Financial Freedom: Definition, Tips, & More

Table of Contents:

  1. Benefits of being financially free
  2. What’s independent income?
  3. Benefits of financial freedom
  4. How to achieve financial freedom
  5. Side hustle ideas to build income
  6. The bottom line

When it comes to personal finance, we all have different ideas about what financial freedom looks like for us. So, what is financial freedom? For some, it means living comfortably without the worry of unforeseen expenses; for others, it means being able to quit the 9 to 5 grind and live on their own terms. Still, for others, it’s about having enough saved, so you don’t ever have to worry about money again.

When you have financial freedom, you gain control over your life in a way that brings peace of mind and security, so you don’t have to worry every time an unexpected expense arises. So the question is, what does financial freedom mean to you?

Once you’ve defined it for yourself and decided it’s something you’d like to achieve, you can start to set goals to get you there, and that’s a great place to start.

Key Takeaways:

  • Financial freedom allows us to gain control over our financial lives to give us peace of mind.
  • Financial freedom means that residual or passive income exceeds all financial obligations, so you can live a life without financial constraints.
  • To achieve financial freedom, a combination of income-generating sources may be implemented to reach financial goals more quickly.
  • Budgeting for spending and saving can keep you focused on your financial goals and offer a roadmap for success.
  • Financial planning is essential for becoming financially free. Using tools, such as calculators, can make it easy to create a plan to become debt-free.

Benefits of being financially free

We’ve all learned over the last several years that sometimes, despite doing everything right, events can happen that bring about a lot of uncertainty. The COVID-19 pandemic spotlighted that fact and, for so many, their work and financial lives were derailed.

For many of us, it’s changed the way we think about work and money and has sparked the idea that becoming financially free is more important than ever. Of course, financial freedom isn’t going to stop world events from happening, but it can offer more control over how we respond.

So, what are some benefits of financial freedom?

  • Less stress, more freedom – when you no longer have to worry about day-to-day expenses or living paycheck to paycheck, you reduce anxiety about how to pay the bills.
  • More control – financial freedom gives you the power to make financial decisions that align with your goals instead of worrying about unforeseen expenses.
  • Improved relationship with money – lack of money can have a negative impact on how we view it, so the ability to let go of those feelings can improve our relationship with money and how we use it for our benefit.
  • Focus on long-term financial goals – when we no longer have the burden of paying the bills, we can focus on what we want in the future and can think about the long-term versus our immediate needs.
  • Freedom to make choices – although money won’t bring us happiness, it does give us the freedom to choose how we want to live our lives.

There’s no doubt that financial freedom can feel out of reach, especially if you’re living paycheck to paycheck and drowning in debt from student loans, a mortgage, and high-interest credit cards. But, in reality, it’s more within reach than most people think. We can all achieve financial freedom. We just need a plan.

The terms financial independence and financial freedom are often used interchangeably because they live under the same umbrella and, although they are similar, they’re not the same.

To clarify, financial independence means you don’t need to rely on your income to cover living expenses but have enough passive income or residual income that covers all required expenses, so you don’t have to rely on a job.

Financial freedom means that residual or passive income exceeds all your financial obligations and allows you the freedom to live the way you want without any financial constraints.

There are 3 primary levels of financial freedom:

  1. Financial security – is when you bring in enough extra money from other sources that you can still pay all your monthly expenses if you were to lose your full-time job. To determine the amount you’d need to be financially secure, you add up all your expenses and other necessities. That amount is what is considered your financial security number.
  2. Financial independence – is when you have enough residual or passive income to pay your bills and enjoy some extras. To determine the amount you’d need to be financially independent, you add up all your expenses, necessities, and all the nice things you enjoy. That amount is what’s considered your financial independence number.
  3. Financial freedom – is having enough passive income to cover all expenses, the extras, and living the life you’ve always wanted without any concern for money. To get your financial freedom number, think about what you want your life to look like. This is when you’ll need to think big. Make a list and figure out what that life would cost. This step is essential because the number you come up with is what you’ll need in passive income to live the lifestyle you envision for your future.

