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Journey of Financial Freedom

Yesterday was the 234th anniversary of the signing of the U.S. Declaration of Independence.  It’s an annual holiday intended to commemorate our independence and freedom and to honor those who sacrificed and paid a price to obtain and secure freedom for our nation.

Since this blog is primarily devoted to matters of finance, I thought it would be appropriate to write about financial freedom.  If I were to ask you if you would like to be financially free, you would probably give an affirmative-type answer.  It’s common sense.  But what does financial freedom mean?

Do a Google search and see what pops up.  You’ll see links to websites for reverse mortgages; debt management; people who teach financial seminars or sell financial resources; tips for investing; financial articles; and even one for the dummies guide to financial freedom.  If you search for “financial freedom” in Investopedia.com, which includes a dictionary of financial terms, you’ll come up empty. 

There are a plethora of financial freedom sites but no uniform definition because “financial freedom” is more of a concept than an objective standard.  It’s based upon your personal values and lifestyle, not your wealth or net worth.  Consequently, the definition and standard of financial freedom will be different for each person.

For me, the concept of financial freedom is encompassed in the idea that your decisions are not primarily motivated by money.   In my life, motivation is the critical factor.  Money will always be a consideration in making significant life decisions.  First off… I’m not that rich, so money does matter.  Secondarily, I also believe in being a good steward of my money.  In other words… just because I can afford something, doesn’t mean I should or will buy it.   

Here is a personal example regarding motivation.  We moved from Vermont to Texas nearly 18 months ago. From August 2008 to February 2009, we went from three sources of income to one.  Including the loss of employer-provided health benefits, our income dropped nearly 45%.  Moving costs (which we paid for) and the expenses associated with selling and buying a new home added to the financial drain.  Although Lady M and I considered the financial implications, we made the move because we felt it was the right thing for us to do, irrespective of what it would cost us.  Fortunately, we had the financial wherewithal to make the move, and we’re very thankful that after a difficult year, things have turned a corner.  However, if money controlled our decision-making, we would still be shoveling snow in Vermont rather than baking in the Texas sunshine.

Financial freedom is not the amount of money you make.  It is sad, but I have clients who make hundreds of thousands of dollars, yet are far from financial freedom, because they spend it as fast as they make it.  Sometimes, they even spend it faster.  You can be broke at any level of income.

One aspect of financial freedom is to be able to create margin between your income and expenses.  Let’s be honest, nobody likes to make less money, but sometimes it happens, voluntarily or involuntarily.  If you spend all that you make, you’re probably under a constant stress to maintain what you have and can easily become panicked if you think your income is about to drop.  This situation will also limit your decisions.  You may continue to work late or sacrifice precious family time because you don’t dare to take time off.  You can also become trapped in a career or business you dislike because you can’t afford to make a career change.  Spending less than you make is an important step in your journey to financial freedom.

Debt management is integrally tied to creating margin. Debt payments are very different from many other expenses and discretionary spending.  You can’t just decide not to make a payment next month, at least not without consequences.   Be cautious when taking on debt, especially in good times.  You have to consider the implications of what would happen if your income dropped, even temporarily.   A significant factor in the recent economic recession and mortgage crisis resulted from people who could only afford their mortgage payments in the best of times.  Even a slight decline in the economy, pushed people over the edge and triggered a chain reaction of mortgage defaults, falling real estate prices and a financial catastrophe.  This has been a painful lesson for millions of Americans.  As tragic as the current situation is, it will be even more horrific if we don’t learn from it.

Wealth is also not an indication of financial freedom.  Although wealth is an objective measure of value, it is fluid and can change quickly.  Falling real estate prices and declines in the stock markets have caused trillions of dollars of wealth to vanish over the past couple of years.  Bill Gates is the richest man in the world, yet a substantial portion of his wealth is tied up in Microsoft stock.  If something dramatic were to happen and Microsoft suddenly lost tremendous value or became worthless, his lifestyle could be seriously affected.  Can’t happen?  All you have to do is look at what’s happened to the price of BP shares in the last 75 days.  Even for the rich and famous, wealth can come and go rather quickly.   

Life is like a country road.  There are hills and valleys, curves and straightaways, clear visibility and blind spots.  Your ability to navigate and make a successful journey is dependent upon your ability to recognize and adapt to changing situations.  Your attitude and aptitude to adjust to the changes in life will not only determine the life you live, but also your ability to experience financial freedom. 

In my humble opinion, financial freedom is more of a journey than a destination.  There is never a point where you have fully arrived. There are just stopping points and markers along the way.  The destination is a successful, productive and happy life and family.  Financial freedom allows you to make decisions along your life’s journey that will help you to arrive at your destination. 

This is what works for me, but since it’s personal rather than universal, what does the journey of financial freedom mean to you?

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