Financial freedom and financial security are two essential concepts that are often talked about in personal finance. While both terms are related to achieving economic stability, they have different meanings and implications. Financial security is enough money to cover basic needs and unexpected expenses, and financial freedom is about having enough wealth to live the lifestyle one desires without relying on a paycheck.
Financial security is a crucial first step toward achieving financial freedom. It means having a solid financial foundation to withstand unexpected events such as job loss, illness, or economic downturns. Financial security is achieved by creating a budget, saving money, paying off debts, and building an emergency fund. It provides a sense of stability and reduces financial stress, which can lead to better mental and physical health.
On the other hand, financial freedom is about having enough wealth to live the life one desire without being tied to a job or a specific location. It means having enough passive income to cover living expenses and pursue passions and interests.
Financial freedom is achieved by investing in assets that generate passive income, such as rental properties, stocks, bonds, and businesses. It allows one to retire early, travel the world, start a business, or pursue other goals that require time, money, and freedom.
Key Takeaways:
- Financial security covers basic needs and unexpected expenses, while financial freedom allows living a desired lifestyle without relying on a paycheck.
- Financial security is achieved by budgeting, saving, paying off debts, and building an emergency fund, whereas financial freedom involves investing in assets generating passive income.
- Balancing financial freedom and security is crucial to create a resilient financial plan and supporting long-term goals and values.
- Multiple income streams and investing in assets that generate passive income are vital strategies for achieving financial freedom.
- Financial security involves creating an emergency fund, proper insurance coverage, establishing a retirement savings plan, and reducing/managing debt.
- Behavioral finance plays a significant role in achieving financial freedom and security by understanding the psychology of money, overcoming cognitive biases, and adopting a growth mindset.
- Striking a balance between financial freedom and security requires continuously evaluating and adapting financial strategy, celebrating milestones, learning from setbacks, and embracing a holistic approach to economic well-being.
Understanding Financial Freedom and Financial Security
What is Financial Freedom?
Financial freedom is living your desired lifestyle while having already established a means to pay for that. It means having enough money to cover your living expenses, pay off your debts, and still have enough left to invest in your future.
Financial freedom is about being in control of your finances and having the ability to make decisions about your life that won’t jeopardize your financial security.
Financial freedom can be achieved through various means, such as saving money, investing in stocks, bonds, or mutual funds, and creating multiple income streams. It takes time and discipline to achieve financial freedom and requires a long-term mindset.
On this site, 40PlusFinance.com, our definition of being financially free is having enough cash flow from investments to cover living expenses.
What is Financial Security?
Financial security means having enough money to cover basic living expenses, pay off debts, and save for emergencies. It means having a solid financial plan in place that provides a sense of stability and peace of mind.
Financial security can be achieved through various means, such as creating a budget, saving money, paying debts, and purchasing insurance. It is about having a safety net that can protect you from unexpected events such as job loss, illness, or other financial emergencies.
Critical Differences Between Financial Freedom and Financial Security
Financial Freedom Financial Security Ability to live the lifestyle you desire the ability to cover basic living expenses Long-term mindset Short-term mindset Multiple streams of income Reliance on a single source of income Investing in your future Creating a safety net
While financial freedom and security share some similarities, they are fundamentally different. Financial freedom is about living on your terms, while financial security is about having a safety net to protect you from unexpected events.
It is important to note that achieving financial freedom does not necessarily mean sacrificing financial security. Financial freedom can provide a sense of security, allowing you to have more control over your finances and make better financial decisions.
Another way to describe the relationship between the two is that financial security is a requirement before you become financially free. However, one can be economically secure in a state of financial freedom.
See our other related article on Financial Independence vs Financial Freedom
The Importance of Balancing Financial Freedom and Financial Security
While financial security and financial freedom are both critical financial goals, it’s crucial to find a balance between the two. Financial security provides a solid foundation for an individual’s finances, while financial freedom allows them to pursue their dreams and enjoy greater flexibility and independence.
Balancing both goals can help create a resilient financial plan that supports long-term goals and values.
Security can be considered the base of what we’ve described in another article as the base of a wealthy pyramid. Once you have achieved that, you can then pursue freedom.
Achieving Long-term Financial Goals
One of the primary benefits of balancing financial freedom and financial security is the ability to achieve long-term financial goals. Individuals prioritizing financial security can create a stable financial foundation to help them achieve their long-term financial goals.
On the other hand, individuals who prioritize financial freedom can create a financial plan that allows them to pursue their dreams without compromising their long-term financial security.
