Do you ever catch yourself daydreaming at your desk? It’s safe to assume most people have spent at least some company time thinking about life without work.
For some disciplined savers and investors, the motivation to leave work behind for good has been enough to kick their financial planning into overdrive. Now, they work because they enjoy it, not because they have to—and they don’t worry about making ends meet. They’ve built a big enough portfolio to support their financial needs for the foreseeable future.
This is called financial freedom, and depending on your goals and financial circumstances, it could be more attainable than you think.
What Does Financial Freedom Look Like?
One of the great things about a grand term like “financial freedom” is that the definition is really up to your own interpretation. What feels like financial freedom to you may very well look different than what your neighbor, parent, best friend, or yoga instructor considers it to be.
Rather than a one-size-fits-all term, the idea of financial freedom can be molded to reflect your values, goals, and vision for what life is like when you aren’t tied to a paycheck or you feel unburdened by debt.
In terms of your finances, however, there are some critical components to achieving financial freedom.
Yes, you need substantial savings. But beyond savings, you’ll need a way to earn income, because without opportunities for growth and steady earnings, your savings will eventually diminish over time (and lose its purchasing power as inflation rises).
For many people enjoying financial freedom, that income is passive—in other words, making money without working.
Some common forms of passive income include:
- Rental income from investment properties
- Dividends and interest from stocks and bonds
- Being a silent partner or angel investor in a small business
- Selling a product or course online
If you plan on leaving work behind before traditional retirement age, keep in mind you won’t be able to access funds from your 401(k), IRA, or other retirement accounts until age 59.5. Resources like Social Security and Medicare also won’t be available until you turn 62 and 65, respectively.
In addition to income, you’ll likely want to see your savings grow. As you pursue financial freedom, your portfolio should still follow the core tenets of investing, namely maintaining an appropriate amount of risk and sufficient levels of diversification.
Is Financial Freedom the Same as Financial Independence?
The term “financial independence” is a bit more definable, though the terms are often used interchangeably. When an individual achieves financial independence, they’ve accumulated enough assets and/or sources of income to cover their financial obligations and living expenses. They don’t need to work if they don’t want to, meaning they can pursue a work-optional lifestyle. Most people associate financial independence with retirement, though many disciplined investors can achieve a certain level of financial independence earlier in life too.
Financial freedom is broader and more about being able to make choices based on what you want out of life, without feeling limited or constrained by your financial circumstances. For example, someone with financial freedom may choose to work fewer hours or take on a job with fewer responsibilities. They may choose a job that pays less but fulfills their personal mission. They may also opt for more lifestyle changes, like traveling in style or upgrading their living space.
It may help to think of it this way—financial independence is an important stepping stone along the path to total financial freedom.
Why Is Financial Freedom an Important Goal for Investors?
Financial freedom gives investors the flexibility to pursue their passions, without feeling weighed down by their financial obligations or limitations. There’s a certain peace of mind that comes with knowing your bills will be paid, even if you choose to take time away from work to focus on something else (like babysitting grandkids, traveling the world, or starting a new business venture).
When investors feel no longer financially tied to their employer or weighed down living paycheck to paycheck, they can focus on living life to its fullest potential.
Tips for Pursuing Financial Freedom
Perhaps the most common misconception about financial freedom is that it takes a large stroke of luck (like winning the lottery) to achieve it. Financial freedom is more often accomplished when an individual establishes and sticks to some basic money habits that are, in all honesty, boring but effective.
Consistency and discipline are key, as well as gaining a keen understanding of where your own emotional biases or habits could hinder you. Here are a few practices savvy investors may consider adopting in pursuit of financial freedom.
Pay Down Debt (Especially “Bad” Debt)
For some of the world’s richest individuals, debt isn’t a four-letter word. In fact, in many cases, debt can be used strategically to further one’s financial goals. Real estate investors, for example, may use lines of credit to purchase their next property or keep more of their cash freed up for renovations and other expenses. Student loan debt is another form of debt that people can use to invest in themselves and, eventually, further their professional development and earning potential.
But some debt (think credit cards and personal loans) is considered “bad debt.” Not only do the interest rates tend to be higher, particularly on unsecured lines of credit, but the debt doesn’t serve the borrower’s financial goals or well-being.
If you have existing debt, prioritize paying it down as soon as you’re able—ideally paying off whichever loan has the highest interest rate first (this is called the “avalanche” debt repayment method).
If financial freedom is your goal, you’ll likely want to think carefully before taking on more debt in the future—and avoid high-interest consumer debt altogether, if possible.
Create Your Own Safety Net
You may not be able to guess when something will happen—a hospital visit, car accident, storm damage, you name it—but you can assume something will, eventually, require your immediate attention (and it’s going to be costly).
Once you achieve financial freedom, you must be able to protect your financial resources from unexpected emergencies. Otherwise, you may be forced to draw down your accounts sooner than anticipated, take potential early withdrawal penalties on retirement accounts, or otherwise risk the longevity of your financial plan.
Even if you haven’t yet reached a state of financial freedom, having a financial safety net is important to protect the savings and investments you’ve worked so hard to build.
The general guidelines regarding emergency funds differ, so consider what makes the most sense for you and your family. If you’re the sole provider for a spouse and child, for example, you may need to set more savings aside than if you and your spouse both work full-time with no small children.
Automate Savings and Investments
Around 87% of private sector employees have access to a 401(k) plan.1 Government workers and public sector employees often have access to similar options, such as a 403(b) or thrift savings plan (TSP).
If your employer doesn’t offer a 401(k), you may be eligible to contribute to an IRA or Roth IRA as well, though the annual contribution limits are lower.
Whatever you have access to, automate your contributions—no ifs, ands, or buts about it. If your goal is to achieve financial freedom, you’ll need to save diligently, and there’s no better, more effective way to do so than to automate contributions to your accounts.
In addition to your retirement plan contributions, automate savings to your other accounts including your emergency fund, taxable brokerage account, and savings account.
Build Your Path to Financial Freedom
Investors don’t accidentally stumble their way into financial freedom. They make deliberate decisions about how they spend, save, and invest their money to support their future goals (like achieving a work-optional lifestyle).
Take some time to consider if your current money habits are working for (or against) your future financial freedom, and make adjustments as necessary. You may find it helpful to talk to a financial advisor about your intentions and build a plan together.
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