Financial Freedom Step 1: How Do You Measure YOUR Wealth?

There’s a really important first step that so many people skip when talking about building wealth and attaining financial freedom. It’s also one of the key reasons why we prefer the term financial freedom, rather than financial independence. Some people argue these two terms are interchangeable, but I believe there is a distinct difference that is often overlooked.

Financial Freedom vs Financial Independence

The generally accepted definition of financial independence (FI) is this:

Financial independence is the state of having sufficient personal wealth or passive income to support your basic expenses, without having to actively work.

Some people might tweak that definition a bit, but in actuality that is what the term means. Now, I love the concept of FI and I applaud people for implementing the financial discipline to pursue it. What I don’t love about that definition, and the FI movement as a whole; is that people tend to view obtaining FI as the goal, without a whole lot of thought into what comes after. FI isn’t the finish line, it’s the beginning of a different way of living.

When people treat FI as the destination instead of a starting point, their focus is inevitably directed at cutting expenses as much as possible, identifying the resulting cost of living (COL), and then using those numbers to determine what their FI number is, meaning the amount of money they need to generate via passive income in order to cover their basic COL.

What’s wrong with that approach you may ask? I do agree that identifying and cutting unnecessary expenses is definitely part of any successful financial plan, but it is NOT where you should be starting if you want to obtain FF. Why? Well, let’s take that FI definition and tweak it a bit to demonstrate the difference between a FI and FF approach. How about this:

Financial freedom is the state of having sufficient personal wealth or passive income to support your ideal lifestyle, without having to actively work.

The difference? For Freedom Seekers it’s not about reaching the goal of FI as quickly as possible, it’s about what financial independence gives you, FREEDOM. But freedom isn’t so great if you’re on such a restricted budget that you can’t do the things you really enjoy. That’s not freedom, that’s just someone with a lot of time on their hands!

As Freedom Seekers we are looking to cover the costs of our IDEAL LIFESTYLE. We want to recapture our time and invest it in things that bring us VALUE. Think of your time as currency. For the most part you want to invest that currency into the things that give you the strongest return. Things that you enjoy, bring you happiness, give you a sense of accomplishment, and improve the lives of people around you.

Now I’m certainly not saying that your ideal lifestyle can’t be done on a minimal budget. It absolutely can. I just think FF is a more mindful and intentional way of pursuing FI, and also applies to a broader spectrum of people who may want to work some indulgences into their plan.So long as those indulgences bring them sufficient value for their cost.

So, in order to cover the costs of your ideal lifestyle, the starting point for FF is to actually sit down and define what exactly your ideal life consists of? What does it look like now, how about in 10 years, or 20?

When you ask yourself this question you need to be aware that as humans we are woefully poor at predicting what will make our future selves happy, also known as affective forecasting. We are especially bad at it when the time frame we are forecasting is years into the future. (Harvard psychologist, Daniel Gilbert, writes an excellent book which highlights the science behind this flaw.

The book is called Stumbling on Happiness, and is well worth a read. For those that are interested, I’ve linked to the Amazon page for more details on the book, but if you want to start exercising your FF muscles by reducing unnecessary expenses early, go get yourself a membership at your local library and borrow the book!)

How To Retirement Plan If We Suck At Forecasting??

If we are so bad at predicting what will make us happy in the future, how do we plan our future lifestyle and provide a base from which to accurately project our expected COL?

The best way to do this is to take a different approach than traditional retirement planning. Forget about the typical goals of leisure, golf, and sunny beaches, that might work when you are planning to retire at 65+ (although I still don’t think it works that well), but what about when you are planning for 30, 40, even 50+ years of “retirement”.

Why not start in an area which experiences limited change over time. Our intrinsic values. Our values are engrained in us from the totality of our life experiences, but are heavily influenced by how we grew up. They form part of our moral fibre, and while the priority of our values often change over time, the values themselves tend to remain quite stable. So start by identifying 3-5 of your top values.

Happiness is directly correlated to the quality of our relationships spent with friends and family. The more time we spend with those we care about and the more effort we put into cultivating those relationships, the happier we are. So it makes sense that people naturally list relationships with friends and/or family as one of their top values.

Other key values that are frequently mentioned, helping those less fortunate, improving the environment, learning new things, experiencing adventure, health and wellbeing etc. The list goes on, but once you’ve identified your top values, WRITE THEM DOWN. You’re going to refer back to them a lot in your future planning.

Now take your list and start looking at how you might model your ideal lifestyle to prioritize what you’ve just identified as most important to you. If family made the cut, perhaps your ideal lifestyle might involve moving to be closer to them, or being able to travel to visit them more frequently. If health and well-being hit the top of your list, set a goal of walking/running each day, or better educating yourself on diet and nutrition.

Currently the top five values for us are family, health, continuous learning, helping others and having a positive impact on our environment. Our annual goals centre around these values and include taking several family trips each year, regularly traveling to visit our families, staying active and eating healthy, pursuing whatever business interest is on our radar, and operating an electric vehicle!

