Around 72% of Americans do not currently feel financially secure; however, over 40% believe they will achieve financial freedom eventually. But what does financial freedom mean? Because personal finance is a broad topic with many approaches, it's important to know that financial freedom is not a perfectly definable term, but generally refers to reaching the point you are free to pursue your life goals without finances being a limiting factor.
If the concept of financial freedom appeals to you, you may be a good fit for comprehensive wealth management, which follows a very similar structure.
The Basics of Financial Freedom
At its core, financial freedom is the ability to live life the way you want without constantly worrying about money. It's about having your money work for you instead of you working for your money. But why is understanding how to get financial freedom so important? For discerning investors, it's the foundation on which all other money decisions are built. On top of that, knowing the basics of personal finance gives you clarity, direction, and purpose in your financial journey.
7 Stages of Financial Freedom
The journey to achieve financial freedom isn’t one-size-fits-all. It's a series of stages, each with its own personal challenges and rewards. Let's explore these stages to better understand where you might be and how that will impact your financial goals.
Stage 1: Dependence
Most people start out in the Dependence stage — living with only enough money from paycheck to paycheck and relying a lot on others for money help. To assess if you’re in this stage, ask yourself these questions:
- Do I constantly stress about my next paycheck?
- What is my current credit score?
- How much money do I still need to earn to pay off my student loan/debt?
- Do I have a bank account with decent savings?
To get out of this stage, you must follow a monthly budget, cut unnecessary expenses, and pay down high-interest debts. Your debt payments must be your priority, even if your smallest debt comes from your student loan debt. You must also learn to track how financially fit you are before making any investments. Studies show over half of Americans are financially dependent on others and not sure how to gain financial freedom even after five or 10 years.
Stage 2: Solvency
Solvency is when you've stopped accumulating debt and can pay all your bills without too much trouble. At this stage, you’re no longer living paycheck to paycheck and no longer worried about unexpected expenses.
How can you reach financial freedom in five years from the Solvency stage? You must start living debt-free. Steady saving and living within your means are essential to reach and stay in this stage. Investing is also another important aspect of this stage. You don't need to invest a lot just yet, but it's crucial to start learning the basics while focusing on low-risk investments. It's the first real step toward financial freedom.
Stage 3: Stability
You've reached Stability when you have a good emergency fund built up and are regularly saving for financial plans and future goals. Being in the Stability stage means your financial situation has improved, and you now have diverse investments (e.g., mutual funds, equities, real estate, life insurance) and a clear sense of what financial freedom means for you.
Stability is that peace of mind knowing you’re ready for life's curveballs (unexpected expenses). Experts say having 3–6 months of living expenses saved can really improve your financial stability.
Stage 4: Agency
Once you've reached the Agency stage, you have the freedom to make life choices without stressing over immediate money issues. It’s about having options. You no longer need to worry about having only a single source of income.
To determine if you're in the Agency stage, think about whether you can make career or life decisions without money concerns right away. This stage involves maximizing your income, optimizing passive income investments, and investing more money into your retirement savings.
Stage 5: Security
Financial Security is the stage when your investment income can pay for your basic needs. Start by computing your monthly expenses, then compare them with how much you’re earning from your passive income investments. If you can quit your full-time job and live comfortably with only your passive income, then you’re already at this stage.
Security is not full-on retirement yet, but it's a big accomplishment. You must focus on long-term investing, minimizing taxes, working on multiple income streams, working on your retirement plan, and planning for the transfer of your assets after you die to reach this point.
Stage 6: Independence
Independence is when your investments can support your current lifestyle forever — this is what many people see as retirement. Having a balanced approach to risk, steadily investing over time, and keeping an eye on market trends can help you achieve this stage. You’ll have to be smart about how you invest and understand the markets, and some patience also helps.
The Independence stage of financial freedom is also a good time to hire an elite team of wealth managers who can offer strategic advice tailored to your investment profile and risk tolerance. Partnering with a trusted financial advisor also increases your chance of achieving the next, and last, stage much faster.
Stage 7: Abundance
Abundance means having enough not just for yourself but also to positively impact others. It’s the pinnacle of financial freedom. Now, it's not just about you — it's about taking care of your family for generations, giving back through charity, and leaving a legacy. To get to this level, you’ll need smart investments, to run your own successful business(es), and — alright, you might as well say it — a little luck can't hurt.
Managing multiple streams of income carries a certain risk, so this will require strategic management and implementation of investment strategies with high success rates. Similar to the Independence stage, working with a financial advisor can also help you streamline your wealth management strategies, but you also have to take note of what type of financial advisor works best for your current financial needs.
How Working with an Advisor Can Help Your Freedom
At Plancorp we do not use the term financial freedom but many of the tenets are the same. Generally everything is working toward a comprehensive approach that aligns your finances to your life goals.
It may seem complicated, but remember you don't have to do it alone — a trusted advisor can provide direction and strategies tailored to your situation. They can guide you through the steps to financial freedom, ensuring every decision aligns with your goals and values. Let us help you evaluate your financial advisor options and create a tailored wealth management plan for you.