Financial Freedom - Meaning, Benefits, Stages, How To Achieve? (2024)

Financial Freedom Meaning

Financial freedom is a monetary backup that allows a person to do what they desire. It can mean different things to different people. It means having complete control over one's time without trading it for money, being able to explore or pursue a different interest, or quitting a job with passive income.

A financially free individual can manage their finances comfortably to live on their terms. It gives them a choice, security, comfort, and the time to pursue things they like. Therefore, planning to achieve this state early in life is important.

Financial freedom meaning
- Financial freedom explained
- Stages
- How to achieve
- Examples
- Benefits
- Financial freedom vs. Financial independence vs. Financial security
- Frequently Asked Questions (FAQs)
- Recommended Articles

Financial freedom can be stated as the feeling of liberty experienced by a person about their finances. It may mean different things to different people.
Freedom of choice, better security, control over time, fulfillment of goals, generational wealth, the ability to align actions with values, and the ability to take risks are some of an individual's benefits when achieving financial freedom.
Budgeting, paying off debts, setting financial goals, having an emergency fund, planning for big splurges, saving money, living below their means, and investing are some ways individuals can be financially free.

Financial Freedom Explained

Financial freedom can be stated as the feeling of liberty experienced by a person about their finances. It could mean different things depending on the people who enjoy it. For example, it could be having enough money not to work every day and to try new things without fear of not having money.

Generally, it is inclusive of the following:

Obtaining a steady source of income and feeling in charge of one's finances.
Staying on track to reach financial objectives.
Having sufficient funds set aside in case something goes wrong.
Having enough money to live a certain lifestyle.

Anyone can achieve actual financial freedom through the creation of enduring wealth. In the end, everyone's definition of financial freedom is different. However, having the power and freedom to do whatever one wants is the common unifying factor.

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Stages

Here are the stages of how a person can achieve financial freedom:

Level #1 - Clarity

The first step is to be aware of one's current financial situation. It includes estimating how much money they have, how much debt they have, the goals they want to achieve, and within what period. It is important to know where one is to get to where one wants to go.

Level #2 - Self-Sufficiency

This stage concerns being self-sufficient, which means being in a position not to accept help from other people to meet one's needs. It may involve living paycheck to paycheck or even taking out loans, but it is important to reach a certain level of sufficiency.

Level #3 - Breathing Room

Once basic needs are taken care of and people are sufficiently fed, they can work towards building their dreams. This can be accomplished by saving whatever is left after spending on necessities and diverting it towards one's emergency fund or investing for retirement. Theroad to financial freedomdemands critical saving skills.

Level #4 - Stability

Individuals who reach this level would have incurred high-interest debt, including credit card debt or personal loans. In addition, they would have saved up an additional six months' worth of expenses as an emergency fund. This stage allows people to move to another place or shift jobs. In addition, unexpected shocks, such as job loss, can be absorbed by savings.

Level #5 - Flexibility

People at this stage have at least two years' worth of savings. The saved amount will be sufficient to cover their living expenses. This amount need not always be in hard cash; it could also be in the form of investments, as long as it is liquid enough to be accessed when needed.

Level #6 - Financial Independence

People at this stage have achieved financial independence, meaning they can live off the income generated from their investments without other sources of income. However, individuals must invest much of their income to get here. Therefore, they might need to downgrade to a simpler life to reduce their living expenses significantly. Pursuing this lifestyle necessitates a shift of perspective away from the conventional paradigms of personal finance.

Level #7 - Abundant Wealth

This stage is for financially independent people with an investment portfolio that allows them to safely withdraw 4% of their retirement account, adjusted for inflation. This portfolio of stocks needs to be balanced and should have the potential to grow continuously.

How To Achieve?

Financial freedom can be achieved through several strategies, and they are as follows:

#1 - Budgeting

Living on a budget is key to financial success. Every penny must be tracked and planned for the previous month so that nothing goes unaccounted for. Theroad to financial freedomstarts with budgeting.

#2 - Pay Off All Debts

All debts, including student loans, car loans, and credit card bills, must be paid off immediately. When the dues are paid early on, it saves money from being thrown away as interest. An emergency fund should be created before closing off debts. This will provide a monetary cushion in unexpected situations. The next step is to work one's way up by closing the smallest items first and working your way to the biggest.

#3 - Setting Financial Goals

Setting financial goals is the key to financial freedom. Getting out of doubt and saving for retirement are examples of such goals. Goals must be specific, measurable, and within a time limit, and the means of achieving them should also be planned out. Keeping track of it with a simplefinancial freedom plannercan also help.

#4 - Emergency Fund

A fully funded emergency fund is a must for being financially free. This fund should ideally have three to four months' worth of expenses saved up.

#5 - Plan For Big Splurges

Big purchases are not emergencies; however, there may be such situations, and spending may go overboard. This can save dents in the plan and help with being organized with spending and disciplined with investing.

