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What Is Financial Freedom?

What Is Financial Freedom?

February 10, 2022 By Kurt Henn last modified on January 23, 2023 Leave a Comment

When people first hear about being financial freedom, the first thing that comes to mind is thoughts of luxurious houses, extensive vacations, and smoking cigars in dark rooms where massive deals are being made.

What does financial freedom mean to the average person?

That is what is article is set to explore 3 things, what financial freedom is, different frameworks and strategies on how to achieve financial freedom, and finally our own definition of financial freedom.

So let’s get started.

Table of Contents

  • Definition of Financial Freedom
  • Ways to Achieve Financial Freedom
    • 1. Asset Accumulation.
    • 2. Cashflow Assets.
  • What Does Financial Freedom Mean To You?
  • What Should You Think Of Before Financial Freedom?
    • Further reading:

Definition of Financial Freedom

Financial Freedom Defined

When people first hear about being financial freedom, the first thing that comes to mind is thoughts of luxurious houses, extensive vacations, and smoking cigars in dark rooms where massive deals are being made.

Generally speaking, means having enough savings, investments, cash, or cash-flowing assets to live life as you want on your own terms.  The ability to do what you want, when you want, and with whom you want to sums it up.

To make the definition more formal, let’s put it into a formula.

Financial Freedom = Income from “investments”  >  expenses.

A key component of this is what is known as your “financial freedom number”.  In the context of the above formula, your “number” is your day to day expenses that you need to meet in order to live life as it is right now.  Not some future version of yourself, but rather what it would take to pay the bills today.

You compute this by tallying all of your expenses up on a monthly basis, including a mortgage, car expenses, medical expenses, food, etc.  Everything you need to live as you do today.

For the sake of an example, let’s say that all of your expenses each month were $5,300.

This means that all of your investments (whether through withdrawals, sales, cashflow, etc) need to equal or exceed that number monthly.

When you achieve that, you are by definition, financially free.

Ways to Achieve Financial Freedom

Ways To Achieve Financial Freedom

Generally speaking there are two frameworks or paths that people follow when working towards financial freedom.

1. Asset Accumulation.

The first is through an accumulation of assets that, once you have “enough” of them you are able to live off of as you draw them down.

The rule governing the drawdown of assets is more commonly known as the “4% rule” and means that you shouldn’t withdraw more than 4% of your assets in any given year.

People approach this in one of two ways.

The FIRE (Financial Independance Retire Early) movement focuses on extreme savings and investing.  This often requires socking away upwards of 50% of your income towards that goal to be able to “retire” early.

The first step towards FIRE is tracking your spending. You can use a program like Mint or YNAB (or own personal choice) to track your spending and determine where you spend your money. With Mint, you can see which categories you’re overspending and which ones you’re under. You can also set goals using the app and keep yourself accountable. When you’re responsible for your financial future, you’ll be able to enjoy the feelings of elation that come with achieving financial freedom.

This was made popular by the blogger Mr. Money Moustache and we don’t personally adhere to the austerity technique of FIRE, it’s become extremely popular, particularly among millennials.

Next would be a more traditional, accumulation based approach, saving money in financial investments such as stocks, bonds, mutual funds, etc.  

You can use our own financial freedom calculator to see how on track you are on your path and at what age you should be able to retire.

2. Cashflow Assets.

The second overall approach is through buying and holding cash-flowing assets with the goal of accumulating enough assets that kick off cashflow to eventually meet your financial freedom number.

Two popular investment vehicles for this are either through real estate or dividend fund investing.  In the example we gave earlier in the article, with a goal of $5300, let’s say that you decide on the real estate approach.

Using and example of each property kicking off $250 per month in positive cashflow, it would the final solution would look like this:

$5300 / $250 = 21 properties.

Once you have purchased all of those properties, each kicking off their own particular cashflow, you have become financially free.

What Does Financial Freedom Mean To You?

Technical definitions aside, I think a starting great framework on how to think of this is and a far better way to look at it (before we get into strict definitions) “what does financial freedom mean to you?”.

Does it mean being able to retire and quit work, hanging out at the beach all day?  Or does it mean having the freedom to do what you want, with whoever you want and when you want? In the end, what you hope to achieve should be the first question you ask yourself.

Your own personal path will largely be determined by what your own financial freedom goal is.

My own mentors at Cashflow Tactics posed this question to me when I first started on the journey to financial freedom.  Honestly I really didn’t think that much of it at the time, but it’s a super important question.

My own definition of financial freedom is really a two part answer:

Part One: Having the ability to give my own time and support for my family.  Providing mental and emotional support for my own siblings and father.

Part Two: Having the freedom of choice and giving me the possibility of growing spiritually, emotionally and mentally.

It’s such a squishy concept, but can be summed up in the two images below.

What Financial Freedom Means To Me

What Should You Think Of Before Financial Freedom?

One of the key essences of financial freedom is understanding you need to learn how to manage your money. When you choose to follow the path if financial freedom, you are taking active control of your own finances.

The first step is to become more conscious of your spending habits. Make sure to account for every single paycheck. This will allow you to know how much you spend on different categories each month. You should also create a budget with room for savings and investments. This is the key to financial freedom. You may find it difficult to save a small amount of money each month, but it’s important to stay conscious of how you’re spending.

For those who have a lot of debt, paying off debt is an essential component in achieving financial freedom. Many people, for example, have made their finances more secure by putting money aside for emergencies. In addition to putting money into savings, paying off debt is an important step toward creating a secure future. By saving for retirement, you’ll have more time to pursue your passions and live a life with more confidence. After an initial emergency fund is established, the bulk of your savings should go towards paying what I’ll refer as revolving debt.

Personally we chose to pay down our debt so it wouldn’t be a burden on us in our own path to financial freedom.

What about you, the reader?  What is your own preferred path to financial freedom and how far along it are you?

Further reading:

A plan to be financially free in 10 years. Even if you are starting in your 40sWealth Snowball Strategy: My Financial Freedom Plan In My 40s Even After A Financial Meltdown Financial Independence vs Financial FreedomFinancial Independence vs Financial Freedom Best Books For Financial FreedomBest Books For Financial Freedom side hustles for real estate agents11 Side Hustle For Real Estate Agents

Filed Under: Features, Financial Freedom

About Kurt Henn

Follow @40Finance

Kurt runs things around here. He is a professional real estate investor, media buyer, faithful Red Sox Fan.

Pursuing financial freedom while being a family man.

You can learn more about Kurt here, or get a hold of him on Facebook or Twitter.

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