Do you want financial independence but don’t know where to start? Have you heard people talk about financial freedom and wondered about the differences?
According to data from Google Trends, searches for “financial freedom” have remained steady over the past five years, ironically peaking during early March 2020. And interest is not limited to the Western world, with rising interest in places like Singapore, Jamacia & Kenya.
This is going on even with talk of a pending recession in 2023.
If you are one of those, then this guide is for you! We will be diving into the benefits of each concept and outlining what steps need to be taken to reach your financial goals. Whether investing, cutting expenses, or creating multiple income streams, this guide provides a comprehensive overview of how planning for your future can help you gain greater control over your money.
So if you’re ready to take control of your finances and secure long-term financial stability as someone over forty, keep reading!
- Financial independence has sufficient personal wealth to live without actively acquiring it, while financial freedom is living the lifestyle you want without worrying about income.
- Financial independence can be calculated using the 25x annual expenses rule and follows the 4% withdrawal rule for savings.
- The FIRE movement promotes drastically cutting expenses to save and invest a large percentage of monthly income.
- Financial freedom is about mindset, feeling confident and free regarding finances, and not letting money control decisions.
- Three levels of financial freedom: 1) Financial Freedom – covering basic expenses; 2) Lifestyle Freedom – passive income covers current lifestyle; 3) Legacy Freedom – passive income supports desired lifestyle and leaves a legacy.
- A key difference between financial independence and financial freedom is the mindset; financial independence focuses on savings and scarcity, while financial freedom focuses on abundance and creating value.
- Investing in real estate, such as turnkey rental properties and real estate syndications, is a popular path to financial freedom, providing passive income and diversification of income sources.
Financial Freedom vs. Financial Independence
An excellent way to think about your finances is to imagine you are a toddler learning to walk. Do you feel like you’re able to move freely and without restriction? Can you go anywhere you want? Or are you living paycheck to paycheck?
Think about it this way. If you were to lose your job today, your life would change drastically. You would have to find a new source of income and would likely have to downsize your lifestyle. Is there another source of income that could cover your living expenses if you lose your job? Is there an emergency fund that can be used as a backup? Would you like to have enough income to fund your current lifestyle indefinitely?
And yes, I’m talking about income, not savings. No matter how much you save, eventually, you will run out of money. However, if you have a source of income, you don’t have to work actively; it can last indefinitely. The money you make from your job is active income. To achieve financial independence and freedom, you will need multiple passive income sources – income you earn without working for it.
No one achieves financial freedom or early retirement overnight. The journey has many milestones.
What is Financial Independence?
Financial independence has sufficient personal wealth to live without actively acquiring it. Residual, or passive, income is the key to financial independence. A residual income exceeding your budget allows you to live without working. You become independent when you can finally say you rely on no one but yourself.
The FIRE movement is one of the most widely followed (and controversial) in the financial realm, standing for Financial Independence Retire Early. One of its core principles is to cut down drastically on expenses so that you can save a large percentage of your income to contribute towards investing, sometimes upwards of 50% of your monthly take-home pay.
Bloggers like Mr. Money Mustache & Millenial Money have popularized the concept of financial independence.
Calculating Your FI Number
Financial independence is a number you can nail down. The conventional advice is 25x your annual expenses.
If you can support yourself financially and keep up with your current expenses, you won’t have to work and will never run out of money. When it comes to financial freedom, it’s all about mindset. But financial independence is about your net worth and not about any other sources of income.
This strategy generally follows the 4% rule: you shouldn’t withdraw more than 4% of your savings per year, especially in retirement.
How Do I Save Enough to Be Financially Independent?
There are several ways to hit financial independence. You can invest your money in three primary ways: stocks, bonds, or mutual funds. One concept that most financially independent bloggers miss out on is having passive income to assist you in meeting your expenses.
A potential problem with following the FIRE movement’s principle of retiring once you have achieved financial independence is that your needs will likely change. For example, your financial goals will change if you have kids, get married, or even divorce.
Readers of this blog (those of us north of 40) know about changing goals too well.
The key to financial freedom is having more money than you need to cover your current expenses.
You never know what’s going to happen in life. Your parents may need to move in with you, laws around real estate or taxes may change, or any other number of small things that you think are stable right now may shift. If you need extensive care or therapy after an accident that your insurance doesn’t cover, you may have to pay for it out of pocket. It is a good idea to have some safety net for those people.
