There are many definitions of financial freedom, but I particularly like this definition quoted from Kim Kiyosaki several years ago:
“Financial freedom is much more than having money. It’s the freedom to be who you really are and do what you really want in life. And many of us… lose site of this by putting others first and playing many different roles such as parent, spouse, employee, friend, and more.” Kim Kiyosaki
I like this definition because it goes beyond money and possessions and focuses more on the freedom to pursue the vision, goals and passions in your lives. Who doesn’t want that freedom? But to be financially free, we need to have a clear view of what we want to be free FROM and where we want to be free TO GO. So we need to have a goal(s), a plan and some measurements to make financial freedom a reality. Unfortunately, the converse is also true. If there is no goal(s), no plan and no measurement it is very hard, some would say impossible, to reach financial freedom. Thus, I give you Financial Freedom: No Goals, No Plan, No Measurement, NO WAY! to help us think through the basic mechanics to achieving financial freedom.
Financial Freedom Goals
Where to start? Let’s start with some sound financial freedom goals. If you already have yours, then skip to the next part. But if not, take a look at these fundamental financial freedom goals:
- Become and stay debt-free (consumer debt at least)
- Adequate emergency fund to handle life’s financial challenges
- Savings and investments to fuel future goals, needs, passions and obligations
- A financial system to eliminate the stress and anxiety of financial management
Do these goals make sense to you? The list starts with being debt free, primarily because debt is an expensive obligation that presumes that you can control the future in the form of future payments and that is not always the case. For instance, right now in America, roughly 6% of all car loans are delinquent or in default. That means that roughly one out of every 16 cars on the road are not being paid for, which could result in forfeit of the car. Those people who took out those loans to buy those cars didn’t intend to default on those loans. But for one reason or another they can not make their payments and will risk losing their cars. There’s no freedom in owing other people money, so we must have a goal to eliminate our debts.
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What about an emergency fund goal? Each of us pursuing financial freedom must have some sort of emergency fund to handle the expenses of unexpected, but inevitable, challenges and troubles in life. People get sick, get in an auto accident, get a leak in the roof, or have some other unexpected emergency. The list goes on and on. We need to have money set aside for such occurrences. How much is enough? The traditional answer is three to six months of expenses but the actual amount depends on your situation and personal risk aversion. The emergency fund is the single biggest insurance of financial freedom. Why? It prevents debt and it gives emotional comfort in knowing that it is there. Some call this “sleep at night” money.
Savings and investments, what’s the right amount? The answer to that is based on your goals and objectives. For most people there are at least three goals to achieve with their savings and investments: 1) Retirement needs. Most people want to retire and the best way to do that is to start saving early in a tax-preferred plan, like a 401K. 2) Household needs. Cars, furniture and homes, among other needs, either become too small or wear out and need replacing. Money, properly invested producing compound interest, will provide the means to purchase these needed items at the proper time, without debt.
What financial system goals are needed to ensure financial freedom? Let’s start with a system to automate our payments and savings. If possible, isn’t it liberating to have a system that ensures your bills are fully paid, on time, every month? Just as important, or maybe even more so, is having a system that automatically moves money each month into your savings and investments to ensure you are funding your future needs and passions. Automated savings also has the added benefit of being done before you even see your net paycheck, so you don’t “miss” the money or be tempted to re-direct it toward other pursuits.
Take a moment and define what financial freedom means to you. Then, write down your financial freedom goals for your life. It is important to know what we are striving for so when the process gets bumpy, we can stay focused on the goals.
What should a financial freedom plan look like? It should contain a set of coordinated actions that allow you to reach your financial freedom goals in an acceptable timeframe, that usually culminates in a detailed budget. Say, you want to be consumer debt free in 14 months. You would prioritize in your budget the debt payments that would allow that. Say you want to have a fully funded Emergency Fund in 12 months. You would prioritize a savings line in your budget that would make that a reality. In these two examples I used the word “prioritize” because the plan to meet your financial freedom goals must take precedence over daily living expenses. What does that mean? It means that if debt elimination is a true goal for you, you must ensure you make those debt payments BEFORE you allocate money in your budget for discretionary things like entertainment, eating out or clothing. It means you may have to forego some entertainment or cable TV for a season to fund your financial freedom goals. It is a small price to pay for freedom. In the case of debt elimination and savings to meet your financial freedom goals, we can adapt a quote from Warren Buffett that says “Don’t save what is left after spending, but spend what is left after saving and debt-reduction.”
I would suggest your financial freedom inspired budget should have four prioritized allocations before you spend anything on discretionary spending: 1) Debt elimination, 2) Savings for the emergency fund, retirement, kid’s needs and future purchases, 3) Basic living needs including shelter, food, needed clothing and transportation, and 4) Generosity of some kind to keep us humble, grateful and generous. I would also suggest that savings would be automatically withdrawn from each paycheck, BEFORE you see your balance for bill payments and that bill payments would be automated to ensure prompt payment and to lessen the need to think about and stare at your obligations. Last, I suggest reviewing the budget periodically, to ensure it is still accurate and it is still supporting the achievement of your financial freedom goals.
Measurement, what does that look like? Most people I know prefer to measure their financial freedom progress with a Net Worth Statement that compares your net worth (assets minus liabilities) over time, usually month to month. Take a look at this sample net worth statement:
|Net Worth Statement|
|Assets||Current Month||Last Month||Difference|
|Liabilities||Current Month||Last Month||Difference|
This net worth statement gives you instant measurement on all but one of your financial freedom goals: It shows you your debt elimination progress, it shows your savings and investment progress and it shows specifics on your emergency fund. It also shows your the overall progress in growing your net worth. In this example, the person increased their net worth by $3,150 in the last month. What it does not show is if you are on schedule to meet your debt elimination and savings timeframes. For example, the net worth statement shows reductions in debt: The car loan amount by $300, the credit card amount by $250 and the student loan by $150. But the question arises, is this the right amount of reduction to meet the debt elimination timeframe? For this, you would need to keep a debt reduction schedule. Maybe something like this:
|Debt Reduction Schedule||Goal: All consumer debt gone in 4 years|
|Loan||Amount Owed||Payoff/month||# Months||Goal Met?|
In this example, the debt reduction amounts DO NOT meet the goal because the student loan will not be paid off in the desired time of four years. So an adjustment would have to be made in the budget to increase the amount paid each month toward the student loan debt from $150/month to about $230/month in order to meet the desired timeframe.
Financial Freedom Final Word
Financial freedom is much more than having money. It is having the resources to pursue who you really are and your passions in life, while being free of worry and anxiety about money in the process. Financial freedom is not easy, but very worth it! And the best way, the only way really, to achieve the goal of financial freedom is to have set goals, a plan to achieve those goals in the form of a budget and clear measurements to ensure your are making progress towards those goals, in an acceptable timeframe. Over time those goals, plans and measurements may change or adapt, but without them and the direction they provide, we are running aimlessly and run the chance of failing to achieve true freedom. I think Benjamin Mays said it best when he said: “The tragedy in life doesn’t lie in not reaching your goals. The tragedy lies in not having goals to reach.” Take the time to define your goals, plan your approach to those goals and measure your progress to ensure your achievement of financial freedom!