What Is Financial Freedom?

I’ve recently been having more and more discussions with people about what exactly “financial freedom” is. One remark from someone lead me to write on this subject as they said, “I would be too bored to retire.” I believe this is approaching the subject from the wrong direction. Financial freedom isn’t necessarily retirement. Being financially free does not mean you have to quit your job or fundamentally change the way you live your life.

Financial freedom is simply the freedom from worries brought on by the lack of money to live life the way you would like. Financial freedom is the state where an individual has enough positively cash flowing investments that all of their expenses would be covered without them needing to work. The choice to continue working is one that involves other considerations such as whether one likes their job, enjoys the social aspect of working, or simply would like some additional income. Financial freedom is simply having all expenses covered by passive income (income that rolls in whether you are working or not, as by dividends from companies, rental income from real estate, royalties from book or song writing, etc.).

How do you know you’re financially free? If you require $20 000 per year to cover all of your living and daily expenses, including the vacation that you take every year, etc., and you generate $19 999 per year from dividends, you are not financially free yet. The moment you cross over to $20 000 from passive investment income, you can consider yourself financially free. If you require $130 000 and you generate $130 000 from passive investments, then you would be financially free here also. The amount of money you need to generate from passive investments to be financially free depends on your lifestyle. The moment your expenses are covered, you can consider yourself financially free.

Why is financial freedom a good thing? With the amount of people who have lost their jobs over the course of the past few years with the recession, we have seen firsthand the importance of having other streams of income than simply a job. When your sole source of income is your job and you don’t have your money working for you through investments, if you lose that job all income flowing toward you stops dead. In that situation, you need to scramble mightily to find a new job to replace that lost income. If you are financially free, or even part of the way there, you at least have something else to buffer the loss of your primary source of income. While being financially free doesn’t mean you need to quit your job or retire, it certainly helps in the event that your job is taken from you. Financial freedom adds some security to your economic situation.

The key to all of this is to take the first baby steps and get started.