Living a Stress-Free Financial Life
Financial security can help individuals live more stress-free. Individuals can reduce their financial stress and anxiety by creating a plan prioritizing financial safety. This can help them focus on other areas of their life, such as their career, relationships, and personal growth.
Planning for Uncertainties and Emergencies
Another benefit of balancing financial freedom and financial security is the ability to plan for uncertainties and emergencies. Individuals prioritizing financial security can create an emergency fund that helps them handle unexpected expenses, such as a medical emergency or a job loss. On the other hand, individuals who prioritize financial freedom can create a financial plan that allows them to take calculated risks without compromising their financial security.
Balancing financial freedom and security is crucial for creating a resilient financial plan that supports long-term goals and values. By finding a balance between the two, individuals can achieve their financial goals while living a stress-free economic life and planning for uncertainties and emergencies.
We keep our financial security funds in a high cash value whole life insurance policy for the above use cases. It’s easy to access, generates more dividends than banks, and is outside the banking system (particularly relevant in 2008 or 2023).
Strategies for Achieving Financial Freedom
Developing Multiple Income Streams
One of the key strategies for achieving financial freedom is to develop multiple income streams. This means building sources of income that do not require your direct involvement daily.
Examples of passive income streams include rental income, dividend income, or business income. By developing multiple income streams, you can diversify your sources of revenue and reduce your reliance on a single source of income.
Investing in Assets That Generate Passive Income
Another way to achieve financial freedom is to invest in assets that generate passive income. This can include stocks, bonds, real estate, or other assets that appreciate over time and generate revenue through dividends, rent, or interest payments. By investing in these assets, you can build wealth over time and generate a steady stream of income that can help you achieve financial freedom.
Our implementation involves buying cash-flowing single-family rental properties, which kick off money every month.
Focusing on Financial Education
One of the essential strategies for achieving financial freedom is to focus on financial education. This means learning about personal finance, investing, and other financial topics to help you make informed decisions about your money. By developing your financial literacy, you can make better decisions about investing your money, managing your debt, and building wealth over time.
Two great resources for financial education are books by Robert Kiyosaki (Rich Dad Poor Dad) and an online curriculum accessible through our mentors at Cash-flow Tactics.
Practicing Delayed Gratification and Effective Money Management
Finally, achieving financial freedom requires practicing delayed gratification and effective money management. This means living below your means, avoiding unnecessary debt, and saving and investing your money wisely. By practicing these habits consistently over time, you can build wealth and achieve financial freedom.
Building a Strong Foundation of Financial Security
Financial security is a critical component of achieving financial freedom. Long-term goals and dreams can only be challenging with a solid financial security foundation. Financial security begins with protecting one’s economic well-being and establishing a solid financial plan.
Creating an Emergency Fund
Creating an emergency fund is an essential step in building financial security. An emergency fund is a savings account for unexpected expenses, such as medical bills, car repairs, or job loss. Experts recommend saving three to six months of living expenses in an emergency fund. This fund provides a cushion to help individuals weather unexpected economic storms without derailing their long-term financial goals.
Properly Insuring Yourself and Your Assets
Proper insurance coverage is another crucial component of financial security. Insurance policies can help protect individuals and families from significant economic losses from unexpected events, such as accidents, illness, or natural disasters. Common types of insurance include health insurance, life insurance, disability insurance, homeowners or renters insurance, and car insurance. It is essential to review insurance policies regularly to ensure they provide adequate coverage and adjust them as needed.
We use our life insurance policies as virtual banks from which we can borrow money. This concept is known as infinite banking.
Establishing a Retirement Savings Plan
Establishing a retirement savings plan is a critical component of building financial security. A retirement savings plan, such as a 401(k) or IRA, allows individuals to save for retirement while taking advantage of tax benefits. Experts recommend contributing at least enough to receive an employer match, if available, and increasing contributions over time. Starting early and consistently contributing to a retirement savings plan can help individuals achieve long-term financial security.
Alternatively, one could use the passive income or multiple income stream strategies discussed in the article previously.
Reducing and Managing Debt
Reducing and managing debt is another essential step in building financial security. High debt levels can make it challenging to achieve financial goals and lead to financial stress. Individuals can reduce and manage debt by creating a budget, prioritizing debt repayment, and avoiding taking on new debt. Reviewing interest rates regularly and considering refinancing or consolidating debt to lower interest rates and reducing overall debt is also essential.
The Role of Behavioral Finance in Achieving Financial Freedom and Security
Understanding the Psychology of Money
Behavioral finance is the study of the influence of psychology on the behavior of investors or financial analysts. It is essential to understand that money and emotions are closely linked, and people’s behavior towards money is often driven by their feelings, which can lead to irrational financial decisions.
