What is True Financial Freedom and Why is Financial Literacy so Important to Get There

Dr. Joel J. Napeñas

Seventy percent of lottery winners end up broke within seven years. Even worse, a number of winners die horribly or witness those close to them suffer.  Statistics suggest that up to 78% of NFL players go bankrupt or fall into severe financial stress within just two years of retirement. For basketball players, the figures are only slightly better at 60% of financial ruin within five years of retirement.  

What is the common denominator among all these folks?  Lack of financial literacy.

For the past couple of years, I have given a series of financial literacy webinars to my own and other residents and students at dental schools and programs across the US and Canada.  Why?  Because I am passionate about the topic of personal finance. I do not want them to make the same mistakes that many of my counterparts have made that have left them feeling trapped, bored, unfulfilled or even worse, burned out in their career and practice.  

We would be lying to ourselves if we said that the only reason we are going to work is simply for the pure joy of what we do.  No.  We are going to work out of necessity.  We have to pay the bills to fulfill our basic needs and provide for our families.  If you are fortunate, then you are earning enough to live a comfortable lifestyle, do fun things and make memories with loved ones, contribute and donate to others’, and save and invest.

However, if you do not learn the basic principles of financial literacy, then you are letting the tail wag the dog.  The financial decisions and systems you have (or lack) dictate what you will have to do and how much time you will have to spend at your work to do it.  I previously covered the average dentists’ value of their time as a wage earner and how the biggest ticket items (student debt, home) cost their future selves in terms of time having to be at work or in their job, which is years (and even decades).

As long as you have financial obligations in order to cover your needs (or desires), and to cover those obligations you have to earn income that is directly correlated to your time and effort at your work, then you are not financially free.

Financial freedom = Time freedom.  This means that you can cover your needs (or desires) without being obligated to spend your time and effort to do so.  When your financial obligations are completely met by income that does not directly correlate to your time and effort, then you are financially free.

Debt and expense reduction

So how do you achieve that?  One is to decrease your financial obligations, by reducing your debt and expenses.  First step is by paying off completely or paying down your debt.  The second is by reducing expenses and not taking on more (or minimizing) debt to fund your lifestyle.  For example, this may entail holding off on buying that home or car that we are often pressured (by society or others’) to do.  

That is usually the first step and the one that most individuals (of all income levels) are struggling and failing at.  It is the premise of the often maligned financial guru Dave Ramsay’s teachings.  It is also the basis of the fast FIRE (Financial Independent, Retire Early) movement, of living a life in frugality to have the least financial obligations.

Increased Income

But most of us do not want to be frugal.  We want to enjoy our lives and have our efforts rewarded with a combination of nicer things and experiences.  The first thing most do is find ways to earn more, and increase their income.  But again, as long as the earning is dependent upon your time and effort, it is not financial freedom.  Also for most, increased income usually is accompanied by taking on increased expenses and debt.

Nest Egg Build Up and Winning the Lottery

Others’ hope that they can either build a nest egg and/or dream of a big financial windfall that they can then use to fund their chosen lifestyle.  However as long as there is no income generated from that nest egg, it is finite and can be depleted. 

Therefore earning high income, having the big nest egg, or even winning the lottery is not true financial freedom.  If financial freedom equals time freedom, the way to achieve it is to invest in and accumulate assets that generate enough cash flow passively (e.g.:  that is not directly correlated to your time and effort) to cover your financial obligations to meet your basic needs, and hopefully your desires and beyond.

The minority of lottery winners, pro athletes and entertainers who are truly financially free are financially literate, and use their windfalls to invest in assets that generate cash flow, like businesses and real estate.  They do so with both cash flow and appreciation as their objectives. They then live off of the income generated passively to fund their lifestyle.

Conclusions

Time is the most valuable asset that we have.  Once it is spent, it is lost forever.  The time spent in our work requires spending this most valuable asset in order to earn money.  But why do we earn money?  In order to fulfill our basic needs and wants, and hopefully our desires and to contribute and give to others.

In the end, our jobs, careers and businesses are a means to an end, the end being making a living and earning money.  And how you conduct your personal finances dictates what you do, where you do it, with whom you do it and most importantly, how much you have to do it.  

Financial freedom equals Time freedom.  When our time is not spent in order to earn money to fulfill our obligations and desires, then we are financially free.  To get there:

1. Be Financially Literate

2. Determine Your Financial Freedom Number by finding out the amount to fulfill your obligations to meet your basic needs and lifestyle.

3. Use your income and nest egg to accumulate assets that will in turn generate income passively that is not directly related to your time and effort.

4. Once that passive income matches your Financial Freedom Number, you are financially free.

Once you are financially free, then you can Do What You Want, Where You Want, With Whom You Want and As Much as You Want.  

Only then are you the true steward of, and completely in control of the most valuable asset of them all… your TIME.

Dr. Napeñas, a practicing academic dental specialist in Oral Medicine, is founder and managing partner of 5DH Partners, a real estate investing firm that educates and helps dentists and other professionals generate passive income and build wealth through investing in real estate.

Want to learn more about investing in real estate without being a landlord?

Subscribe to our email newsletter here.

Set up a time to talk with us personally here.

Download a copy of our free e-book here to learn how dentists and other professionals can replace their income by passively investing in real estate.

Visit our Facebook and LinkedIn page, or join our newsletter mailing list for articles, updates and opportunities.