Depending on who you ask, you’ll get a different answer. For some people, defining financial freedom means having enough money to take their family on a vacation every year. For other people, it means have a enough money to cover life’s emergencies in the event of a job loss, visit to the emergency room for when their kid accidentally hurts himself, or an unexpected car repair.
For others, the ultimate goal when you get financial freedom is when work is optional rather than a requirement.
If you’ve having trouble defining financial freedom, then here are some ideas. As with any other area in personal finance, the goals you set are personal to you. It’s important, though, to know what your goals are so that you’ll know when you reached them.
Investing $10,000
Financial freedom can mean having the guts to invest $10,000 of your hard-earned dollars into the stock market. For some people, it’s hard to let go of the money and put it to work. This is one idea of passive income. Money is used to create more money and you don’t have to work for it. It now works for you. Unfortunately, the fear of losing that money is greater than their ability to realize the return-on-investment (ROI). As a result, some people cannot achieve financial freedom if they are unable to let go of that money.
Having an Emergency Fund
For others, defining financial freedom means having enough money saved up in the event of an emergency. Emergencies can range from unexpectedly losing your, a car repair, or a visit to the emergency room. According to a recent bankrate study, only 40% of Americans are able to pay for $1000 in emergency spending from their savings.
What about the other 60% who cannot afford to do so?
- 15% would put those expenses on a credit card.
- 14% would reduce spending on other things to help pay of the $1000.
- 13% would borrow the money from friends or family members
- 6% plan to take a personal loan
- 10% would not know what to do
How’s that for defining financial freedom? I wonder if the 13% who try to borrow money from friends or family realize that only 40% of the people they ask are able to loan them that money.
How much money should you save in your emergency fund? A $1000 is a good start. Ideally, there should be enough funds in this account to cover your expenses for the few months it will take you to find a new job. As you reach your 40s, this should be a year’s worth of expenses, simply because as you get older it will be harder to find a job because of age discrimination or the cost of hiring you when someone fresh out of college will cost a lot less. Avoid the temptation of just having enough to cover that unexpected car repair or medical emergency.
Yearly Family Vacations
Defining Financial freedom could also mean the ability to take yearly family vacations. At the end of your long life, you’ll look back not to your material possessions but the time you spent building up a meaningful relationship with your family.
Set up a plan to allocate funds every paycheck into an account, preferably one that is a high-yield savings account so that you’re building up interest and offsetting the cost of inflation simultaneously.
Passive Revenue Streams
To you, the fruits of financial freedom may also mean having multiple passive revenue streams. What is a passive revenue stream? A passive revenue stream is where you put a system into place, making money for you with a minimal of effort.
A job is not a passive revenue stream because you have to work for it, putting in hours for dollars.
A business in which other people work for you and you do actual little work is a passive revenue stream.
Real estate investments in which you receive a monthly income is a passive revenue stream.
Stock investments in which you use money to create more money is a passive revenue stream.
A high-yield savings account, money market account, or certificate of deposit are also examples of passive revenue streams.
Money Is No Longer a Primary Consideration
You may have heard of FIRE (financial independence, retire early). Don’t fall for this trap of thinking if you save x-dollars for a just a short time that you’ll be able to stop working altogether, retiring early.
When you reached a point in your financial development when you can make decisions in which money is no longer the primary consideration, then you’ve reached a higher plane.
For example, you can now take a yearly vacation because you’ve set up a system to create that money. Or you can take a workshop or have a daily latte because you have the ability to create that money.
Start Tracking Your Assets Today!
A good place to start on your financial freedom journey is to start tracking your assets and watch your net worth grow over time. You likely have a checking and savings accounts, multiple credit cards, 401(k), and various other accounts strewn all over the place. With so many accounts, it’s hard to see if your net worth is actually growing. With Personal Capital, you can aggregate all your accounts in one place and start putting a plan into motion to grown your net worth and work towards your own version of defining financial freedom. Help me out today by using the provided link. We both get $50, you for using my link and me for referring you!