Financially Free 2: What is Financial Freedom?
What is Financial Freedom?
If this is your first post in the series, start here for the background. A simple definition of financial freedom or sometimes referred to as ”being financially independent” is when a person’s passive income exceeds his/her expenses. This frees the person from working a job to generate income needed to fund his/her lifestyle. Income from work is referred to as “active income.” Income from investments that do not require effort is referred to as “passive income.”
I think this definition is missing an essential element though. And this is truly the starting point of any discussion about money, wealth, freedom, and contentment. I propose the following is a better definition of financial freedom:
When passive income is sufficient to fund a person’s purpose without the need for undesired work.
To determine whether you are “financially free,” requires the hard work of determining your purpose in life. This shouldn’t be taken lightly. For example, there are numerous blogs devoted to people living ultra frugal lifestyles to maximize their “free” time as soon as possible in their life. These tend to follow an extreme savings path followed by “retiring” early, but limiting your expenses to an absolutely Spartan lifestyle. For some, this is achieved by traveling to foreign countries to keep expenses low. The extreme frugal lifestyle doesn’t align with my purpose or my current life situation so it is not an option I choose.
Choosing to be Financially Free
Once you are crystal clear on your purpose, the work begins on designing a lifestyle that maximizes your impact on the purpose. For example, if helping others is an important aspect to your purpose, you could choose a career/job that both generates active income to support your lifestyle and serves your purpose such as volunteering on weekends or a career in healthcare. Another option is to build sufficient passive income to buy you free time you can devote to helping others.
Whatever your choice, this blog series is aimed at equipping you with high level strategies to reach this goal.
Our next post in the series will discuss one of the most important aspects of financial freedom — opportunity cost.
I am not a CPA, tax lawyer, registered investment advisor, or any other type of financial professional. The thoughts in these posts are mine and are shared solely for discussion purposes. Do not rely on these thoughts for any kind of advice. See a financial professional before making any decisions.
I hope these thoughts have been helpful — or at least challenged your views on the concepts of money, wealth, freedom, and contentment.
In addition to Thriving Attorney, Darin M. Klemchuk is founder of Klemchuk LLP, a litigation, intellectual property, and transactional law firm located in Dallas, Texas. Click to read more about Darin Klemchuk's practice as an intellectual property lawyer.