Our daily lifestyle typically includes a trip to Starbucks for our favourite coffee (remember FF is about doing the things you get VALUE from, and we get a LOT of value from this little ritual!), doing something active; whether it’s working out in our home gym, taking a yoga class, or heading out for a hike, buying quality ingredients and putting together wholesome meals, spending quality time as a family, maintaining our home, and reading.

When you look at our daily lifestyle, with the exception of some pretty small indulgences, its pretty low-key. As a result, our COL is pretty minimal day to day. But, our annual lifestyle goals include some bigger ticket items, and having the freedom to prioritize these values is what this is all about. If we don’t plan our future COL to accommodate what matters most to us, we can’t expect to get a lot of value or happiness out of the FF experience.

The Bottom Line On Defining Your Wealth

As you identify your lifestyle goals, start to break them down into actionable and measurable pieces of what your ideal life would look like. Work on it until you have a pretty strong idea of what you want your days, months and even years to look like. What do you enjoy, what do you want to learn, what do you want to accomplish?

Once you have a clear understanding of what is important to you and how you want your lifestyle to reflect that, THEN move on to step two. But I highly recommend you take some time on this step, give it some thought, set it aside, and come back to it at least a few times. The last thing you want to find once you reach FF is that you’ve structured your whole plan around a lifestyle that you don’t truly enjoy.

So know your values, and measure your wealth by the freedom to live a life that reflects those values.

Next week we’ll dive into Step 2: Why 1+1=3

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Thanks for reading!

 

 

15 thoughts on “Financial Freedom Step 1: How Do You Measure YOUR Wealth?

  1. I can really resonate with this quote:

    “When you ask yourself this question you need to be aware that as humans we are woefully poor at predicting what will make our future selves happy, also known as affective forecasting.”

    I’ve never heard of affective forecasting before but will have to look into it! I have tried things so many times that I thought would make me happy but they don’t. I’ve learned I like the challenge of a journey and hardly ever feel excited at the destination (at least not for long).

    Now, I measure my success in life by how much I laugh each day. This has worked pretty well as a barometer!

    Liked by 1 person

    1. Dan Gilberts book “Stumbling on Happiness” delves into affective forecasting, and includes a lot of great resource references as well. I thought it was definitely a worthwhile read 🙂 it gave me a lot of insight in terms of how I set goals, lay future plans, and measure my own happiness!

      I love your barometer! I definitely believe that looking for simple metrics like that helps us focus on the small day to day moments that cultivate happiness, rather than always looking for the next “big” peak.

      Thanks for reading 🙂

      Liked by 1 person

  2. Great site you have here but I was curious if you knew of any community
    forums that cover the same topics talked about here? I’d really love to be a part of group where I
    can get opinions from other knowledgeable individuals that share the same interest.
    If you have any suggestions, please let me know. Appreciate it!

    Like

    1. Thanks so much! There are quite a few forums that address Financial Freedom or Financial Independence. The largest forum that is consistently active is likely the Mr. Money Mustache forum, but there’s also a lot of really great conversation and resources within the FIRE/FF Twitter community. Those should be great places to start!

      Like

    2. Hey BDO,

      If you’re on Facebook, I’d also suggest the Choose FI Facebook group as well as any Choose FI local Facebook groups (I bet there’s one for Orlando).

      I’m in the Choose FI Canada and Vancouver groups, and get so much value from the discussions there.

      Like

  3. How did I miss this post before!? So well said. Although I have focused on the numbers and how to get to FI, it inevitably becomes an exercise in what comes next. Truthfully, it’s really challenging to have that introspective discussion with oneself. I’ve spent much more time recently reading into the psychology of happiness, knowing that money is just a tool to achieve the greatest value in life. I think that there are many ah-ha moments on the path to freedom, we just don’t always get them in the right order.

    Liked by 1 person

    1. Thanks so much! I agree with you that it’s super challenging to have those candid discussions with yourself. I have also found so much insight from shifting my reading from traditional “finance books” to books about psychology, happiness, contentment, and general self awareness. Hands down I have gotten more out of those books in terms of evaluating how I use my money, and what it’s actually bringing into my life than I ever did reading finance specific books. (Although they both definitely have value!)

      Like

  4. Hi Phia,

    I remembered that your views on FF vs FI resonated with me, so thanks for digging up this article and sending it to me!

    I completely agree with so much of what you’ve written here—from needing to have a vision for our post-FI lives, to getting clear on our values.

    Your writing is thoughtful and insightful. Thanks for sharing your stories and thoughts here on your blog!

    Like

    1. Thanks Chrissy! Really appreciate your kind comments, and thanks for following the blog. I’m excited for your new blog, eatsleepbreathefi.com! Looking forward to gaining some new insights and inspirations from another FI mama so close to home!

      Liked by 1 person

      1. Thanks for checking out the blog Darlene! It was really nice to meet you and your family as well! Hopefully we’ll get a chance to chat some more at a future meet up 🙂

        Like

  5. Thank you! I love the idea of FF vs FI. Every person and situation is different and I think this really respects those variations. My hubby and I are working hard for FF and it will be so worth it when we get there! Keep the thought provoking posts coming!!

    Liked by 1 person

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