Do you need to be wealthy to be financially free?

Good news: you don’t have to be wealthy to achieve financial freedom. Bad news: in order to maintain it, you should live below your means.

Although the concepts of wealth and financial freedom are similar and we often treat them as synonyms, they mean completely different things. Wealth cannot be unambiguously defined, and it can only exist in comparison to others living more modestly. That is why wealth is a relative term, related to local financial standards. An entrepreneur from a small village near Sieradz does not feel so rich at a charity ball in Lodz, a bigger town. At a similar event in Warsaw he is even less comfortable, and he might not even be let in to a charity ball in Monte Carlo, Dubai or Moscow, because he is the only one who drove to the luxury hotel himself, without a chauffeur wearing a frock coat and white gloves.

Financial freedom is a completely different concept from wealth. Its definition is very precise, and our own financial needs are its point of reference. In order to say that you are financially free, you need to have a monthly supply of cash which at least equals the level of your monthly expenses. It has to come from a different source than your job, that is, from a passive source. The aim is to amass enough property to cover the normal needs of a financially free person or a family.

Wealth – as a relative concept – is something exclusive, belonging to the elites. Financial freedom, which is defined according to individual needs, is much more achievable. A teacher in a high school in a small town can be financially free, if he rents out two studios inherited from his grandparents, and his rental income is bigger than the cost of his modest life. Obviously, the standard of living of a financially free person who rents out 15 villas in the rich suburbs of a big city will be different. But both of these people are financially free, if only their rental income covers at least 100% of their normal monthly expenses necessary to maintain their existing living standards.

You can become a wealthy person by chance. You can win the lottery or find out that you have just inherited a fortune. In order to achieve financial freedom, however, you have to plan it. In this case, there is no place for randomness.

If you want to achieve financial freedom, you should start by fixing its limits because somebody who always wants more cannot be free. That is why everyone has to define their satisfactory living standard. What is more, you will always have to defend the defined limit. Against what? Against the eternal  temptation to improve your quality of life, and in reality, against the increase in the costs of maintaining your standard of living.

While defining financial freedom, the real financial needs constitute the point of reference. The concept of wealth, contrary to financial freedom, implies that the temptation to earn more is irresistible and practically endless, unless we fix its limit. In the definition of wealth, it is the comparison with others that becomes the benchmark.

Can a wealthy person be financially free? Yes, but it is not easily achievable. As rich people and their families are used to high costs of living, the bar is set high. How much do you have to earn from passive sources to cover mountainous needs? A huge villa in the best neighbourhood, an art collection, a deep-sea yacht, a holiday home at the seaside and a luxury apartment in Spain or in Dubai? There are many wealthy people who are – paradoxically – far from achieving financial freedom, because they have never determined the limits of their consumption. Plus they spend more than they earn.

Can poor people achieve financial freedom? Yes, but it is not easy either. First of all, they should have a place to live and be in and a stable job. They also have to gather a certain sum of money, which will be their own contribution, necessary to get a mortgage to buy their first property. Then for many years they have to be very self-disciplined. Otherwise, they will be tempted to elevate their living standards because of strong external stimuli or their own improving financial situation. In this way they will be able to get another mortgage in a few years’ time.

So, does it mean that average people are most predestined to achieve financial freedom? In a way, yes, provided that they can curb their consumption and consistently invest while purchasing new sources of passive income (property).

The next difference between wealth and financial freedom is related to their stability. There are some cases of rich people who lost their fortunes in various circumstances. Financial freedom, if it is built on a solid basis, that is on assets generating every month a stream of passive cash, will be eternal. A good example of this rule is the income from the sale of Michael Jackson’s music, image and biographies, which after his death reached even higher levels than when he was alive. Even though the King of Pop has not been active for 6 years.

In the end everything depends on your determination and the personal goal that your financial freedom should serve.

The good news is that you do not have to be rich to achieve financial freedom. The bad news is that in order to achieve financial freedom and then maintain it, you should always live below your means, and accept that you cannot spend everything that you earn. This attitude is not especially fashionable. Nowadays it is more fashionable to live beyond your means, on credit and on leasing, hoping for a bonus or a pay rise in the future.

Sławek Muturi
Author of five books and a blog fridomia.pl. The founder of two companies, Mzuri and Mzuri Investments (www.mzuri.pl), as well as crowdfunding investment trusts Mzuri CFI (www.mzuricfi.pl).