You gotta know: What’s financial freedom?

The word “freedom” is enticing. And you want it, like, yesterday.

But you don’t fully understand the concept, leaving you unsure how to achieve financial freedom.

How do you become financially free?

Is it another tedious budgeting method? A membership you can join for financial tips and tricks?

Don’t worry; I’ve got you. Below you’ll find the lowdown on the financial freedom movement, including the basic building blocks, the challenges you may face along the way, and a clear directive on what to do next.

Let’s find the answers to your questions.

Financial Freedom Defined

Definition: Financial freedom is when your decisions, actions, and profession are not driven by debt and a lack of money, but instead by your passions, desires, and values.

Basically, when you achieve financial freedom, you can live your life however you so please!

Financial freedom is not sacrificing happiness today so you can enjoy your life….40 years down the road. It’s not living so frugally that you wake up one day and realize you haven’t left the house in 15 days (gotta keep that no-spend streak going!) or showered (goodbye water bill!). 

Financial freedom is a conscious lifestyle that is different for everyone. 

That said, a few building blocks to financial freedom are universal. I like to look at these in two categories: (1) Money Factors and (2) Mindset Factors. 

Let’s look at each. 

Money Factors

Would it surprise you to hear that a few core components of financial freedom involve managing your…money?

Groundbreaking. I know

To provide a bit more context, you’ve reached financial freedom when you can tick off the following milestones:

• Minimal Debt: You have no debt or are actively working towards zero debt. To keep your debt low, you carefully consider large purchases (such as a car, home, or anything that puts you over 30% of your credit card limit). Because your debt balances are minimal to none, you’re not losing money to interest accruals that outpace your monthly payments (looking at you, student loans).

• Emergency Fund: You have 3-6 months’ worth of living expenses in cash to hedge against the unexpected (like medical bills or job loss). Even better if you have more than 6 months of savings as extra protection from recessions, unsteady income, or your industry is prone to layoffs. Having a well-funded emergency fund is a crucial step on your journey to achieving financial freedom

• Investment: You have an investment portfolio (i.e., 401k retirement savings, real estate, Roth IRA) in which you consistently deposit money. Each investment acts as a long-term savings account, meaning you don’t take money out (except for financial disaster). 

Ok, so financial freedom means having your financial ducks in a row. Got it. 

What’s next?

Mindset Factors

Also central to achieving true financial independence are mindset factors. 

Mindset factors refer to your relationship with money and overall lifestyle. They refer to how you treat and use your money.

Specifically, financial freedom mindset factors include:

• Abundance: You no longer live paycheck to paycheck or give your time and energy to jobs, people, and things that don’t align with your values. Rather, you live according to the lifestyle you designed for you. Maybe you work. Or enter early retirement. Perhaps you dress to impress. Or stick to the oldies-but-goodies. Whatever you have, be, or do is totally up to you when you’re financially free.

• Patience: You know that financial freedom takes time to achieve. So you don’t compare yourself to your peers or create unrealistic timelines that lead to frustration and giving up. Instead, you focus on yourself and appreciate your daily progress towards your dream lifestyle.

• Commitment: You consistently monitor your money, address problems, and adjust your financial goals. Think of personal finance maintenance like houseplants. Do you bring a fiddle leaf fig home, set it by the window, and never care of it again? No. You check moisture levels every few days, fertilize quarterly, and re-pot annually (at least, I hope so). Give the same treatment to your money. 

Now that you can define the theory of financial freedom, you’ll want to know how to measure where you are today. 

Levels of Freedom

You can’t read one article, snap your fingers, and assume financial freedom immediately. It’s a process that takes time. Like a skill. And with skills, there are levels of expertise. 

To make your journey more enjoyable, use the following as benchmarks toward your goals:

• Level 1 – Financial Security. You have minimal to no debt and 6-12 months of emergency savings and intend on saving more. Your income is primarily active, and your retirement savings are below your age benchmark or nonexistent. You don’t stress about your financial situation daily, but do worry about your financial future.

• Level 2 – Financial Independence. You have no debt or low-interest debt, enough emergency savings to last a few years, a retirement account showing consistent growth, and multiple active and passive income streams. You are confident in your financial standing but not quite ready to give up the stability of a day job. However, you will leave a miserable job knowing you have a financial cushion until you find a more-aligned role. 

• Level 3 – Financial Freedom. Your only debt is related to investing in wealth-generating assets, such as a mortgage. When financially free, you don’t need active income streams because your investment portfolio can support your lifestyle in perpetuity at a withdrawal rate of 4-10% a year (thanks, compound interest!). 

And be sure to celebrate each milestone! Every step made towards your goal is something of which to be proud.

So, What’s Financial Freedom?

You now understand the basic principles of achieving financial freedom.

Was there anything that surprised you? Inspired you? Where are you on your journey? What does achieving financial freedom and becoming financially free mean to you?

An emergency fund to cover a year? Never needing to work again? Working because you WANT to, not because you HAVE to?

Tell me in the comments below.

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