How To Create an Affordable Freedom Lifestyle
What is affordable freedom? Well, it can mean different things to different people.
But when working with my clients, we define it as the ability to spend your time however you please, without much financial stress.
Notice, I didn’t say financial independence.
Financial independence means you never have to earn money again. Because you’ve built up enough assets, where you can support yourself for the rest of your life by making withdrawals from these assets.
Freedom, on the other hand, means that you are free to do whatever kind of work is joyful for you. Even if it means making less money.
Sure, financial independence is the ultimate goal. But why wait until you’re 60 years old to have financial freedom?
I view the path to financial independence in three distinct phases:
Financial Security: you know you’ll be ok if you lost your job and had to find a new one
Financial Freedom: you have freedom to do work you love, on your time schedule
Financial Independence: you can do whatever you want, whenever you want, with whoever you want, without earning an income
For most people, getting all the way to phase-3 financial independence requires amassing significant wealth. Even if you only need $50,000 per year of income to support your needs, you’d still need over $1,000,000 to be financially independent.
However, getting to phase-2 financial freedom doesn’t necessarily require massive wealth. When you throw in the extra variable of earning income doing something you love, it becomes much more attainable for most people.
Affordable Freedom Case Study
To illustrate what affordable financial freedom can look like, consider the scenario of a family that I work with. I think their story provides a very practical example of achieving phase-2 financial freedom.
For privacy reasons, I’ll change their names to John and Amanda.
When we started working together two years ago, John was 38 and Amanda was 40. And they were a typical dual-income household. They had a great combined income of around $250,000 / year.
When we met, this is what their extremely-high-level-rounded-for simplicity’s-sake finances looked like:
After analyzing their expenses and building in some intentionality around them, they were able to immediately drop their monthly expenses by around $1,000.
This is because two things became clear.
There were expenses that were unaccounted for. In other words, they were spending more money than they thought.
Some of the money they were spending was on things that didn’t really improve their quality of their life.
After establishing a more precise family budget of around $10,000 / month, they had an extra $1,000 / month to increase debt payments so they could pay off their loans sooner. And getting rid of those debt payments has been a nice boost to their monthly cash flows.
Furthermore, after the debt was fully paid off, that additional $1,000 / month started going into a high-yield savings account to build up their emergency fund.
And looking out two years, we knew their expenses would fall even more. Because starting this school year, their kids are at the neighborhood schools.
Which means no more monthly daycare expenses. The daycare raise is a beautiful thing!
These very basic planning steps paved the way for them to be in the position they’re in today.
Amanda will be leaving her stressful job and moving to part-time work that she thinks she’ll enjoy a lot more. And it will also allow her to work around the family’s hectic schedule (school, activities, etc).
Thankfully for their family, John actually enjoys his work. So he’ll keep his job.
Going forward, here’s what John and Amanda’s extremely-high-level-rounded-for-simplicity’s-sake finances look like:
Despite Amanda’s income falling by more than $70,000 per year, their annual gross income is still $112,000 more than their annual expenses.
And they’re in a lower tax bracket, too. Which helps their cash flows even more.
Amanda is no longer contributing to her 401(k), but she’s now maxing out a Roth IRA. And between 20 more years of compounding returns on her current retirement savings, the growth of her new Roth IRA, and John’s retirement savings — they should still have plenty of money in retirement.
Not to mention, the ability to access funds sooner. Because Roth IRA contributions can be withdrawn before 59 1/2, tax and penalty free, in 5 years.
And they’re learning that Amanda’s newfound freedom and happiness is creating a ripple effect, improving the wellbeing and happiness of the entire family. Heck, just planning for it has lifted their spirits over the past couple of years.
Affordable Freedom Framework
When I first started working with clients, I didn’t really have a framework for what I’m describing. It was just ongoing conversations about aligning time and money around values and life goals.
But as I started having these conversations on a regular basis, I’ve developed a more structured framework around this. Below is a framework that can be used for 2-income households.
The idea here is that — assuming we sleep 8 hours each night — we have 112 waking hours in a day. So together with a partner, we have 224 waking hours in the day.
This framework allows us to measure how we’re spending that time. And by shining a light on how we’re currently spending our time, we can identify any gap between that and how we would like to spend our time.
If we determine there is a discrepancy between the two, we can then assess our financial needs with a little more intention, as described earlier.
This allows us to determine if there might be any room to sacrifice some of the money we’re earning, in exchange for a little more time. Which can be applied to get us closer to the ideal allocation we’ve identified.
And ultimately, the ideal life we’d like to live.