The journey to financial freedom is essentially a continuum of incremental advances toward a stated end-goal. Each milestone provides one with greater autonomy and freedom of choice, which in turn contributes to one’s overall feeling of fulfilment.
Although generally defined as the state of having sufficient personal wealth to cover one’s living expenses without accessing one’s assets, all-encompassing financial freedom means different things to different people. ‘How much is enough’ is a thoroughly personal question that every person will need to answer for themselves.
In general, the key milestones on the path towards financial freedom include the following:
Unless you’re a trust fund baby, everyone starts off life being financially dependent on a parent or guardian. At some point during the early stages of adulthood, we become more financially independent as we begin generating an income and paying our own way. Until you reach a point where you earn more than you spend on a monthly basis, you are considered financially bound to someone else. This is the beginning of the journey and is defined by lack of autonomy and little personal choice, with self-esteem being adversely affected the longer this state continues. Your first salary marks the first step of the journey, and this is the best time to draft a financial plan and start saving.
In the black
The move from dependency to this first stage of independence means that from a budgetary perspective you are making a profit each month. With earnings exceeding your expenditure, you are considered to be ‘in the black’ and can meet all your financial obligations. In this stage you are able to service your good debt and cover your basic living expenses without incurring further debt. Very little autonomy is experienced, and financial decisions are somewhat reactionary. Your standard of living can easily be compromised by interest rate increases and inflationary hikes, and your finances need to be carefully managed.
Although this stage may include some secured debt, it is notable in that a portion of your net monthly income is now being channelled towards saving for the future. At this stage, short-term and high-interest debt would have been eliminated and an emergency account set up to protect against unforeseeable expenses. All debt should be secured, low-interest debt on appreciating assets such as property. Consumer debt should be a thing of the past, and surplus income should be channelled towards wealth-building. At this stage, you would have created effective financial buffers through emergency funding, an access bond and regular debit-order investing, although your financial decisions may still be somewhat reactionary.
At this point, you have settled all debt, including home- and vehicle debt, which marks the end of the survival period and the beginning of hard-won prosperity.
All income is directed towards wealth-building and you now have the freedom to take more proactive financial decisions that are specific to your personal goals and dreams.
In general, you would still need to generate an income to cover your living expenses, although these would be dramatically reduced as you are no longer servicing debt. This stage may come with added flexibility in terms of work commitments and possibly reduced working hours, providing you with new levels of autonomy and choice.
Once you have amassed sufficient wealth, you will reach a point where your lifestyle expenses can be covered by your passive income and will continue to do so for the remainder of your life. Freedom of choice and autonomy over your time are hallmarks of this phase in the journey, and you are now free to work (or to not work) for pleasure, passion and purpose, or a combination of all three. Your living expenses are no longer regulated by your pay cheque, and there is freedom in your budget for travel, luxury and impulsiveness. Your finances are such that they are able to support your philanthropic and charitable goals. Regular reviews of your investment portfolio are essential, and the skill of a qualified financial planner will be required to ensure that the cashflow from your investments is optimally constructed and that your investments are tax efficient.
In this final stage of the journey, your passive income is considered more than enough to support any lifestyle you choose while also ensuring that you will have a sizeable financial legacy to bequeath to your loved ones.
With this level of net worth, you are able to take risks and indulge in whatever interests you desire, secure in the knowledge that even a failed business venture will not erode your underlying wealth or the legacy you wish to leave behind.
This age of abundance is void of financial worry and allows you to be the master of your most precious asset: time.