Financial independence is a great goal, but it is only the middle step. You will continue to live at the same level as before, and it is likely just enough to support your current way of life. Not knowing the future gives you a sense of independence, but you’re not free until you experience it. So, what constitutes freedom in the FIRE world?
With that said, let’s move to the next concept of financial freedom.
What is Financial Freedom?
Financial freedom can mean different things to different people, but let’s try to nail down a definition or at least a concept.
Some studies suggest that having a financial freedom mindset is the key to achieving financial freedom, while the opposite – a scarcity mindset – will prevent you from ever reaching that goal. Different people have different ideas about what financial freedom means. For some people, having a lot of money is not essential.
The Financial Freedom Mindset
You can start thinking about financial freedom as the time when you no longer have to let money control your decisions. Not constantly worrying about money will make you feel less stress and anxiety. It’s not about how much money you have. It’s about feeling confident and free when it comes to your finances.
When you’re financially free, your Passive Income will support the lifestyle you want to live and all your other expenses. This is why it is hard to define what lifestyle you want, as it is vague. You have to decide on what lifestyle you want.
For some people, living with fewer possessions leads to financial freedom sooner. Some people view luxury as a necessary part of their lifestyle and thus must earn more money to maintain it. Although having a lot of money can make life easier, it is not required for financial freedom.
The Different Levels of Financial Freedom
My mentors at Cashflow Tactics introduced me to financial freedom and discussed its three primary “levels.” Make sure to check out my review of the Cashflow Tactics Program. There are three levels of financial independence. The three main things you need to do to achieve financial freedom are:
Step 1: Financial Freedom
This is achieving financial stability to the point that if you were to lose your job, you would still have enough income to cover your basic expenses. Once you hit this level, you are indeed financially free.
Step 2: Lifestyle Freedom
When your passive income covers your current lifestyle, you won’t have to change a thing about your day-to-day living at this level with payment strictly from your investments.
Step 3: Legacy Freedom
Finally, there’s legacy freedom. This is enough passive income to allow you to live your lifestyle and do what you want. Or, money from passive income sources that is enough to cover your lifestyle expenses plus some extras. You have ample funds to pass down to your children or dependents and create a complete “legacy” for yourself.
What Does Life Look Like When You’re Financially Free?
You can do what makes you happy without worrying about the cost. You can use money in a way that helps you achieve your goals and values. This means that you can overcome financial challenges without worrying if life changes.
The goal of FI is to have enough money saved to retire as soon as you reach your desired number. But financial freedom means you can do what you want without worrying about money. Once you get financial independence, you can treat yourself more often and give yourself little life upgrades that you might not have been able to if you had retired then.
To understand what kind of budget you need to feel financially free, consider your discretionary expenses separately from your required expenses. Then double your discretionary money.
You will need to take your discretionary budget plus your required expenses and multiply it by 25 to be financially independent. Having a financial goal in mind is your first step.
Even if I were to win the lottery, I might not feel entirely financially free. If I had more money, I would have more room in my budget, but I don’t know if I would feel freer. This is where financial freedom is difficult to describe. How comfortable you feel will depend entirely on you as an individual.
In conclusion, financial freedom is about lifestyle and mindset. If you’re not thinking about “how much” money you have first, you’re financially free.
Financial Freedom vs. Financial Independence: Differences
Now, how are financial freedom and financial independence different?
As discussed earlier was that the first step to financial freedom is financial independence. Before you run, you have to walk. Financial independence is walking. True freedom comes from within. It’s something that you have to build and learn for yourself.
Financial independence is a complex number with a formula. This means understanding exactly how much you need to earn through passive means to cover your expenses. Financial freedom is living the lifestyle you want without worrying about your income. Passive income covers your living expenses so you can live without worry.
The view of financial freedom you would see if you were to climb a mountain is only halfway up the mountain of financial independence. The idea is still beautiful, but we’re not quite at the top yet.
Although you may have money, you can still be unhappy if you’re not living the life you want. Living in alignment with your goals and values means being financially free and not worrying about the cost.
A key differentiator between the two is the mindset. Financial Independence (& in particular FIRE) focuses on savings and scarcity of money, while Financial Freedom focuses more on abundance and creating more value in the world.