For example, people may be more likely to invest in a stock they have an emotional attachment to, even if it is not a good investment. This is known as the “endowment effect.”
Similarly, people may be more likely to sell a stock that has increased in value while keeping those that have decreased. This is known as the “disposition effect.“
Identifying and Overcoming Cognitive Biases
Cognitive biases are mental shortcuts that people use to make decisions quickly. However, these shortcuts can often lead to irrational financial decisions. Identifying and overcoming these biases is essential to achieve financial freedom and security.
By identifying these biases and taking steps to overcome them, individuals can make more rational financial decisions and achieve greater financial freedom and security.
Adopting a Growth Mindset for Financial Success
A growth mindset believes hard work and dedication can develop one’s abilities and intelligence. This mindset is essential for financial success, encouraging individuals to take risks but, more importantly, learn from their mistakes.
By adopting a growth mindset, individuals can overcome their fear of failure and take the necessary steps to achieve financial freedom and security. This may include investing in their education, taking on new challenges, and seeking opportunities for growth and development.
Overall, understanding the role of behavioral finance in achieving financial freedom and security is essential for individuals who wish to take control of their financial future. By identifying and overcoming cognitive biases, adopting a growth mindset, and making rational monetary decisions, individuals can achieve their financial goals and live a life of financial freedom and security.
Final Thoughts: Striking the Perfect Balance Between Financial Freedom and Security
Continuously Evaluating and Adapting Your Financial Strategy
Striking a balance between financial freedom and security requires continuously evaluating and adapting your financial strategy. It’s essential to regularly review your financial goals, assess your progress, and adjust your plan accordingly. This can help you stay on track and avoid any potential financial setbacks.
One way to evaluate your financial strategy is to track your income and expenses. This can help you identify areas where you may be overspending and where you can cut back. Additionally, regularly reviewing your investment portfolio and adjusting as needed can help ensure you’re on track to meet your financial goals.
We track progress towards our financial freedom goals every quarter, usually setting aside a Saturday morning to review real estate and profits and losses from various businesses.
Celebrating Milestones and Learning from Setbacks
While evaluating and adapting your financial strategy continuously is essential, it’s also important to celebrate your financial milestones along the way. Whether paying off debt, reaching a savings goal, or achieving a certain level of financial independence, celebrating these milestones can help you stay motivated and focused on your financial goals.
However, setbacks are also a natural part of any financial journey. It’s essential to learn from these setbacks and use them as an opportunity to adjust your financial strategy and move forward. This can help you avoid making the same mistakes in the future and ultimately achieve greater financial freedom and security.
Embracing a Holistic Approach to Financial Well-being
Finally, balancing financial freedom and security requires a holistic approach to economic well-being. This means considering your financial goals and overall well-being, including physical, emotional, mental, and spiritual health.
One way to embrace a holistic approach to financial well-being is to prioritize self-care and stress management. This can help you avoid making impulsive financial decisions and focus on your long-term goals.
Ultimately, you can strike the perfect balance between financial freedom and security by continuously evaluating and adapting your financial strategy, celebrating milestones and learning from setbacks, and embracing a holistic approach to economic well-being.
Frequently Asked Questions (FAQs):
Q: What is the difference between financial freedom and financial security?
A: Financial freedom and financial security are two distinct concepts. Financial security is having enough money to cover basic needs and unexpected expenses, providing stability. On the other hand, financial freedom is about having enough wealth to live the lifestyle one desire without relying on a paycheck. It involves generating passive income that can cover living expenses and enable one to pursue passions and interests.
Q: How can one achieve financial freedom and financial security?
A: Financial security is achieved by creating a budget, saving money, paying off debts, and building an emergency fund. Economic freedom, however, is achieved by investing in assets that generate passive income, such as rental properties, stocks, bonds, and businesses. It’s essential to balance both to create a resilient financial plan that supports long-term goals and values.
Q: What role does behavioral finance play in achieving financial freedom and security?
A: Behavioral finance plays a significant role in achieving financial freedom and security. It involves understanding the psychology of money, overcoming cognitive biases, and adopting a growth mindset. By identifying and overcoming cognitive biases, adopting a growth mindset, and making rational financial decisions, individuals can achieve their financial goals and live a life of financial freedom and security.
Kurt has gone from the financial lows of the ’08 financial crisis to personal financial success. He is a professional real estate investor owning properties in multiple states.
One of his passions is financial education and the pursuit of financial freedom.
You can learn more about Kurt here.
