Financial Freedom

Financial freedom is about maximizing the choices over which you have control. Most people are happier when they have control over their own lives. More money brings you more options on how you live and more opportunities to make an impact in the world. You can still do amazing things without money, but lack of money can hold you back from accessing useful things.

You will progress through the stages of financial freedom at your own pace and you have the choice to stop anywhere along the path. You could join the FIRE (Financial Independence, Retire Early) community and save like crazy when you are young. You could spend and enjoy your money now and work on financial freedom later. There are many paths to success, but in general, if you are making no effort, you are probably making little progress.

Not everyone wants or needs to make the trade-offs required to get to Stage 6: ABUNDANCE. Your needs are unique to you, but let’s agree on two things: (1) we would all like to live a long time, and (2) we would like to have enough resources to live that long life in a way that is comfortable and enjoyable. Retiring independently requires we at least reach Stage 4: SECURITY. Even if you want to work forever, there may come a time in your life when you can’t work, and having financial security that allows you to live where and how you want is a great thing.

Knowledge can help you move through these stages faster as you make smart financial choices. Saving and investing money when you are young can put you way ahead of your peers. Understanding and developing good money habits will speed up your progress. Having a vision of your end goal will make it easier to make small sacrifices in the short term.

The first three stages describe a type of financial survival where you have to depend on others or always be working in order to meet your daily needs. In stages 4, 5 and 6 you will be financially thriving – your money is working for you and your net worth continues to grow.

Stage 1: DEPENDENCE

This is where we all begin. You started out life dependent on others for food, shelter, and everything that costs money. If you are a very wealthy “trust fund baby”, you can stay in this stage the rest of your life and be quite comfortable. The rest of us want to move on and establish our independence. During this stage you might accumulate student debt and credit card debt that you will have to deal with later.

To move to the next stage:

• Get a full time job that pays enough to support your needs.
• Make a budget.

Stage 2: SOLVENCY

At this stage you earn enough to meet all your basic financial needs. You can afford housing, food, transportation and are paying at least the minimum on all your debts, but it all takes everything you earn. It is estimated that ⅓ of Americans who make over $200,000 per year are stuck in this category, spending everything and saving nothing, which is shocking. Don’t let that happen to you. If you allow your lifestyle to keep expanding to match your paycheck, you will never break free of this stage. Find strategies to spend less than you make so you can start saving.

To move to the next stage:

• Make saving a habit. Increase your saving rate over time.
• Build an emergency fund.
• Keep paying down all your debt and wipe out your credit card balances.
• Look for ways to make more money or spend less so you can grow your savings.
• Learn about financial services and simple, low cost investment strategies.

Stage 3: STABILITY

Stability means you have the financial means to get you through planned or unplanned changes, like switching jobs or moving. To be fully flexible you need to build up an emergency fund and have no high interest debt (like credit cards). These two things give you cash and a line of credit that can save you from taking on less desirable debt.

You might enter this stage with student loans that you are still working to pay off and you might acquire a mortgage during this phase.

As a financially stable person, strive to save 20% or more of your income. Hopefully you are enrolled in a retirement savings program and have a non-retirement savings account that is invested. Part of your stability is understanding your investment goals and risk tolerance.

You could live very comfortably in this stage for a long time, but you must work and keep making money to stay here. Most people will need more than this to be able to retire.

To move to the next stage:

• Pay off your student loans.
• Pay off your credit cards every month.
• Save aggressively in both your retirement accounts and investment accounts.
• Have an investment strategy.
• Protect yourself, your savings, and your future earnings by having the right insurance.
• Hire professionals to handle complex things (tax accountant, investment advisor, trust lawyer)

Stage 4: SECURITY

Your financial situation is secure when you know your earnings on investments could cover all your basic needs. If you were out of work for an extended period, you could live comfortably, though not extravagantly, until you found a new job. Your investment income and emergency fund insure you won’t have to resort to undesirable and expensive forms of credit to get you through rough times. Retiring now is possible but risky because volatility of your investments and the eroding effects of inflation could reduce your available income.

Reaching the Security stage is a great milestone and evidence that you have been doing a good job saving and managing your budget. Continuing to earn money will help you guarantee your financial security, but you don’t need to stay in a job you hate just for the money. You can afford to make a little less at a job you like as long as you can still meet your financial responsibilities and continue to save.

To move to the next stage:

• Keep accumulating assets.
• Stay debt free.
• Pay off your mortgage (or you have the money to pay it off but chose not to pay it off)
• Keep adding to your retirement and investment accounts

Stage 5: INDEPENDENCE

At this stage, your investment income can cover your desired standard of living for the rest of your life. Your desire to work is independent from your need to make money. Inflation and market fluctuations make it difficult to set an exact dollar amount you need to meet this goal, so working with an advisor can help you get clarity.

To move to the next stage:

• Keep building your assets through saving/investing.
• Work with financial professionals to maximize what you have.

Stage 6: ABUNDANCE

The ultimate stage of financial freedom is having more than you need. This will give you many choices beyond living comfortably. You can put your money to work in the service of others – like helping your children or giving to charity. You can use it for yourself to live extravagantly. You can pursue new hobbies, interests or start a business just because you want to. Abundance lets you dream and explore.