#6 - Investing

Investing is best when it gives great interest, and the power of compounding will work it's magic better when it is started earlier. Contributions to a 401(k) and a Roth IRA are good options.

#7 - Saving Money And living Below Means

It's better to restrict spending to the absolute minimum. This includes cutting out unnecessary costs. It could be anything as simple as canceling a gym membership. Unwanted things need to be cut off. However, getting health and life insurance can be a good option and need not be considered an expense. Savings can be categorized, and the amount can be divided into small goals. Afinancial freedom plannercan come in handy here.

Examples

Check out the following examples to get a better idea of the concept:

Example #1

Drew wants to retire in 25 years with $2 million. He can save $5000 a month. In this situation, Drew can save about $60000 a year (5000 * 12), and $60000 over 25 years will give him about $1.5 million ($60000*25=1500000). This figure is 0.5 million less than his target of 2 million, so he will need to invest more to make up the difference.

Example #2

Danny has a dream of visiting every country in the United States. He would need around $500,000 to live lavishly, and he has $2 million in investments and savings. Going by the 4% withdrawal rate rule, and can spend $200,000 * 0.4 = $800,000. This amount is more than what Danny needs; hence, it can be concluded that he is financially free.

Benefits

Being financially free awards an individual with a great many benefits:

#1 - Freedom Of Choice

Financial freedom gives the power to make the right decisions for an individual. Living the life one desire is a crucial component of financial or otherwise freedom. This might imply having enough money to spend time and whatever one likes.

#2 - Better Security

Individuals work hard to save in hopes of a better future. They toil away their days, hoping for a better tomorrow. One of the most basic needs of humans is to feel secure. This influences the decisions made, especially those of a financial nature. Feeling secure about one's financial future alleviates stress and allows individuals to pursue their dreams without hesitation.

#3 - Control Of Time

Time is the most valuable asset that, once lost, cannot be regained. With financial freedom, individuals have better control over their time. For example, with money, one can often travel to see their family on an airplane. If an individual does not have that luxury, they must endure a long journey through other slow modes of travel that consume more time and effort. A financially free individual has more time and resources to compensate.

#4 - Fulfillment Of Goals

Individuals may develop new interests at any time, or sometimes they would need help to pursue a long-lost interest. Being free financially gives them a way out of their mundane jobs that tie them up and prevent them from pursuing them. Individual goals may vary; they may pursue a different career, an expensive hobby, travel, learn a new skill, buy a house, etc. Using afinancial freedom calculatorcan make the process easier.

#5 - Generational Wealth

When individuals create companies or invest in properties that can continuously generate income, they and their families are wealthy. Some legacies continue, and the family can become financially secure for more than a generation.

#6 - Alignment Of Actions With Values

Individuals may be stuck in a job that aligns differently with their values; it may be something other than their passion. Being financially free allows them to be driven not by profit but by passion.

#7 - Taking Risks

There are few things an individual can do when living paycheck to paycheck and trying to make ends meet. It may not allow them to shift jobs or leave the job to pursue their interests as this is their only source of income, and leaving it would be a disaster. Being financially free helps individuals make that shift they have always wanted because they are financially secure.

Financial freedom vs Financial independence vs Financial security

These three topics seem similar, but they have some differences. Let us look at them in the following table.

Key differences	Financial Security	Financial Independence	Financial Freedom
Meaning	Financial security is the safety net for preventing mishaps or minimizing their effects.	Financial independence means being able to afford one's current lifestyle with adequate passive income.	Financial freedom means being able to afford the current lifestyle and additional luxurious lifestyles if needed.
Example	An emergency fund that can cover two months of basic living expenses is an example of financial security.	For example, having rental income and business income to cover expenses even if one has lost a day job is being financially independent.	e.g., having multiple income streams from rental property, business, investments, etc., helps an individual not only fly on airplanes but also travel in business class all the time.
Progression	Financial security is the first step to financial freedom and is closely followed by financial independence.	Financial independence is the prerequisite to being financially free.	Financial freedom is the end goal of financial security and independence.

Frequently Asked Questions (FAQs)

How to achieve financial freedom before 30?

There is no one-size-fits-all approach. It depends on various factors such as income, age, expense rate, health, well-being, etc. One can always trade their way to financial freedom. However, that may also require a mix of investment strategies. A financial freedom calculator can help individuals conclude.

Why is financial freedom important?

It helps individuals have enough money to pay one's expenses so they can spend their valuable time engaging in activities they enjoy rather than working solely to increase their income. In addition, life without stress is relaxing and rewarding, therefore important.

Is financial freedom the same as being rich?

It's crucial to understand that achieving financial freedom doesn't necessarily mean being wealthy or accumulating an endless supply of funds. There is no point in being wealthy with lots of expenses. Being financially free means having enough to fulfill life's needs and being smart about it.

Financial Freedom - Meaning, Benefits, Stages, How To Achieve? (2024)