If I asked 10 people about their definition of “financial freedom”, I would most likely receive 10 different answers.
Financial experts and PF bloggers have identified 4 financial stages that most of us will be in at some point. Most of us will eventually be in stage 3, financial independence, but very few of us will actually land in phase 4, financial freedom.
- Phase 1, Financial dependence: we all start there. We are first dependent on our parents. Then, we are dependent on our paychecks. Money -or lack thereof- is not really a concern. We may be racking-up debt, not saving anything or both. During that period, we tend to make financial mistakes after financial mistakes after financial mistakes. We are usually jostled out of this phase by a single event, for example a job loss. In my case, it was becoming a homeowner.
- Phase 2, Financial stability: at this stage, we take our money more seriously. We are focused on paying debt-off, on ensuring our bills are paid in full and on time and on having some sort of financial buffer, a.k.a. emergency fund. We may also start saving for retirement and learn about investing and personal finances.
- Phase 3, Financial independence: In this phase, we are consumer debt-free. We may still have other debts such as a mortgage. Some will actually be completely debt-free. We also have a significant buffer and are well on track in our retirement savings. In this phase, we start realizing we have more options for our lives. For example, we may be able to change jobs or take extra time-off without any hardship on finances.
- Phase 4, Financial freedom: This is the ultimate Graal. In this phase, we are free to live the life we want to live. Money is truly not a concern.
A lot of people confuse financial independence with financial freedom. They are not the same. The truth is that achieving financial freedom can be hard and take a long time.
I personally am in phase 2, financial stability, but teetering on phase 3. What about you? What financial phase are you in?