping on the floor all that time helped me to look at little luxuries in a different way, and have a true appreciation for the small things in life.
July 23rd, 2008 at 08:03 pm
just to add a couple thoughts. while, it maybe be a few years of HARD work to achieve financial freedom, life does still go on. who’s to say you can’t have fun while working hard? or maybe work hard for a week, play hard for a day–whatever works with your schedule.
i have a family–wife and 4 kids, and one on the way. we have been working hard, but because of that, the enjoyment that comes from play time has been intensified because of the work. you don’t have to have things to have fun, and you definitely don’t need a life of comfort to have enjoyment.
secondly, about Balance. i think it’s a very hard state to obtain. i think rhythm would be more achievable. what is your life’s rhythm? do this for a while, do that for a while. we all have tons of responsibilities –wife, kids, parents, in-laws, church, work, 2nd jobs, community, etc, etc, etc. that’s a lot to balance.
i think the average person has given up the right to seek balance in their life. if you’re in debt, you’re already totally turned upside and knocked off balance. i would recommend waiting till you at least get out of debt before even thinking about balance.
July 24th, 2008 at 11:33 am
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