If given the choice, would you rather achieve financial security, freedom or security? If you are a bit confused and not sure which one to choose, don’t worry, most people are. In fact, we think all these represent one and the same concept of being financially set. And while that may be true, there is different ways and stages of being financially set.
The terms financial security, financial freedom, and financial independence represent different stages of financial well-being and can be ranked in terms of the extent to which they cover living expenses and overall life enjoyment. Let us go through each. and by the end of this article, you will come to appreciate the difference and how it can help you financially.
Financial Security
Financial security means having enough savings, investments, or income to cover basic living expenses and emergencies. This includes having a stable job, an emergency fund, and insurance. These resources ensure you can handle unexpected expenses without going into debt. A stable job here may not necessarily mean a high-paying job, but it should be secure.
This is the foundational stage, requiring the least amount of money. It ensures you can handle life’s essentials and unexpected costs without financial stress. Out of the three categories of financial stability , most people fall into this category. While most are content or happy with this setting, some work hard to make their way into the next class.
Financial Freedom
Next is financial freedom, where you have enough resources to make choices that allow you to enjoy life. It goes beyond covering basic needs to allow discretionary spending, such as travel, hobbies, and other lifestyle choices. In other words, you have discretionary spending for lifestyle choice, reducing dependence on a single income source
This stage requires more money than financial security. It allows for greater enjoyment and flexibility in life, providing the means to pursue passions and experiences without significant financial constraints. Being in this category is a great place to be for most people, but there is an even better place, where you are fully independent and relying solely on yourself for all your living expenses, discretionary spending, and future financial goals.
Financial Independence
Last but certainly not least: financial independence! This is the state where you have enough wealth to live on without needing to work for money. Income from investments, savings, or other passive sources fully covers all living expenses and desired lifestyle activities. In other words, all living expenses (basic and discretionary) are covered, you have complete financial freedom without the need to work, long-term financial stability and wealth accumulation, and most importantly, the ability to pursue any lifestyle choice without financial limitations. This stage obviously requires the most money. It represents total financial control and the ability to live life without the constraints of earning a paycheck. To get to this stage, you have to have started early and made a lot of sacrifices, be it with saving, investing or working hard on your own business and ventures.
Ranking from Least to Most Money Needed: to recap the three stages of your financial journey:
1. Financial Security: Covers basic and emergency needs.
2. Financial Freedom: Adds discretionary spending and lifestyle choices.
3. Financial Independence: Complete financial self-sufficiency without the need to work.
Each stage builds on the previous one, progressively allowing for more freedom and enjoyment in life as financial resources increase.
Are you simply surviving financially, or are you building a prosperous future? Understanding the distinctions between financial security, financial freedom, and financial independence is crucial for planning your financial journey. Each stage represents a different level of financial well-being, with increasing levels of freedom and stability. By recognizing where you currently stand and where you aspire to be, you can make informed decisions about saving, investing, and spending. Remember, achieving financial independence is a gradual process that requires discipline, strategic planning, and combination of patience and perseverance. Whether you are just starting to build your financial security or are on the path to complete financial independence, each step you take brings you closer to a life of financial stability and freedom. While there are no shortcuts, you can accelerate and even 10X your way to the top by making some radical sacrifices in the present.