What is Financial Freedom – Foundations of Financial Freedom Part IV

Last week for the Foundations of Financial Freedom, we discussed some basic anti-budgeting tools to store and save money. You’ve now had the chance to save some money, create a goal on what amount to save each month, and have some places to store it. Now, you have likely been wondering – what is Financial Freedom?

The Ideal of Financial Freedom

Financial Freedom can be defined in a number of ways mathematically. Yes, mathematically. There is a reasonably accurate calculation for you to figure out how much money you need to be financially free. And while it is a math equation, do not see it as a binary option. That means it doesn’t mean you are either financially free or not. By the strictest of sticklers for the definition, they may say you are not financially free if you hit your “number”, as you will see in a moment. But as Brad likes to consistently say from ChooseFI – Financial Freedom is a spectrum. And most importantly, you begin the reaping benefits of it as soon as you move towards Financial Freedom.

The “Number” of Financial Freedom

Financial Freedom – often called Financial Independence by others – is literally this: Having 25 times your annual expenses.

That’s it in its simplest, purest form.

So, in its simplest form, if you spend $25,000 a year, first of all, great job. Second of all, your “Number” is:

Financial Freedom = 25 * $25,000 = $625,000.

That’s it.

If you held $625,000 that is all you need from the exact point you are at to live the rest of your life not working, barring something like a world war or complete economic breakdown.

I am a bit different in that I do want to work and create many things, so the never working again thing doesn’t entice me, though it may entice you. At the far end, if you literally did nothing, you will be bored. No ifs about it. If you are determined enough to reach your Financial Freedom number, you are very likely unable to simply do nothing. It will not be in your character.

So, I’m going to pretend that the “RE” part of the acronym of “FIRE” does not really exist. And you might be wondering where I pulled this acronym from. Well, once you find it, you see it everywhere. It stands for “Financial Independence, Retire Early”. This is why the phrase “Financial Independence” is more common than the alliterative “Financial Freedom.”

Big companies like to call it a “movement” and say that people are “devoted to extreme savings”. Quite frankly, I don’t find anything extreme about saving a quarter to half of your paycheck instead of burning it like the Joker in ‘08. Though that does not mean there are people who are extreme.

My Co-Opting of Financial Freedom

So, if Financial Freedom is about equivalent to Financial Freedom, does that mean I believe in the same exact number as Investopedia defined it?

No.

I do not.

Because there’s actually a more accurate and close-up view that I find to be a better definition of Financial Independence. And to be honest, since most people consider Financial Independence equivalent to Financial Freedom, it is time to co-opt a word and create a new definition for the purposes of, well, innovation.

I define Financial Freedom as having enough money coming in outside of a job to cover your expenses for a month.

The reason for this is that if you had that situation, you do not have to work. At all. For the rest of your life. And I imagine it more as an engine. Once you got the train rolling and the engine going at meeting your expenses with income not from a job, then the train will roll for an infinite time. It’s a sustainable system.

Now, the very idea behind having 25 times your annual expenses is actually to do just about the same thing of creating a sustainable system for you to withdraw or receive a bit of money from for the rest of time.

But that number seems so big and angry. $625,000?! That’s only if you live like a college student in a cheap part of town with multiple roommates for the rest of your life and your only sustenance is hiking and video games.

It doesn’t seem like a bad life. But what if you had a spouse? What if you had kids? What if your expenses were at least doubled or tripled – like they are for many modern families? And we have not even taken into account inflation because $625,000 today is targeted to be $640,625 next year!

And for demonstration, say you had a small family and your expenses were $75,000 a year in 2022 dollars.

For the FI calculation, you would need to obtain $1,875,000 to retire right now and never work again and pay for your family.

If we add a little spice of inflation of 2.5% a year, that is $1,921,875 next year. That’s about $50,000 more dollars you would need just because you decided to live another year! Did your wage go up by $50,000 this year? No, I doubt it went up more than cents for most people in America!

Fighting Month-by-Month

So, month-by-month makes it a bit more surmountable. But not only that, I do think it makes things a little easier to digest and that you do not need to make a massive amount of recurring money. For example, if you spent only $2,000 a month, can you find a way to replace that from your active job?

Sure, maybe the easiest way is to work part-time and spend the rest building a business or side-hustle or passive income. But figuring out a way to make streams of income to add up to $2,000 a month sustainably seems a lot easier of a problem to solve than figuring out how to save 2 Million dollars today!

In a very quick example, I calculated that if I bought a house (I don’t have one and I know it’s hard, believe me, we will discuss this later) and rented out a portion of it or a second unit of it and received $500 a month, then I only need to find $1500 a month. Then, say I found I enjoyed flipping random items and made $500 from that a month (not impossible.) We still need to find $1000 a month.

What if I made some guides about the expertise I have on YouTube or other websites and found a way to make $500 more a month? Now we only need $500 more to replace. For my last trick, say I rent my car out on Turo for another $500 a month.

And bam you’re done. As long as you maintain the system, you do not have to (do much) work for the rest of your life. As you can see, there is some amount of work you have to do in the form of maintenance, but it might end up not being the amount you would do at a job (passive income is a lie). And you might feel a bit spread thin from 4 different streams.

But not one of these involved stocks. It didn’t involve crypto or gold or anything else. And all those other traditional tools can help you find more ways to reach your expense goal for the month. And, it seems much more feasible to fight inflation by finding an extra $50 a month than finding an extra $600 a year for $2,000 of expenses a month. You will go search for a sustainable way per month rather than hoping for a lottery ticket of $600 to appear this year somehow.

So, the point is that if you could just find a way to either work a job you like or prefer or create a few relatively small streams of income per month, then you are Financially Free. As soon as you make $1 more than your expenses, you are exponentially obtaining more and more freedom in this world where money is the most important and useful tool.

Regroup & Realize

So, Financial Freedom as typically defined is having enough money to be 25 times your annual expenses. Most people often equate Financial Freedom directly with Financial Independence.

However, from on, I am going to co-opt it and define Financial Freedom as having enough money outside a job to cover your monthly expenses.

Next week, let’s have some fun and show that passive income is a lie.

Godspeed,

Dennis