Exploring the 4 levels of financial freedom

Imagine sitting down for a meal and not having to look at the prices before you order. If you want to feel more financial freedom, you’re not alone. A recent survey found that 73% of Americans feel stressed about finances. You don't have to be one of them. Keep reading to learn how the four levels of financial freedom can affect your family's finances. 

What is financial freedom, and how does it impact family finances?

Financial freedom can mean different things depending on whom you ask, but the most common way to understand it is this: You no longer have to work to support yourself or your family. In other words, you are free from the need to work a 9-5 job to feed your family. Instead, you let the checks roll into your mailbox, living off passive income streams from savings, investments, or business ventures. It's always a good idea to diversify your income as much as possible so that if you lose one source of income, you have others to fall back on. 

Financial freedom rarely happens overnight. Financial freedom is a step that typically comes later in life after your financial situation has security, flexibility, and stability. 

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How your children can benefit from your understanding of financial freedom 🎁

Finding a way to achieve financial freedom is a gift you can pass down to your kids. A whopping 85% of young adults with an upper-level income said their parents did well preparing them to become financially independent. Compare this to the 53% of folks with lower incomes who say their parents did not prepare them well. Becoming financially free can profoundly affect your family's financial well-being for future generations. 

Greenlight tip: Do you want to make financial education fun for your kids and teens? Check out Level Up (TM), the interactive game-changing money game.

The 4 levels of financial freedom 

In this section, you'll learn about the four different stages along the climb to absolute financial independence. 

1. Financial security 🔒

When you're financially secure, you can pay your living expenses from your annual income without having to incur debt. It's helpful to note that your living expenses include both expected and unexpected expenses. Financial security is built on good money habits, like budgeting, goal setting, and record keeping. Establishing good financial habits and sticking to them can take a while, but it's worth it. You could also benefit from finding a financial mentor.

This may be more difficult for some than others. A Consumer Financial Protection Bureau report found that age, education, and physical health all affect financial security. For instance, young adults aged 18-24 have the lowest rate of financial security, while those over 70 have the highest. Likewise, those with higher levels of education and good health tended to have higher rates of financial security. 

2. Financial flexibility 🤸

It's tempting to think you should make a plan for your money and stick to it, no questions asked. In reality, it's good to maintain financial control without being overly rigid. For instance, maybe you planned to start retirement planning by contributing $200 per month to your company's 401(k) plan. After a few years, if your investment portfolio isn't performing well, you may want to invest in a different fund. It's not that your goals have shifted, but the road you take to get there can change. 

Maintaining financial flexibility also has benefits that extend beyond the budget. Remember that you and your family are human beings with wants, needs, desires, and disappointments. So, it's OK to overspend in one area from time to time. Your future retirement is important, but is it unattainable if you take the kids on a vacation this summer? Financial flexibility means you get to make that call. 

3. Financial stability 🪨

A boat that only sails in smooth waters isn't best for all occasions. The same is true of your finances. If you have enough money coming in to cover all your daily expenses, that's great, but what happens about the less common costs? Financial stability means your financial life isn't going to be turned upside down by an unexpected event. 

Finding financial stability starts with a budget. Manage your cash flows well, directing your money to both short-term and long-term savings. Someone who is financially stable has a good grip on their daily finances but has effectively anticipated the unexpected by saving for it ahead of time. For instance, imagine you are financially stable, and your lifestyle requires a car. A financially stable person won't be caught unprepared when the car fails to crank one morning. An emergency fund can help avoid busting your budget when the unpredictable happens. 

4. Absolute financial independence 

Total financial freedom is the goal of all your financial striving. Absolute financial independence means you will not have to work again to support yourself or your family... ever. You could become financially solvent for life with a combination of income streams that keeps your annual income north of your expected expenses. 

There’s not usually a magic path to retiring early. The most reliable path to financial independence for most folks takes time. Building a balanced portfolio of stocks, mutual funds, bonds, and similar long-term investments is the best way to increase your wealth level until you have the freedom to retire. 

The path to financial freedom starts here

No matter where your finances stand today, you can start climbing the steps to financial freedom. Plus, you can pass this freedom on to your kids by teaching them how to earn, budget, spend, and save at a young age. If you could use a refresher (or introduction), check out our Learning Center, which has helpful articles on personal finances and more.