We hear a lot about financial freedom and financial security but what do these terms really mean? Coming up with a a clear definition of each is really a personal exercise in defining what is important in your life.
At a dinner party recently I heard neighbours talking about how happy they are with where they live, their homes and lifestyles and saying that life is pretty good - why would you want more? At the time I thought how lucky they are to be feeling this way, to be satisfied and happy with their lives. Knowing these people as I do I know they would say they are financially secure - not financially free but they wouldn't be looking to change their situation, they are happy with their comfortable house, social life, occasional travels and income.
So it got me thinking, what is financial contentment for some would be luxury to others while frustratingly middle class for others. What matters is the personal satisfaction of those involved not the opinion of others.
Robert Kiyosaki has defined wealth as being how long you can live off the income of your investments without having to work - how long your money will last to allow you to live without working. While Financial Independence is achieved when your monthly income is more than your monthly expenses. When I read his definition it was like a light bulb going off - what a simple and accurate definition.
So to help you start to get a clear idea of the amounts involved in your own life to get to the first stage - to get to financial independence:
1. figure out what your monthly expenses need to be - are there some that you are paying that aren't needed or being used or are there others that would be beneficial if started?
2. look back over the last few years to see what have been those unexpected costs that have been outside the regular monthly expenses to get an idea of what else you need to budget for - think of those surprise additional expenses such as hospital or vet bills, weddings, funerals, emergencies, moving house or repairs - something happens every year so plan for those additional expenses.
3. set out what you monthly income needs to be to exceed the regular and irregular expenses
4. compare this amount to what is your current monthly income - do they match or does one exceed the other? If currently your expenses exceed income then there needs to be changes made - either spend less or earn more (or both) to correct the balance so you have more coming in than going out.
Next is to figure out what you want in life - what life do you want to be living? Let yourself think freely and openly about this idea so you're going outside the box with this. It may seem a million miles away from where you are now but that's fine. Life has a lot of variations and opportunities so let yourself explore them. Make a note of what you want in life.
Often people find that what's really important for them are the essential things like a healthy family, a good home, time with friends and family and regular holidays. Then it starts being specific to our interests, for my cousin John his list would include Hotrod cars while for my neighbour it would be a house down the south coast.
For some people it would include a long list of luxury items like big boats, fancy cars, extravagant holidays, multiple big houses, a wardrobe of designer dresses and serious jewellery.
Others would want to be able to bring about real and sustainable change in the world in social, environmental and knowledge terms by doing things like sponsoring Camp Quality or funding a youth centre in a run down part of town.
It could mean retiring early and doing what you want. But keep in mind what seems like work to some is pure enjoyment to others. John, a corporate lawyer, loves what he is doing and the money he is making. Even if he had millions in the bank and didn't need to work anymore John would still be doing deals because that's what he loves - it isn't work, the intellectual stimulation is play for him and he's making money from it - another thing he loves doing. For each of us, the details of the definition of what we want in life will be different.
Defining what's important to you lets you see what would give you financial independence, security and freedom - how much do your dreams and wants cost and how to you make that happen?
Financial security is different to freedom in that security is about being safe whereas freedom has safety as well as choices.
Robert Kiyosaki sees being part of the rat race will only ever keep you in the rat race and probably struggling with financial independence, let alone creating financial security. To him financial security and freedom comes from investments and business building - having control over the production that creates the income.
The starting place is financial independence - having your monthly income exceed your monthly expenses. Once you are achieving this you are set to make the rest happen - whatever you choose to define as your security and freedom.
Write a list down of what things you'd like at have in your life at different stages - family raising years, working years, retirement etc.
Work through your monthly budget to so you can then make sure your income exceeds your expenses.
Write out what financial independence, security and freedom means to you and how you could achieve this.