The Two Key Pillars to Financial Freedom

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HOW WOULD YOU DEFINE financial freedom? That’s the intriguing question I’ve been asked twice in recent weeks by journalists curious about the new HumbleDollar book, My Money Journey: How 30 People Found Financial Freedom—And You Can Too.

Financial freedom is something that pretty much everybody wants, and yet there’s no agreed-upon definition. Still, I think most folks would focus on two key elements: time and money. But I don’t think it’s a simple matter of having lots of dollars and lots of free time. Instead, I believe financial freedom rests on two key pillars.

First, we can spend our days as we wish. Time is the ultimate limited resource, which is why things that waste time—think doing the taxes, sitting in traffic or waiting at the Department of Motor Vehicles—can be so infuriating.

For better or worse, none of us knows how much time we have. But we know that one day it’ll run out, so it’s crucial that we make the most of the days we’re given. To that end, we should spend our time with those we love and we should spend it doing the things we love.

If we love our job and we like our colleagues, we may not have achieved financial independence in the traditional “I never have to work another day in my life” sense. But, arguably, we’re pretty close:  Not only do we get to do what we love, but also we get paid for doing it.

That brings me to a notably silly definition of retirement. Over the years, I’ve occasionally heard readers argue that if folks are still earning money, even if it’s from part-time work in their 60s or 70s, they aren’t truly retired. That, I think, is a dangerous mindset. Next thing you know, these readers may decide that doing anything that looks like work—paid or unpaid—is against the rules of retirement, and soon they’ve committed themselves to a dreary life of nothingness.

My contention: We all need a sense of purpose, whether we’re working or retired. The blessing of financial freedom is that we can choose our purpose, deciding to devote our days to activities that we’re passionate about and that we find fulfilling. That might mean doing volunteer work for our favorite charity, our place of worship or the local library. It might mean painting, writing, carpentry or gardening.

There’s great pleasure in working hard at activities we care deeply about—and, indeed, I believe it’s one of the three key elements of a happy life. What if these activities happen to pay a little money? You won’t find me complaining.

Second, we rarely worry about money. Many folks fret constantly about their finances—because they have to. They struggle to live within their means, so every expenditure, even if it’s intended to boost their happiness, often instead ends up boosting their stress level. And, no, this isn’t just an issue for those with low incomes.

That raises the age-old question: Does money buy happiness? If we’re struggling to afford life’s necessities, the answer is a resounding “yes.” If we can lift ourselves out of poverty, or do so with assistance from others, our happiness will be greatly improved. Throw in a few thousand dollars in a bank account, and we’ll also have a sense of financial security that’s crucial to peace of mind.

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But once we’ve achieved some minimum standard of living and have some sense of financial security, happiness becomes less about our absolute level of income and wealth—and more about our relative standing. A recent study found that the higher our income rises, the happier we’re likely to be, with the gains in happiness becoming ever smaller with each incremental dollar. That suggests that our income relative to others is what matters.

I’m not suggesting the research is wrong, though I do think the results are likely skewed by what’s called a focusing illusion. In other words, when those who are better off are asked about their happiness, they think about their fortunate financial standing relative to others and that prompts them to say they’re happy. This is the power of gratitude at work.

Instead, I’d argue that the researchers are focusing on the wrong “relative.” True happiness doesn’t rest on how we stand relative to others—though those around us may influence our material desires. Rather, happiness hinges on how we stand relative to our individual wants and needs, something that’s much harder for researchers to measure.

If we earn great gobs of money but our desires regularly run ahead of our income, we’ll suffer enormous financial stress—because we’ll never feel like we have enough. To be sure, earning more or having more means we’re more likely to have sufficient money to cover our wants and needs, but there’s no guarantee that we’ll indeed feel like we have enough.

That brings us to another important notion. Yes, money can buy happiness. But more important, its absence—not having enough or feeling like we don’t have enough—can lead to great unhappiness.

Financial freedom isn’t a seven- or eight-figure portfolio balance. Instead, it’s knowing we have enough to pay for the life we want. It’s the ability to enjoy two great luxuries—spending our time as we wish and not having to think about money.

Jonathan Clements is the founder and editor of HumbleDollar.

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