Defining Financial Freedom

Financial freedom can mean different things to different people. Everything is relative and someone who has struggled all of their life with a lack of money might see themselves financially free when they pay their bills and still have money left over. Someone else might see financial freedom as being able to buy yachts and mansions.

But generally speaking, a good definition of financial freedom is when you can afford to quit your job forever and maintain a reasonable lifestyle. It means that you have enough wealth amassed that you can simply live off of the interest without dipping in to the principle amount.

If you live in a city where you earn $50,000 a year of gross income and you live a reasonable and satisfactory lifestyle, then you will need to accumulate a net worth that can pay you $50,000 a year. It would be reasonable to think that with a well-diversified portfolio and good money management that you could earn a 5% return above inflation. If so, then a net worth of one million dollars will be enough to pay you $50,000 per year.

Perhaps you live in an expensive city or your lifestyle is more expensive. You will probably need to accumulate more than a million dollars. If you need $100,000 per year, then you will have to accumulate 2 million dollars.

Being financially free does not mean being able to be reckless with your money. There are many celebrities that once had tens of millions of dollars, but managed to squander it. Being financially free simply means that if you choose to live a reasonable lifestyle, then you don’t need to work (other than managing your money). It means that if you wake up one morning and you don’t feel like reporting to work, you could literally just stop going and you wouldn’t have to worry about how you will pay the bills.