Financial Freedom Is More Than A Number

Source: author prompt on ChatGPT

Financial Freedom Is More Than A Number

Eight of us meet every week online for a mastermind. Business owners and senior managers mostly, a group that chats about the mundane sometimes but mostly explores the elevated. In recent weeks we circled one question: what does freedom mean? The answers ranged wider than I expected. Healthy mobility. Travel with family. Time to give to causes that matter but don't pay. And of course, the conversation included financial freedom. Nearly everyone in the group, like nearly everyone beyond it, defined financial freedom the same way,  having a lot of money.

I learned a different definition years ago.

For fourteen years, I taught at the Van Tharp Institute, where financial freedom was an aspiration, sure, but it was also a three-day workshop. Students signed up and we taught the course at least once each year. Dr. Van Tharp had spent decades studying what separates successful investors from everyone else, and his definition of financial freedom differed from the one most people carry around.

Van wanted people to succeed in the markets. Beyond that though, he wanted something bigger for them. He wanted them to experience freedom, to live the kind of life that opens up when income from their investments covers their expenses and working becomes a choice rather than a requirement to pay the bills.

Van defined financial freedom not as a pile of money but as a unique relationship between income and expenses. Money and wealth can become a burden or it can provide freedom. The amount matters, but not nearly as much as how someone positions their money. What kind of work do you have your money doing?

That question changes everything, including what counts as an asset - which surprises most people the first time they hear it.

Let’s start with the definitions. Van's model has a liability taking money from you. An asset puts money in your pocket.

That probably sounds simple enough until you apply it to the biggest holding most of us own – our house. Asset, right? Of course. But look at the direction of the monthly cash flow: mortgage, taxes, insurance, utilities. Then the capital expenses arrive slowly and suddenly: the 30 year roof that doesn’t quite last that long or the water heater that dies on the day after Christmas (happened to me). A house requires money to keep, month after month, year after year. For Van, a house counted as a liability, not an asset.

In Van’s model, an asset means any holding that produces revenue or income. Dividend-paying stocks offer a familiar example. Those typically yield low returns but they count because they throw off cash. A growth stock sits in an interesting third category. It may make great gains for years, yet without a systematic way to pull money out, it produces no income. Not a liability, but not yet working for you either. Financial freedom focuses exclusively on sufficient passive income to cover living expenses. 

The math runs simply enough. Someone with a $10,000-per-month lifestyle requires $10,000 or more per month in passive income to count as financially free. And passive, in this model, means the income demands no more than an hour or two of attention per day. That’s not a hard definition, just a guideline. The real requirement: the income demands less than full-time attention.

Consider two business owners. Owner A works 70-80 hours per week and earns $600,000 a year. A nice income, for sure, but none of that income comes passively. On the other hand, owner B earns $60,000 a year and works a few hours a week because a well-paid manager actually runs the business. Owner B’s income counts as passive and per hour worked, B out-earns A by a wide margin. A could become Owner B by hiring a great management team thereby freeing up sixty plus hours a week. That would allow for more strategic thinking about how to grow the business (and their passive income) or it would allow them time to follow other passions.

Early on in his financial freedom experimenting, Van believed in completely passive income, the kind requiring zero attention. Several lessons, some of them expensive, taught him otherwise. Truly passive income doesn't exist. For someone who hires a management company, real estate still demands some hands-on time. Even US Treasuries require attention like managing the ladder and paying attention to prices given our country's debt load. Everything requires something. The question is how much.

So why pursue this at all? The obvious answer says security. Van saw a bigger payoff.

He believed the greatest return on financial freedom comes as personal freedom, particularly the freedom to create. People can certainly exercise creativity with a full-time job and plenty do. But freeing up most of the week opens new levels of creativity and exploration, the kind that rarely fit into evenings and weekends.

And here's where the idea compounds. That recovered time and creativity can flow back into building some more passive income. Income covering expenses means financial freedom. Income covering expenses several times over means something beyond freedom, a level of financial security that removes money from your list of concerns almost entirely and that can provide a legacy for family members.

The idea for this article arrived right after I sent a note to SmartSignal subscribers yesterday. Volatility has clearly increased over the last few trading days, and rising volatility often precedes downturns. This morning's inflation news won't help market psychology either. For investors without a systematic approach, days like these tend to induce some anxiety. Is this the turn? Should I get ready for a dip to buy? Should I have sold on the big down day last Friday or reduce exposure now?

After sending that note last night, I noticed something. No concern. No worry. The SmartSignal and other systematic approaches respond to market conditions so the rules may move us toward a more defensive position if the market meets certain conditions in the days ahead. Nobody has to predict what the market will do. We simply follow rules built on market history and repeating patterns with favorable probabilities.

That counts as real freedom to me, especially at this stage. My portfolio sits in the red zone, those years near retirement when a deep downturn can carry consequences that take longer to recover from than I might want to keep working. Investors in their twenties or thirties are blessed with decades of flexibility. Those of us closer to retirement have different kinds of blessings, but not that one.

So when my mastermind group returns to the question of what freedom looks like, I will have another answer. Rather than a number to reach, freedom is a structure that watches the markets so I can watch everything else.

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Important Disclosures

This article is for educational purposes only and does not constitute investment advice or a recommendation to buy or sell any security. Investing involves substantial risk, and past performance does not guarantee future results. Mentions of any system or methodology are illustrative, not advisory.

Full Disclaimers Statement on www.gginvestor.com.