The financial security, financial independence, and financial freedom numbers provide the road map and something to work toward. Once you achieve one milestone, you focus on the next one, and so on.

Learning how to be financially free means getting clear on your financial goals and making decisions that will move you toward them, and that may require you to think differently. You have to let go of the “trading time for money” rules that you’ve been taught and embrace the ideas of building assets, generating independent income, and creating residual and passive income.

What’s independent income?

Unlike having a job where your income is based solely on working for someone else, independent income is when you own a business, and others run the day-to-day operations, or you own rental property that generates rent. Or you could have some other sources of regular income, such as government benefits like Social Security, that pay you regularly without the need to trade hours for dollars.

Another piece of the financial freedom puzzle is having an abundance of assets that can support your financial needs. They can include investments in various securities, such as a 401(k), a diversified portfolio of stocks, bonds, and money market accounts, and other types of assets that provide long-term security and allow you to take advantage of compound interest.

When the income covers all your expenses, allows you to live the life you’ve always wanted, and provides money freedom, you’ve achieved financial freedom. It’s important to note that most people who enjoy financial freedom don’t rely on one method but use a combination of income-generating sources to reach their financial goals.

Passive income vs. active income vs. residual income

When we refer to income, we’re talking about money we receive by providing some type of goods or services to others or making an investment. That income can come in several forms, including:

Increasing each of these income types can help to improve your average net worth and get you closer to reaching your financial goals.

Active income – is income received for performing a job or providing a service. Examples include full- or part-time employment, where you either earn pay hourly, as a salary, in tips, or in commission. Self-employment is also a form of active income. Each requires you to trade hours for money.

Passive income – is income earned with little or no ongoing effort. Individuals and businesses have discovered its power and aim to make it part of their income-producing activities. The benefits of passive income include increasing cash flow, financial security, a sense of control, and a better quality of life. Some examples of passive income include rental property that you don’t need to manage, peer-to-peer lending, a hands-off business, and dividends on stocks.

Residual income – is the income left after all debts and expenses have been paid and can be used to help lenders to determine creditworthiness. For example, suppose an individual wants to buy a home. The lender takes the borrower’s income and subtracts the mortgage payment, taxes and insurance, and other monthly debt payments to see what’s left. That amount is considered to be the borrower’s residual income.

Benefits of financial freedom

The last few years of living in a pandemic have taught us that we can’t depend on our jobs to be our only source of income. Anyone can understand the stress that comes with losing your income without notice.

Even during that difficult time, not everyone felt the same level of stress. For those who already had a plan in place to achieve financial freedom, losing a full-time job wasn’t as big a financial hit as it was for others. Once you start thinking differently and put a plan in place, you can increase your financial resources, so losing one source of income doesn’t completely derail you.

Being put in a financially vulnerable situation can be a big motivator in seeking financial freedom. At one time or another, many of us have felt stuck in a job that was not only uninspiring but soul-sucking. Maybe you tolerated a toxic work environment or felt undervalued and underpaid because of the need for a paycheck.

Being financially free allows you the choice to do what you want instead of doing what you need to do to pay the bills—and it doesn’t have to take a lifetime to achieve. You may already be familiar with the expert and author on financial freedom, Grant Sabatier, who, in just 5 years, went from $2.26 in his bank account to a liquid net worth of over $1 million.

How’d he do it? He made the decision and created a plan. He had a college degree in philosophy, not a degree with big money traditionally attached to it, but he was dedicated and driven. The way he achieved it is accessible to all of us.

How to achieve financial freedom

If you have a goal to achieve financial freedom, there are definite steps you can take to get you there. For most people, being financially free is having enough savings in a bank account to handle unforeseen emergencies, having enough to save for retirement with a 401(k), individual retirement account (IRA), or other types of retirement accounts, and living a life they enjoy.

To achieve your goals, you’ll need to create a plan and stick with it. However, these steps can help you get started.

