The Truth about Financial Freedom

I believe through knowledge and discipline, financial peace is possible for all of us.’ – Dave Ramsey

Financial freedom is something almost everyone will admit they want. But how really, do we get this elusive freedom? I find that some of us in paid employment can be serious scoffers(mockers) when it comes to personal finance matters.  They do not feel like they need it…not yet anyway. And I should know, that was me once upon a time! As long as it was the end of the month, I knew money ‘was coming’ one way or another. I was never in doubt. At the back of my mind, I was sure I had financial security because I had ‘job security’, right? Wrong!

Until of course, my husband lost his job and all that financial security disappeared. And then I realize that having a job is not financial security but that is what I thought it was.

Interestingly enough, an entrepreneur making a lot of money can behave the same way too. The ‘financial security’ is in the amount of money hitting the account every month. The same amount that makes Bank account managers call you ’specially’ and want to visit with you about their ‘facilities’! The point is, having a business is also seen as financial security because you have ‘money’ or ‘cashflow’ coming in, so you tell yourself that it’s okay, at least, money is still coming in. Abi?

It is on this note that I want to introduce the Hierarchy of Freedom to you, which I created to depict what I believe reflects the reality of our steps to financial freedom and more.

Let us begin at the bottom of the triangle.

Financial Dependency: Many of us start at the point of Financial Dependency, an often ignored and neglected area but where we all start our financial journey. As children and young adults, we are dependent on others to meet our financial needs, either completely or partially. If we are not given what we need, we go without it.

Their alternative source of income is often begging or borrowing, or both. People who are earning an income but unable to meet all their financial obligations such as NYSC corpers, young adults living with their parents but working, also fit into this category too.  Able–bodied persons unable to earn an income for whatever reason are also part of this category.

Financial dependency is how many people start; unfortunately, it is also how many people end their financial journey in life – dependent on others.  A sub-goal is to avoid returning this stage as much as possible at the end of our working life.

Financial Security At this stage, you have the income to cover your lifestyle needs and live a comfortable life. You are paying your bills, meeting financial obligations here and there and typically have little in saving and as you progress, maybe one investment. By most standards, because you are meeting your lifestyle needs and you are not dependent on someone else, you are perceived as ‘comfortable’. Have you ever said about someone, ‘that man is comfortable’? Better yet, do people say that about you?

An interesting thing to note is, Financial security here, is a false sense of security because it lasts as long as your expectation of the next salary or next business transaction, especially where you have one source of income. Once you are done spending the money, your security goes out the window. Many times, once that money is spent, there is little or nothing to fall back on, so you need to borrow to keep up your lifestyle. If you are unable to cope even with borrowing, you need to scale down your lifestyle needs or worse, you fall back in the Hierarchy to the Financial Dependency stage, becoming dependent and needing to be ‘given’ money.

Financial Escape/Enjoyment

What does it mean to escape something? Escape does not mean you are free. The Oxford dictionary defines the word ‘escape’ as ‘ to break free from confinement or control’. If you break out of jail, yes you have escaped. But does not mean you cannot get caught and thrown back in jail. Ask our ancestors who were slaves and broke free from their master’s compound. They had escaped from their master. They had ‘temporal freedom’. But freedom was not truly theirs, as their masters could still find them and take them back. You have escaped, there is some enjoyment, but it is still at risk.

Financial Escape/Enjoyment is when you have money to not just live comfortably, but to enjoy some of the luxuries of life. So you are really enjoying your life here, more than the average person. It is a case of having a high disposable income that allows you to have escaped the Financial Security.

You could also have money coming from your investments that give you passive income that allows you to have such luxuries. The point to note at this stage is, your main income is still very relevant to your financial wellbeing.

It is not enough for you to stop working and still live the lifestyle of your dream. If you stop working now, you would have to dial down your lifestyle (and enjoyment!). You do this, to enable the passive income from your investments to last longer. If not, you may even need to sell off part or all of your assets to enjoy the rest of your life.

Even then, the money might not be enough. You can outlive the money and may have to go back to work later in life. You might HAVE TO WORK until you die. This is certainly not financial freedom.

Some of us might have parents, uncles, aunties that had thriving businesses, or top corporate or government jobs. But when they lost that job, or the business failed, things changed.  The income from other investments was not enough to keep up with their lifestyle. Some have had to back to their hometown/village, move into smaller homes. Some got rid of their cars and go on less or no holidays at all. Some even resort to begging.

This is when you have a premature exit from your job or business for whatever reason. So if you have a business that is making a lot of money, AND you also have some investments giving you some additional income, you may have escaped from financial security but you are not financially free yet.

By all means, enjoy your life, but do not be deceived. You are not free yet. You may have escaped financial security, do not be distracted and deceived that you have arrived at your destination. Do not let the preliminary freedom that comes from excess cash, distract you from the real goal of financial freedom.

Financial freedom is probably not new to you so I won’t elaborate on it too much here. The Oxford dictionary describes the word freedom as ‘when you have the power to act, speak, think,  as one wants’. Financial freedom is when your investments make enough money for you to live the lifestyle you desire. You have the power to do as you please with your life. You do not have to work. You have the choice to spend your time as you wish.

You work or you do not work, it is irrelevant to how you live your life. Your life is on autopilot. You do not have to worry about money because you have an investment portfolio that generates enough income to live the life you desire.

Wealthy people have structured their money from investments to meet their needs. One investment could be responsible for paying for their holiday. For someone who chooses not to live in a property he owns, he may have an investment paying for his rent and so on.  But it does not end here.

Trans-generational freedom:

Here, you are not only financially free; but you have actively planned and executed wealth transfer to the next generation. At least, your children can live off the income from your investments and can pass the same along to another generation.

This way, a number of generations can live and enjoy the benefits of your investment portfolio. This is something people rarely address or do not do very well. Many of us believe it is a good thing to leave an inheritance for our children. Sadly, research shows we do not do this well over generations.

We focus on personal financial freedom and do little to prepare the next generation to multiply it. This is the final stage of the hierarchy of freedom which few have been able to achieve.

There is an obvious question now. What step are you on in this hierarchy of freedom and what are you going to do about it?

Tolu Dima-Okojie