Financial freedom and financial independence are two related but distinct money concepts. Both involve accumulating enough assets to support your ideal lifestyle without relying on a job.
However, they have different definitions when it comes to how much is “enough” and what degree of lifestyle flexibility you need. Understanding the nuances can help you choose suitable targets as you work towards your own version of financial freedom.
Defining Financial Independence
Financial independence means having enough passive income from your assets to cover your cost of living indefinitely without working a job. To calculate your number, estimate your annual expenses, factor in some buffer for variability, and multiply by 25. So, $50,000 in annual spending would equate to $1,250,000 invested, assuming a 4% safe withdrawal rate.
At this stage, you have achieved freedom from dependence on employment income. But you likely need to maintain a relatively frugal lifestyle, and unexpected costs could still derail the plan. Financial independence provides freedom but not necessarily flexibility.
Reaching For Financial Freedom
Financial freedom involves accumulating enough to also provide a high degree of lifestyle flexibility, often with a bigger buffer. For some, that means an extra $10-$20k per year, for others, it could be hundreds of thousands more. The objective is accumulating enough that you don’t have to worry or make calculations when spending money on conveniences, leisure, or helping loved ones.
The financial freedom stage gives you the assets to live life completely on your own terms. It allows you to splurge on pleasures or be generous without impacting your lifelong sustainability. To enjoy this ultimate stage of financial freedom, determine the lifestyle you want and how much it costs annually.
How To Reach Lifelong Financial Freedom
If you’re wondering how to reach lifelong financial freedom, it requires diligently building your net worth over time. The journey starts with mastering essential money management fundamentals. From there, you need to focus on boosting income, spending wisely, and investing diligently to accumulate assets. Here are some key steps to putting yourself in a position to reach lifelong financial freedom:
- Track your spending and create a budget- Understanding where your money goes is vital for taking control. Trim excess spending and redirect savings towards assets.
- Pay down high-interest debts- Credit card or personal loan debt drains resources that could be invested. Develop a payoff plan if needed.
- Build an emergency fund- Have 3-6 months of living expenses in savings before investing heavily. This provides a buffer for unexpected costs.
- Maximize retirement plan contributions- Fund 401(k)s and IRAs fully to supercharge your biggest source of tax-advantaged growth.
- Invest early and consistently- Time in the market is the key to long-term compound growth. Invest as much as possible, as early as possible.
- Utilize tax-advantaged accounts- Maximize contributions to 401(k)s, IRAs, HSAs, etc. Reducing your taxable income can accelerate your progress.
- Diversify your assets- Build a balanced portfolio of stocks, bonds, real estate, and other alternative assets. Diversification helps smooth out volatility.
- Be patient and persistent- Financial freedom is a long journey. Stay focused on the process rather than obsessing over day-to-day market swings.
With the right money mindset and smart strategic moves, financial freedom is achievable for most people. Consistently living below your means and diligently investing the difference over decades is the tried-and-true formula. Stay focused on the long-term goal and don’t get discouraged by short-term challenges along the way.
