Photo credit: Anthony Tori on Unsplash
About the author
This guest post was written by my friend, Steve Cummings—the founder of the personal finance blog The Frugal Expat. As a traveler and expat, Steve has learned a lot about how to save money, live frugally, and invest for the future.
He is living his dream life by traveling the world. His mission is to help people with saving, investing, and reaching financial independence.
Steve also appeared in the How Much Does it Cost to Live the FIRE Life interview series, right here on Eat Sleep Breathe FI! He and his wife do, indeed, live as frugal expats! Check out his interview here: How Much Does it Cost to Live the FIRE Life in Taipei (As a Couple).
Facts and Fictions You Need to Know About Financial Freedom
When I think of “Financial Freedom,” a multitude of ideas come into my mind. Some people interpret financial freedom as being debt-free. Others in the FIRE community characterize it as being able to retire early due to being financially independent.
So, which is it, and how do you achieve financial freedom?
What is the meaning of financial freedom?
The meaning of financial freedom begins to blur the line between personal finance and the traditional meaning of proper money management.
However, a general meaning of financial freedom means being able to live and maintain the lifestyle you desire without being restricted by financial obligations or a lack of income.
Financial freedom differs for each person and walks the line between personal finance and traditional money management opinion.
People hear many terms that relate to financial freedom like FIRE or FU money. So what is financial freedom?
How do you reach financial freedom?
For this article, I am going to focus on the personal finance definition of financial freedom. No one will argue that financial freedom means you have accumulated enough money that you can live the life you want without stressing about money.
Based on that definition, how do we achieve this lofty goal?
To make it painfully simple, we need to ensure we have more money coming in than cash going out. We can achieve this through several different strategies.
Strategy 1
Decrease your spending and financial obligations (bills) until they are lower than your monthly income. (Easier said than done.)
This is all about living below your means. We know that this can be quite hard. You must change your mindset and work on living stingy.
Strategy 2
Increase your income until it is higher than your monthly financial obligations. Again, easier said than done.
It is now time to focus on getting a better job, bigger raise, or even picking up any side hustles. If you can increase your income, then you will be able to achieve more.
Strategy 3
Focus on both increasing income and decreasing expenses at the same time. This is the fastest strategy to achieve your goal of reaching financial freedom faster.
Combining strategies 1 & 2 is the best strategy. It may not work for all people. That is why I have shown the other strategies. If you can decrease spending and increase your income, financial freedom will soon be a reality.
How do you reach financial freedom in 5 years?
Giving yourself a time limit to achieve your financial goals is one of the best ways to hold yourself accountable and to form a plan to accomplish them. Again, financial freedom is hugely personal and must be clearly defined if you expect to achieve it.
What is financial freedom to you? Figure out which of these options defines your financial goals:
- Be debt-free, not including your home mortgage
- Be debt-free, including a paid-off house
- Have enough passive income to live from without having to work
- Increase your income more than your financial obligations
- Decrease your financial obligations to be less than your income
- A combination of all of the above?
Once you have your definition of financial freedom, it’s time to make a plan. Your plan should clearly define your goal, how you’re going to get there, and how long it’s going to take.
To make a financial plan, ensure you are using the S.M.A.R.T. goal planning method.
Your goals must be:
S—Specific
General goals are ambiguous and are difficult to measure when we cross the finish line. Make sure each financial goal you set for yourself is specific. (i.e., no credit card debt, house paid off in 5 years, increase passive income to $5,000 a month, etc.)
M—Measurable
Each goal should be able to track progress. If you said I want to make more money as your goal, what does that mean?
Give yourself a specific goal so you can measure progress to tell if you are actually on track to meet that goal. Vague goals, such as pay down debt, don’t mean anything.
A—Attainable
We all would love to be millionaires tomorrow, but we need to be realistic. If you set goals for yourself that are impossible, you run the risk of feeling defeated or frustrated by the process.
On the flip side, be sure to challenge yourself. Set goals that will be difficult to achieve but are attainable.
R—Relevant
Your financial goals should be similar. By focusing on too much at once, you have a chance of becoming overwhelmed. Set goals that complement and support each other. One goal should help you achieve another one.
T—Time-Based
This is probably one of the most important descriptors of a great goal. Without giving yourself a time frame, you have a chance of forever chasing and not achieving the goal.
Give yourself a set amount of time to achieve a goal and then do everything in your power to make it happen.
What is the difference between financial freedom and financial independence?
We previously described financial freedom as being able to live the life you desire without the stress of your income, not meeting your financial obligations. If that is financial freedom, what is financial independence?
Again, the lines between these terms can blur depending on whom you ask.
What it means to be financially independent
Financial freedom can involve still needing to work, but financial independence means you no longer rely on others to provide you with income.
Financial independence means you have enough passive income or a large enough nest egg that you no longer need to work for money, and you can live off of your own money for the rest of your life. The greatest thing about not needing to work is that you can do anything with your time now. You are no longer strapped to a job.
The primary difference between financial freedom and financial independence is the need to work and rely on others to maintain your desired lifestyle.
Financial independence to me
We are often thinking about wanting to live our own lives without the stress of money. It has brought on new thoughts and plans for my family. Money is the big thing that can sometimes interrupt many plans.
Being financially independent you need to have enough money that will cover your expenses. This is the money that will help last you until you die. We are not hoping to retire poor. It is the goal for our money to last.
