This post is from Kent Thune. Kent urges and guides readers to place meaning and purpose before money and planning at his blog, The Financial Philosopher.
Can freedom be bought? Are there any (financially) poor people who are free? Are there any (financially) wealthy people who aren’t free? If someone were to ask you, “What’s your definition of financial freedom?”, what would you say? Be honest with yourself: Would you reply with a concrete definition? Or would your answer be more abstract?
The conventional definition of financial freedom goes something like this:
Financial freedom comes when you’ve saved a nest egg large enough that the interest earned from your savings will replace 80% of your current income, adjusted for inflation, when you decide to retire. (Assuming your savings are your only source of retirement income.)
Because of its abstract nature, financial freedom is among the most abused ideas in the world of personal finance. In my early training as a financial planner, I was taught to use questions like these to provoke action. (Or, more accurately, to provoke anxiety.)
- Are you on track to reaching your retirement goals?
- Are you paying too much in taxes?
- Are you a slave to your debt?
- What will happen to your money after you die?
- Are you on course to achieve financial freedom? If not, would you like to know for sure?
The idea of financial freedom is no conspiracy to deceive the masses, but it sure has sold vast quantities of financial products and services! How many books, websites, blogs, magazine articles, media advertisements, and financial planners have used the term financial freedom as leverage to sell something?
But how can a person be free if their idea of freedom is defined by monetary means, by someone else — or not defined at all?
It’s important to be aware of abstraction, ideology, and dogma when you encounter it. If the term financial freedom isn’t made concrete (defined by and for a specific person), there’s a danger that true freedom may never be obtained regardless of financial wealth.
Would you agree that life isn’t about the destination, but about the journey? Financial goals are destinations; they’re not life. But isn’t the freedom that money apparently purchases worth the sacrifices we make to reach this freedom? Try answering this question by asking another question: Can freedom be bought? If not, then what does this say about the pursuit of financial freedom?
Meaning precedes money; purpose precedes planning. It’s contradictory to believe that a given life objective can be reached by financial means. The blind pursuit of financial freedom is often closer to slavery than it is to liberation. It’s making life a tool for money, whereas money should be made a tool for life.
I believe that financial freedom, if it exists, lies at the point at which the utility of money begins to diminish, the point at which the basic sources of physical well-being — food, shelter and clothing — have been met. At this point, financial freedom may be had by (and defined as) the capacity to eliminate the desire for more money. Or, expressed in one word, contentment.
Really, though, the only wrong definition of financial freedom is the one that isn’t yours. Don’t allow any financial planner, family member, friend, blogger, or anyone else to influence your definition of financial freedom!
With that in mind, what is your definition of financial freedom? Does it even exist? Can freedom even be bought? Are you free yet?
SEARCH FOR RECENT ARTICLES
To me, financial freedom includes a lot of the normals: no-minimal debt, savings, retirement, etc.
But! Feeling empowered about your current and future money management and purchases is a key ingredient to financial freedom. To me it’s
freedom from fear
Freedom from the fear that you’re overspending and won’t have rent money. Or fear that you’re overspending even when you’re not.
Even before investment, financial freedom starts with an accurate and written down budget that a person can feel comfortable LIVING in. Not squishing into, but really LIVING.
Being able to live without fear of your own choices is an important part of financial freedom.
loading....
To me financial freedom is being able to buy things I’d really like to have, but realizing I don’t need them to be happy. I’ve accomplished this by leading as simple a life as possible (don’t care about new cars, fancy purses, etc.) and not craving things that will put me into debt. I think I’ve achieved it since our only debt is the mortgage on our house and that will be gone in 10 years (or hopefully less).
loading....
@47 Landon:
I like your idea of financial freedom: “…to live the life you want on a daily basis.”
I know these questions are much easier asked than answered (or accomplished) but give them some thought:
Have you made any attempt to begin teaching Jiu Jitsu, Surfing or Music (or all the above)? I imagine if you live in a coastal area with a large enough population, you could make a good living.
If you could exchange all of your financial wealth for an income stream doing what you love on a daily basis, would you do it? What if you decided there was an 80% chance of accomplishing this (20% chance of failure), would you do it?
Why not start your Jiu Jitsu teaching now and slowly build it until you are ready to make the jump out of the cubicle job?
I believe that retirement planning (financial freedom) is not a function of money planning but one of LIFE planning.
Perhaps JD will allow me to write more on this subject in the future.
I wish you the best…
loading....
I like your reminder, Tyler, about the spectrum of freedom, and its societal nature.
I think that on pf blogs, financial freedom is treated as a milestone, a checkbox, a degree program. You are striving, striving all the time until you cross the line (literally, on those YMOYL charts)to financial freedom. Then you get your badge: Congratulations, you are Financially Free! You can sign your name with the initials FF after it, forever.
But real freedom is either societal, as Tyler described, or it’s a personal attitude. It’s not a fixed point, it’s a mindset. If you can’t be satisfied, you’ll never feel free, no matter whether you got for FF badge or not.
loading....
My literal definition of financial freedom is as follows: $2 million in 10 equities that together contribute a full-time income for me to live off of (through dividend payments – I have already identified these 10 securities, and I am invested in 5 of them at the moment), while also growing the principal balance by at least 5% each year. I would love to reach this goal by age 30 (23 now) … we will see. Further, to me, financial freedom means 0 debt and a home I own outright.
On a more abstract basis, financial freedom would mean getting up and going to work everyday because I want to, not because I have to. It is having the ability to continue (or not) in a position as I see fit based on moral and ethical values, without personal finance factoring into the employment decision.
loading....
