How would you define the term “financial freedom”? Loose descriptions might be along the lines of “not having to worry about money” or “being able to afford whatever you want”. While this may sound generally reasonable, they really only gives us a nebulous notion, rather than pinning down a specific, quantifiable and tangible goal.
The truth is, of course, that defining financial freedom is the classic “how long is a piece of string” question and it can mean vastly different things to different people. We would all love to be in the position of not having any money worries, but to make any progress toward that goal it is essential to try and define exactly what that means for you personally.
Different things to different people
Just as we all have different personalities, beliefs and values, our understanding of financial freedom can be very specific to each of us. For some, their needs and wants in life can be fairly simple and not dependent on having a lot of funds to spend. Such people may be content with the stimulation they derive from activities such as social relationships, hobbies and club memberships.
For others, there may be a need for much greater financial resources to underpin what we seek in life, such as global travel or expensive lifestyle assets such as a boat. The vast majority of us will fall somewhere in between these two extremes.
This suggests that the first thing we need to give consideration to is defining what we really do place importance on in terms of a lifestyle. What is it that motivates us to get up every day, what makes us happy and what gives us a sense of fulfilment and purpose.
This kind of self-analysis needs to be done very specifically and consciously. Getting some concrete ideas down on paper is essential. By articulating your aims in this way you will be able to look at them more objectively and prioritise the things that really matter.
Putting a value on your goals
By taking the important first step of articulating your lifestyle goals and interests you can then make an assessment of the level of funds you need to bring those goals to life. If spending every weekend on your 30 metre motor cruiser is your idea of the ultimate retirement lifestyle, then quantifying the funds needed to purchase and upkeep such an item is relatively straightforward. If your goals are more modest, such as a taking a three-week road trip once a year, then the funding required will be a lot lower, but will equally be quite straightforward to calculate.
Don’t forget the day to day cost of living
Apart from the major recreational goals you may have, there will also be the question of what week-to-week standard of living you want to enjoy in retirement. Do you want the freedom to eat out a couple of times a week? Are there family activities that you want to be able to fund? What type of car do you want to drive? Do you want to enjoy a membership at an exclusive golf club? All such activities, together with day-to-day living expenses, can be quantified, so that you can arrive at a monthly income target that your investments will need to generate in order to cover your lifestyle.
Inflation also needs to be factored in to cater for the fact that you will potentially be retired for an extended period of time.
Unlocking the ‘mystery’ of financial freedom
Financial freedom does not need to be a mysterious ‘pie in the sky’ notion. By being definitive in nominating what is really important to you and then putting dollar values on what you need to accumulate to achieve it, you can end up with a very clear and tangible idea of what financial freedom means to you personally.
A personal financial planner can be an important ally in managing this process. Contrary to what you may think, their role is not just to help you choose investments and monitor their performance. A large part of what they do involves helping clients to articulate and prioritise a definitive set of goals and paint a picture of what an ideal lifestyle will look like. An adviser can then apply their specialist knowledge on projecting savings goals and constructing a durable long term financial strategy that will take care of the funding needed to make your financial freedom a reality.
How would you define financial freedom for you personally? Share your thoughts below.