Financial freedom

by Admin
Updated: June 20, 2018

If you manage your resources wisely you can have financial freedom without being wealthy

Financial freedom is, technically, nothing more than the ability to conduct all your financial transactions - the fun ones, as well as the required ones - without concern. In theory, a sufficiently large fund with everything set up on autopay would achieve this. However, the size of the fund is usually defined as an amount large enough to enable you to be careless. In practice, being careless is likely to result in the loss of everything sooner or later so this isn’t the answer.

In order to achieve sustainable financial freedom, it is only necessary to maintain enough financial resources to service your outgoings until those resources are replenished or increased. So the solution has more to do with how you manage your resources then how much you have at any given time.

The interesting thing about most kinds of freedom freedom is that you can have them without being wealthy. Money facilitates the things we want and we’d all mostly be happy with the things - qualities of life - without the money if it wasn’t necessary.

The absolute minimum

Once, as an experiment, I sold everything I owned except for what made sense to travel with and would fit in a medium-sized pack.

Half of what I had in the pack was clothes and I went on to do more traveling with fewer clothes and a much smaller pack.

It made me wonder what was the minimum I might need to survive and I came to the solution that it was a credit card.

Emergencies

Admittedly, if you’re stranded in the middle of the jungle, your immediate chances of survival are probably improved more by something like a knife than a credit card. But the reality is, we are never far from civilization and even in some of the most extreme situations a VISA card is going to get you further than a passport.

A credit card (with a large enough limit) provides immediate financial freedom. Problem solved - but, only in the moment: Although deferred by a few weeks, paying for emergencies is expensive and can ultimately cause a loss of financial freedom.

  1. Most emergencies are not emergencies - don’t be too quick to part with your money.
  2. Emergencies are expensive but can be avoided with planning.
  3. Planning is free.

“The TV is broken - I must get a new one today so I can watch the game tonight!” is not an emergency. It may even be an opportunity.

Take control

Have you ever felt like everything was out of control? Everyone has. Typical reactions are:

  • Drink
  • Eat
  • Fall into depression

Unfortunately, these reactions are self-destructive and more or less expensive.

A better reaction is to work on your finances. Gazing at spreadsheets - reworking them over & over again - is not only surprising therapeutic, it always (and I mean always) moves you in the direction of increased financial freedom:

  • More familiarity with your financial situation
  • More experience working with numbers/spreadsheets
  • Change the timing of payments for improved cash flow
  • Eliminate some expenses completely

But it shouldn’t take a crisis to develop this habit because these benefits are always important.

Money vs Time

Many people run their financial lives from paycheck to paycheck which is actually fine provided their employment is secure: You have enough money for this month but not next, but it’s OK because you get paid at the end of this month.

Unfortunately, job security is a modern myth and bills don’t stop if there’s an interruption in income. In my opinion, the first priority is to have an emergency fund, even if it means borrowing it.

Emergency fund

If you already have a credit card, which gives you a few weeks before you have to pay, you only need an emergency fund for a real emergency. This would be a situation where expenses are much greater than income plus spare cash within the time frame in which they have to be repaid. This could be caused by unexpected expenses or lost income.

The key skill here is to treat the fund as if it is not your money: If you spend some it, that is a debt that must be repaid. The benefit, of course, is that as your own creditor you can be flexible.

There is a world of difference between trying to generate new income (applying for a job or starting a business project) when you need to be paid like yesterday versus when you have the next few months’ expenses covered.

Autopay

With an emergency fund in place and enough in your checking account to cover all your outgoings until you next get paid, putting all your bills on autopay will greatly simplify your life. This means more time to focus on increasing your overall wealth.

Personally, I use autopay for credit cards only as a fall-back. Since I’m doing banking every day, it’s easy for me to stay on top of all my transactions and I prefer to pay some of my cards closer to the statement date.

Freedom means accountability

Many people report struggling with self-restraint when it comes to spending especially if they have a lot of cash on hand. Preaching about having more self-discipline isn’t usually very helpful. Instead, I recommend treating all your money as if you are holding it in trust for someone else and having to justify every transaction.

If you’re in a relationship, reviewing joint income & expenses weekly can be good for the relationship as well as the finances. If you’re on your own, it still helps to do the justifying thing out loud provided no-one overhears you.

Cash & credit rule

Always protect your cash flow. Mostly - and especially if you get your credit for free (e.g. pay your credit card balance in full) - it’s best to use your credit as much as possible and hold onto the cash.

It is better to have cash & debt than no cash no & debt. If you have plenty of cash/credit you have financial freedom regardless of how much debt you might have. Running out of cash means running out of options and almost certainly going out of business.

The problem with cash

Cash loses its value - its buying power - as a result of inflation. Holding cash actually works against increasing your wealth so you need to do something clever with it. How much cash you hold is ultimately a calculation you have to do for your own unique situation.

Appearance matters

From the way you present yourself to the type of credit cards you use, everything matters. Accept that people are judgmental.

Your reputation

Whether in relation to an individual or an institution, never default on a payment. Never ever betray financial trust. If you do, it will haunt you forever. On the other hand, proving yourself to be trustworthy & reliable will enhance you reputation and make future dealings easier and this translates to more financial freedom.

More info

Spend now or save for later? The Atlantic describes “Why Rich Kids Are So Good at the Marshmallow Test” based on an updated version of the famous Stanford marshmallow test.

The Stanford marshmallow experiment was a series of studies on deferred gratification in the late 1960s and early 1970s. Typically, a child is left alone with a marshmallow and told if they can resist eating it they’ll be rewarded with a second marshmallow. Supposedly, the ability to wait - to defer gratification - is an indicator of success later in life. However, it turns out the children’s performance has less to do with willpower than the extent to which their background (experience) allows them to believe in the promise.

Vox has an in-depth push-back against the superficial findings of the marshmallow test.

A contemporary view of what financial freedom means and some good basic advice in 8 sections is at millennialmoney.com.

At the other end of the scale (and history) is Dandyism a.k.a. the cult of the self:

the dandy... would be content... to live indefinitely on credit
On Bohemia: The Code of the Self-Exiled

A current discussion, “What Does Financial Freedom Mean to You?” is on twocents.lifehacker.com (in the comments).

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