I think the term “financial freedom” has gotten a bad rep in the recent past. Whenever I hear it, it reminds me of “get rich quick” schemes that I see advertised. Maybe its just me.
Financial freedom does not come without hard work. Note I didn’t necessarily say sacrifice, but hard work. And it will come to those who put in the effort
loading....
Alex (#23) – consider Iowa. You might like Ames, the home of Iowa State University. Ames was just rated one of the top ten places to live. The cost of living here is low, and the people (especially me, ha ha!) are great.
loading....
I think the term itself (“financial freedom”) is problematic. Because as long as we live in a society, we have responsibilities to that society and our behavior is, in some respects, always at least somewhat bounded by the rules of society.
If we don’t generate our own electricity, grow our own food, pump our own water (etc) we have to pay for these goods & services; if we have financial accounts vs a box full of cash we have to deal with banks or brokerages; if we receive public benefits or an earned income we have to deal with the IRS.
I think what most of us are actually giving here is our notion of financial *security,* which is a very different thing.
Freedom is a state of mind. Security can be quantified. It shocks me a little that people can say they’ve achieved financial freedom when they still have a mortgage! That is neither a free nor necessarily a secure position, as many have discovered.
loading....
I just want to say, great post Kent. It really made me think, in fact I’ll probably be thinking about it all day today.
To me, a large part of freedom is knowing that I am resourceful and well-connected enough to be able to earn an income at whatever stage of my life. So-called “human capital” plays a large part in this.
I am not ever planning to retire. If I do that, I may as well die!
loading....
I’ve given this topic a lot of thought over the course of the rest of the day and I think I’ve come up with a new, more simplified definition of Financial Freedom.
The freedom to choose.
Life is full of choices. Some easy, some difficult. Some obvious and some not. When these choices come along, I want to make the choice based on what my wife and I want, and what is best for our lives and our overall goals.
I don’t want debt, or a lack of resources to stand in the way of making those choices.
By this definition, I have a great deal of freedom right now being debt free and with 6 months in the bank. With a full year saved, my freedom grows and more choices become available to me. Inch by inch, my freedom expands. My choices widen. My options grow more numerous and my fear reduces.
loading....
I think financial freedom has different phases.
My big ones that I passed were:
1. Not feeling ill, stupid, or wanting to cry when an unplanned expense hits (like a speeding ticket).
2. Paying off consumer and student loan debt.
3. Having enough disposable income to give freely to those in need without missing it. If someone dies, I don’t bat an eye at sending a $100 bouquet. I’m glad I can “afford” things like this and giving to charity or relatives in need.
I’m at about here:
4. Paying off house
5. Fully funded 529′s for kid’s college.
6. Having enough savings to be able to live off the interest.
loading....
Actually I like the destination more than the journey. That’s not to say that I’m miserable or anything while I work towards something, but at the same time I just like it more when I get to my goal.
Now that my debt is paid off, I can think of other things that I want to do with my life like have savings, go to college full-time and finish my degree. I’m 27 so its time to finish. Take vacations…I haven’t gone on vacation in 5 years because of my previous debt, and save for retirement.
I believe in saving for the future, while still having fun in the present. I also think its important to know what is “enough” for you. I think its important to balance out my inner ant and grasshopper so that I don’t go to either extreme. I also like what Ramit says about conscious spending, and its what I tend to practice in my own personal life.
loading....
Financial freedom is being able to live comfortably and never having to worry about the cost of basic daily needs. Once you are at this point you are free to indulge in life’s pleasures and enjoy the things that make you happy
loading....
To me, financial freedom is all about balance; keeping debt at bay and saving for the future while enjoying life in the here and now.
loading....
One autumn we were visiting NYC, seeing sights and going to see a play. My son asked, “Dad, if you always worry about money, so why are we here now and why are we going to Europe this summer?” I explained it was all about balance. You don’t want to screw over living and experiencing some today hoping you’ll make it up tomorrow, but you don’t want to blow off tomorrow by not planning and preparing for getting there. The balance comes in making choices on what to do today and what to plan for tomorrow and recognizing that choices today affect your tomorrow.
He just wanted to make sure we had enough money left over for Christmas presents.
It’s all about priorities
loading....
Tyler wrote: “you could walk through the streets naked, smoke marijuana in your home, go outside of town and shoot off guns, drive around in gas-guzzling souped up muscle cars, marry people of the same gender, and do these all on the same day if you liked”
What a fantastic comment. I’d love to live there.
loading....
I think the most important point is like you said: to know what your definition of financial freedom is.
For me, financial freedom is more about achieving lifestyle freedom.
I am not interested in stopping working, but in ending a dependence on a corporate income. My wife and I are working towards building an income from self-employment that will allow us to make money while travelling and living in different places of the world.
That will be our freedom!
loading....
Bravo for this article! Money should be a tool for life, not life a tool to earn money.
It’s a perspective I haven’t heard in a long while.
loading....
Yes, financial freedom carries different meanings not only for different people but for each of us depending upon our stage in life.
I like to share my concept of financial freedom in my workshops as follows: If you’re making your money work for you, then you’re at least on the road to financial freedom. Otherwise, if you’re still working for your money, it controls you and you are definitely not free.
Where that road leads is up to the individual, but I certainly hope it’s headed for fulfillment outside of the financial sphere.
-Todd
loading....
Financial freedom means different things at different life stages, I believe, that is why everyone must personally define it.For me, it’s:
The ability to live off of capital or savings
The knowledge that I can replace income based on my skills and knowledge
I used knowledge twice:). It’s important, especially when it comes to your money.
loading....