Financial freedom is not an all-or-nothing goal. A little bit of freedom is also worthwhile
Updated on: 15-Aug-2022 •Dhirendra Kumar
I get asked for a lot of financial advice and as you would expect, some of the questions are easy and sometimes they are difficult to answer. Sometimes, the questions arise from the saver having inputs, as in, I have x amount of money - what should I do with it? Sometimes it is about outputs - I need x amount in five years so what should I do to make that happen? Sometimes it combines both. All these are fine and have quite well-established and sensible ways of selecting a solution.
The hardest questions are those where all you can do is show the other person, how to work out their own answer simply because the answer is different for everyone. There's one such question which always falls into this difficult category: How do I achieve 'financial freedom'? At first, this looks like a vague term even though it signifies a roughly similar thing to almost everyone: Financial freedom means not having to worry about money ever, and knowing this with a high degree of confidence.
This is probably always the dream of most people but it seems to have become more common to articulate it. Since the daily grind of earning money dominates our lives, a permanent relief from this is the freedom that most of us desire. Of course, there are many degrees of financial freedom, and the ultimate one is not having to work to earn money for the rest of one's life. Of course, there are many who do not have to work. There are those with large inheritances, and there are those whose burden we taxpayers are committed to carry all our lives, but it takes most of us an entire working life to reach that stage. If at all we ever reach it.
However, it's worth it to clearly articulate what different levels of financial freedom mean. Based on what many authors have written, here's one list that you will often come across if you start searching on the internet. This one is based on the one in Grant Sabatier's book Financial Freedom: A Proven Path to All the Money You'll Ever Need.
Seven levels of financial freedom
1. Clarity: When you have understood your financial position and what you can achieve.
2. Self-sufficiency: When you earn enough money to cover your expenses on your own.
3. Breathing room: When you escape living from salary to salary.
4. Stability: When you have six months of living expenses paid and have no consumer debt.
5. Flexibility: When you have at least two years of living expenses saved.
6. Financial independence: When you can live off your investment income, and therefore, working is optional.
7. Abundant wealth: When you'll have more money than you'll ever need.
Clearly, there is a little bit of padding here, just to reach the number seven. However, as you read through the levels you will very likely agree at the general progression of the idea. Moreover, the first step - which is all about understanding and introspection is actually very important. As we read through the list, few of us will think realistically of reaching the highest levels, but that does not mean that thinking about financial freedom systematically is useless.
The simple fact is that if we save and invest with a modicum of planning, lesser degrees of financial freedom can be achieved earlier in life, and that can be just as good as achieving higher levels later. Moreover, as the Indian economy has changed, this has become more important. India is clearly passing through a jobs crisis. There are a number of people in the urban middle-class who have suddenly lost their jobs. Youngsters are finding their first jobs difficult to find, or have to take low-quality employment. Middle-level executives are being shunted out of their employment because employers think they can be replaced at a lower cost.
For salary-earners, getting even a mild form of financial freedom early in life is more important now than it was a decade or two ago. If one can reach level four by the age of 35 or level five by 40, that's a great thing to achieve. I'm not going into the mechanics of doing this - that's what I do most of the time - but I'm simply pointing out the great value in thinking about this systematically, setting a target, and working towards it.