What is financial freedom?

Financial freedom means having enough money in the form of cash and investments to do what you want.

Definition of Financial Freedom and Examples

Financial freedom occurs when you have enough cash and investments on hand to pursue the things that you are passionate about, regardless of their cost. With financial freedom, you can make decisions that align with your values and life goals instead of worrying about how to get your next paycheck.

According to the Consumer Financial Protection Bureau, financial freedom and well-being can be further defined by these four elements:

• Control over your day-to-day and monthly finances
• The ability to absorb financial shocks
• Progress toward your financial goals
• Making choices that allow you to enjoy life in the best way possible

How Does Financial Freedom Work?

The process of striving for financial freedom can be broken down into several key steps:

1. Define what financial freedom means to you: If you had all the money in the world, how would you spend your days? What do you wish to achieve in life?
2. Determine how much money you need to achieve your financial freedom: Calculate the amount of money you need to fund the lifestyle outlined in the previous step. The amount you will need to save will depend on your expected annual expenses.
3. Save as much as possible: When you reach financial freedom, you no longer live paycheck to paycheck; instead, you have enough funds to last and protect you in case of an emergency. By continuing to save as much as possible, you will be one step closer to your saving goals, regardless of what they may be.
4. Live beneath your means and save the rest: If you are able, it is advisable to spend less than you earn to achieve financial freedom.

How Much Money Do I Need to Achieve Financial Freedom?

The amount of money you need to save to achieve financial freedom depends on your expected annual expenses, as well as your annual income. The 25x rule is a helpful guideline used by individuals to calculate how much they need to save for retirement, and it can apply to financial freedom as well:

Financial Freedom (amount) = Expected annual income × 25

Let’s say you need $50,000 annually to enable you to achieve the lifestyle you dream of. In this case, your amount of financial freedom would be $1.25 million ($50,000 × 25 = $1.25 million).

However, in reality, in addition to regularly saving from your paycheck, you can boost the amount of money you save through things like employer matching on a 401(k) plan, compound interest on investments, and other sources of passive income.

Keep in mind that financial freedom will be different (and defined differently) for each individual. Some factors that affect financial freedom include your individual measure of quality of life, your income, and the area you live in. While one person’s version of financial freedom may involve paying off their student loans, another’s might include becoming a high-net-worth individual.

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Sources: Consumer Financial Protection Bureau, Retirement Savings Plan

Source: https://www.thebalancemoney.com/what-is-financial-freedom-5208504