Step 1: Set clear life goals

Wanting something without a clear plan doesn’t get you closer to achieving it, so it’s crucial to write down details about the lifestyle you want. The more detailed you are, the better. Writing down goals and keeping them handy can help you stay focused and give you a better chance of success.

Step 2: List all your debt

This terrifies most people, but if you don’t know your current financial situation, you can’t put a plan together to pay it off.

Step 3: Create a realistic budget

A budget is part of your road map that will help keep you on track. One of the most straightforward budget plans is the 50/30/20 rule, which states that 50% of income should be for bills, obligations, and needs, 30% for wants, and 20% for savings and retirement. It’s straightforward and simple.

Step 4: Pay off debt

Having credit card and loan debt with high-interest rates can monopolize a big chunk of the money you bring home, which directly interferes with the ability to build wealth. Paying it off not only relieves a burden but will put you on the path to creating financial freedom.

Step 5: Monitor credit

Check your credit scores and keep track of any use of credit. Pay off balances in full each month to ensure a good credit rating.

Step 6: Automate savings & investing

By making your savings plan automatic, you don’t have to think about how to save money after other obligations are paid. A great way to start is by automating contributions to your employer’s 401(k) retirement plan or an IRA. Be sure to save the maximum amount to ensure that you take advantage of any employer matching contributions offered.

Step 7: Spend less than you make

It can be challenging to do when you’re paying off debt, but that money can be dedicated to building wealth once your debt is paid off. Keep track of where your money goes and see where you can cut spending.

Step 8: Work with a financial advisor

When you need help managing finances, a financial advisor can assist you with various options to help you reach your goals.

Step 9: Make financial literacy a priority

A financial planner can help you learn to effectively manage your finances with skills that include budgeting, investing in the stock market, and money management to build a solid financial future. You can also use online resources to improve financial literacy.

Step 10: Increase your income

In addition to learning how to manage your money, you can accelerate financial freedom by finding ways to increase your income. People have (or hope to have) additional income streams for various reasons. Whether you need more money to pay for groceries or save for retirement, having multiple sources of income is key to achieving financial freedom.

Side hustle ideas to build income

Building income streams takes work. However, more often than not, the work is done upfront with little maintenance on the backend. Here are some ideas for independent income and passive income streams that you can work on in your spare time:

  • Start an Etsy business – as one of the most popular online marketplaces for crafters, Etsy sellers offer jewelry, books, crafts, clothing, and more. Setting up a shop is easy, but marketing is key to earning money.
  • Pet sitting – we love our pets, and people are willing to pay to ensure their pets are well taken care of.
  • Driving in your spare time – Uber and Lyft are practically household names and have become a popular way to make extra money. Just sign up and start offering rides.
  • Freelancing – whether you can write, code, or design websites, you can use your skills to make extra money on the side.
  • Real estate rental – the Airbnb business is booming and can be lucrative, especially if you live in a vacation spot. Check laws pertaining to rentals in your area. If you get the green light, a few weekends a year can add a nice nest egg to your investments or help to pay off debt.
  • Peer-to-peer lending – through a lending website, you lend money to individuals and earn interest on the loan.
  • Create online courses – we all know something that others can benefit from, and courses are a profitable way to share that information. Udemy is one of the largest online educational platforms, but there are others.
  • Sell digital products – ebooks, courses, songs, and apps are all digital products that can be sold on a variety of platforms.

Side hustles and passive income streams give us a way to accelerate our financial goals without taxing our already hectic lives. We only have 24 hours in a day, and, for most of those hours, we’re working and taking care of other responsibilities. Part-time work and passive income allow us to improve our financial situations and meet our goals for financial freedom without completely sacrificing the life we enjoy.

The bottom line

Financial freedom is about having enough money to give us the freedom to choose how we want to live our lives. Although it’s about money and having control over our finances, it’s even more about the feeling it offers.

Think about the life you could enjoy if you didn’t have to worry about paying the bills. Wouldn’t it be nice if an unexpected expense was a minor problem rather than another stressor we don’t need? We all have the opportunity to learn to manage our money better, have an emergency fund, and invest wisely. To learn more about investing, download the Public app today!

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