How to Achieve Financial Freedom Through Investing in Real Estate
More people have become millionaires by investing in real estate than through other means.
Why is that? What are some ways you could bring in additional streams of income? You could do many things, such as writing a book, starting a business, creating a new mobile app, or pursuing other ventures.
Those ventures require a lot of skill, knowledge, experience, and often money to get started.
Okay, now let’s look at real estate. You can make money from real estate by buying a property and renting it out. Very similar to Monopoly & stacking up little greenhouses. Sounds more straightforward than those other complicated business ventures, right?
This was going through the minds of all the real estate millionaires.
You don’t need to be a rocket scientist to invest in real estate. Generating income does not require a lot of money.
At 40PlusFinance.com, we are big fans of Turnkey Real Estate Investing as the primary method we invest in real estate. If you aren’t familiar with the concept, check out our article, “What Is Turnkey Real Estate.”
Investing In Turnkey Rental Properties
Let’s say that you had $20,000 to invest. Out of the $30,000, $25,000 was put into a rental home, and $5,000 was for reserves just in case you had repairs or vacancies to pay for.
After you buy a property, you can rent it to someone who will pay you monthly rent. The rent they pay is more than the mortgage, so you would have money left over every month. This particular property provides $3,000 of cash flow per year. Not bad for a $30,000 investment.
While $250 a month is not a lot of money to retire, that is just one property. You could make up to $1250 monthly if you rented out five homes.
You can read about our entire plan for freedom in our laid-out Financial Freedom Plan.
There is no single solution that will lead to financial freedom. You must create your path by taking one small step at a time.
Investing In Real Estate Syndications
Another way to invest in real estate is to invest in a real estate syndication, where a group of people invests together. This can be a good option if you don’t want to deal with the hassle of finding and fixing a property yourself.
A real estate syndication is where a group of investors come together, each investing a certain amount of money. Together, they have enough money for the down payment and any renovations that need to be done. It’s similar to the rental home example but on a larger scale.
The sponsors are the people who are doing the hard work. The people responsible for a rental property’s syndication are in charge of everything that would typically fall to the homeowner, like finding tenants and working with the property management team. They also oversee any renovations that take place.
The sponsors of investment receive a portion of the profits, but most of the money goes to those who invested.
This is an example of how much money you would make if you invested 50,000 dollars into a real estate syndication with a projected 10% return. You would make around 5,000 dollars a year, or 400 dollars a month.
Syndications are passive, meaning they require little to no effort to maintain. You use the time and expertise of the sponsor partners to do all the hard work. When you invest in a real estate syndication, you are not responsible for any active duties. You invest your money, then start seeing returns.
Investing in different markets and asset classes lets you quickly diversify your income. By doing this, you will create multiple streams of passive income.
Go Forth, And Enjoy Your Journey To Financial Freedom
There is no way to invest in real estate to accomplish financial freedom quickly. Owning property can help you become financially free because it is easy and has little risk.
This map shows you the way to financial security, independence, and freedom. No matter where you are on your financial journey, this map can help guide you to your ultimate destination. It is crucial to enjoy the journey on any trip.
You can’t just snap your fingers and become financially free. It’s about the life lessons you’ll learn along the way, the relationships you’ll build, and the surprises and setbacks you’ll encounter.
What about you, the reader? What is your definition of each?
Frequently Asked Questions (FAQs):
Q: What is the difference between financial independence and financial freedom?
A: Financial independence has sufficient personal wealth to live without actively acquiring it, often calculated using the 25x annual expenses rule and following the 4% withdrawal rule for savings. On the other hand, financial freedom is about mindset and lifestyle, living the life you want without worrying about income, and not letting money control your decisions.
Q: What are the different levels of financial freedom?
A: There are three levels of financial freedom: Financial Freedom, where passive income covers basic expenses; Lifestyle Freedom, where passive income covers the current lifestyle; and Legacy Freedom, where passive income supports the desired lifestyle and leaves a legacy.
Q: How can I achieve financial freedom through real estate investing?
A: Investing in real estate, such as turnkey rental properties and real estate syndications, is a popular path to financial freedom. These investments provide passive income and diversification of income sources. Turnkey rental properties involve buying a property and renting it out. In contrast, real estate syndications involve investors pooling their money to invest in larger-scale properties.
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.