Why Debt-Free Used To Be the Goal — and What Experts Say Financial Freedom Means Now
The average U.S. consumer pays $1,256 a month toward their debts, according to Experian. So, when you reach a point where you’re debt-free, chances are it feels pretty good. But being debt-free isn’t the only way to financial freedom. In fact, for some people, it’s not the way at all.
So, then, what is? If being debt-free is no longer the goal, what does financial freedom mean today? Here’s what the experts say.
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It’s About Living Life the Way You Want
The meaning of financial freedom depends on who you ask. But for some, it’s about living life the way they want. This could mean living debt-free, or it could not.
“Financial freedom to me is the ability to live my life how I want without having to work,” said Russell Moran, owner at Russell Moran Enterprises, Inc. “It will be different for everyone because some folks have no desire for expensive things… If they have little to no bills and can do what they want, I would consider that financial freedom.”
In other words, you could be financially free with a low- or high-cost lifestyle. It’s not so much about the cost as it is about having the ability to make choices because your money doesn’t limit you.
Financial freedom—and whether debt prevents or helps it come to be—comes down to two things. The first is perspective and purpose.
“A mortgage gives you tax write-offs and it's usually an appreciating asset — it builds value just by sitting there,” Moran said. “A business loan can earn much more money than it costs and is a great debt used correctly.”
The second is the type of debt. The debts that can prevent financial freedom are most often those tied to depreciating assets, like credit cards or cars. You might end up spending way more money over the long term unless you have a dedicated pay-off plan.
It’s About Clarity and Knowledge
For other people, financial freedom is about having financial clarity. When you know what’s going on with your money, you have more control over it.
“Financial freedom isn’t a number, and it isn’t being debt-free. It’s clarity – fully understanding where one’s money is and where it is headed,” said Barry Cothran, financial educator and founder of Vision and Hope Financial, LLC. “If you don’t know where your money is going, you can’t expect it to take you anywhere.”
To truly obtain financial freedom, you need to be able to see the bigger picture. And you need to be able to plan for the future. But according to Business Wire, 47% of Americans don’t have a written financial plan. This is even though most of them (96%) believe having a plan would help them achieve their financial goals.
And It’s About Having Choices
You’ve likely seen a trend here, but the overarching theme is that financial freedom comes down to having choices.
“The clients I see who have reached financial freedom do not typically have no debts, they have choice,” said Cody Schuiteboer, president and CEO of Best Interest Financial.
He broke down the concept of having choices into three aspects:
Having the liquidity needed to get through hardship (like losing a job)
Having enough savings to choose when to work and when not to work
Having the cashflow to pay a $5,000 expense without it being much trouble
“A client with a 3% pandemic-era mortgage, maxing their 401(k), contributing to a Roth IRA, and keeping six-months' worth of expenses in their high-yield savings account is financially free, regardless of whether or not they actually carry some debt,” he said.
Now, take someone who has no debt but lives paycheck to paycheck.
On the surface, being debt-free sounds like freedom. But when you consider that person doesn’t have a financial buffer, it soon becomes clear that they also don’t have much choice over their money. They’re not in control. The money is.
“As I say to my clients, ‘Financial freedom is not about having a zero balance, it is about having enough liquidity to not be dictated by your finances,’” said Schuiteboer.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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