So financial independence is literally a number. We seek to achieve this number. My wife and I have set our goals at hitting financial independence in 9 years. That is the estimated time that I expect for us to have enough to not ever have to earn another dollar again.
That number can be different for all people.
What is a financial independence number?
In the age of the internet, we get constantly bombarded by new terms and ideas. A financial independence number is a term coined to describe the amount of money to never work again. This is true financial independence.
A financial independence number also varies depending on which article you read. However, the end goal remains the same. The idea is the number represents the total amount you need to cover all of your expenses without having to ever work for income again.
Here is where the line gets blurred between freedom and independence.
Calculating your financial independence number
To find your number, you need to determine how much money you need to live on each month. Some things to consider are:
- Do you expect your bills to decrease in the future?
- Will your income increase in the future?
- How long do you expect to live?
Some of these questions are easier to answer than others. To avoid getting too complicated, find a monthly amount of money you would need to live the life you desire. Once you have that amount, multiply it by 12 to give you how much you need to earn each year.
Using the 4% Rule To Find Your Financial Independence Number
Most experts agree that drawing 4% from your investment accounts is the safest way to ensure you do not run out of money in retirement. This is because the annual return of the stock market is about 7.9%.
So, if we use that theory, let’s assume you make $50,000 a year and want to retire today, making the same amount.
To generate enough passive income from your investments to live for the rest of your life without the worry of running out of money, we need to divide your annual needed income ($50,000) by 4%.
With this example, you would need a nest egg of $1,250,000 to safely draw $50,000 a year from it.
Your financial independence number would be $1,250,000 with these figures.
Once we know what our goal is, we are able to create a plan to achieve that goal.
Achieving financial independence and financial freedom
My wife and I are working towards financial independence. It is something that will allow us to live the life we want to live.
Life to us is enjoying the adventure. We are avid travelers trying to see many parts of the world. In this adventure of life, it requires money. As frugal individuals, we live our life with purpose. Money is spent to maintain our lifestyle, but we save as much as we can to put it towards our goals of traveling and becoming financially independent.
As we save and work, we want our money to work for us. So we do this through investing, and allowing the power of compound interest to grow our money. The great thing is the more our money grows the less we need to save. That is the power of saving early and often.
When financial freedom and independence get confused is when we talk about it interchangeably. Financial freedom is a mindset. It is when you know you are financially free of all responsibilities. You do not have to worry about income, savings, investing more money than is needed.
If I were to work on my blog, and it constantly brings me enough money to cover my expenses, then I am financially free. I can do what I want, but there is added income that covers some of those expenses.
Financial Independence is the number we are reaching to not have to work again. See we plan and try to hit that financial independence number.
The difference is the mindset vs the number. With financial freedom, you can achieve Coast FIRE, and never invest another dollar into your retirement and you will be set. That is the beauty of financial freedom.
So, what is true financial freedom?
Financial freedom is an idea that you have reached a point in your life where you no longer are worried about money or being able to pay your bills. It is a core component in personal finance—something that is seemingly lost in our world of opinions.
To achieve financial freedom, give yourself the ability to dream. Dream about how much money you would need and the spending habits you need to create to make money an afterthought in your life.
Give yourself the ability to not only dream but to achieve a financial position that allows you to live your life to the fullest while using money to help create that vision.
Remember, financial freedom is not what others tell you it is, but what you believe it to be for your situation.
Chrissy’s thoughts
Thank you, Steve, for sharing your thoughts on the difference between financial freedom and financial independence! I agree that the lines are blurry between these terms, but I think this post summed it up nicely.
Financial independence is about the number and the point at which you no longer need to earn income to live on. Financial freedom is more about the mindset, and can even happen early on in our financial journeys.
As we work towards financial independence, we incrementally gain financial freedom. That means that we can experience financial freedom long before we reach full financial independence. Realizing this is in itself freeing.
I hope you enjoyed Steve’s guest post!
Share your thoughts
What’s your definition of financial freedom? Do you agree with how Steve defines it and how he contrasts it with financial independence? Let us know in the comments below!
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4 Comments
Mr. Dreamer @ VibrantDreamer.com
July 28, 2021 at 3:17 pmThanks to both of you for another detailed post. I love the “Financial Freedom” and that’s what I am working to reach which can’t be done without utilizing Strategy 3 in our case.
I have a time-frame but I am not too sure if it can be achieved. Might be even earlier (or later)! Best is to just have the plan outlined and do our best to get there within our means.
Chrissy
July 28, 2021 at 8:02 pmHi Mr. Dreamer—I think most people need to follow strategy 3 to make real progress. It’s a lot harder when you don’t watch both sides of the equation!
Financial freedom is a fantastic goal, and I’m sure you’ve achieved many aspects of it already, given how good you are with your money.
I’m also sure you’ll get there earlier than anticipated for the same reason! Whatever the case, you inspire me all the time with your smart money decisions!
Maria @ Handful of Thoughts
July 31, 2021 at 2:51 pmI love how you stated that we need permission to dream. This is something often forgotten. But just the act of dreaming and writing it down can help direct your attention.
Chrissy
August 2, 2021 at 9:50 pmHi Maria—you’re right, that is a lovely thought. Dreaming is an important part of the journey and often what propels us forward.
For doers like us, it can be easy to forget this softer side of the journey! I’m glad that Steve included this in his post. 👍