What is Financial Freedom?

This is the first in a three-part series of in-depth articles on how to achieve Financial Freedom. It will help you to take on the optimal mindset for liberating yourself, financially. The second article explains how to prepare yourself to become Financially Free. Finally, the third article shows how to achieve this freedom naturally and successfully.

What do the words, “Financial Freedom” mean to you? Your answer to this question depends on your money mindset, and your money mindset has an enormous impact on how much money you have. This article identifies nine money mindsets, and one in particular that satisfies more definitions of freedom than any other.

The 9 mindsets in this article are very general, but they ring true for many people. They are presented in the order that most people adopt them growing up. We all have remnants of many of them in our outlooks, and so it is rarely correct to simply say you have one or the other mindset. Rather, think of yourself as having more than one of these, with some guiding your attitude towards money more strongly than others.

The first step in becoming financially free is to choose and adopt a perspective on money that will bring you closer to it. This is not taking action, but rather the willingness to consider new (possibly more complex) ways of thinking about money. When your current situation is not working out, a new perspective may very well produce more desirable results. By becoming familiar with the following 9 money mindsets, you can choose to focus on the one that will benefit you the most.

Money Monks

When we’re young, money seems to have magical properties. As small children we often expect that our parents can magically produce it whenever necessary. Sometimes, they may tell us not to touch it because it might be (or is!) dirty. Together, such notions can lead to a sense that although it can help us satisfy our needs, we need to be protected from it. Rather than touch it, a Money Monk will try to remain spiritually pure by getting someone else, usually a caregiver, to handle it.

People become Money Monks innocently, though not everyone experiences this mindset as strongly as others. It seems to depend on when a person started having experiences with money; what one heard about it growing up; and what one thinks can be done with it. Ultimately, the money attitudes of peers and family members tend to determine how much we believe it affects our spiritual purity. Sometimes people hold religious convictions that reinforce this mindset.

To the Money Monk, financial freedom means not being tainted by it. Sadly, this can only last for short periods of time because money is everywhere. Eventually, perhaps at a coffee shop or the grocery store, the Money Monk will have to use money. When that happens, efforts to remain pure get frustrated. Money Monks often come to associate dark and negative emotions with money for this reason. In some people, this mindset lingers for life because they allow the fear of poverty to reinforce it over and over again in their daily lives. Fortunately, a lot of people grow out of it.

Emotional Spenders, Avoiders, and Hoarders

Money serves us when we have it to spend. With the power of credit, money also serves us when we can borrow and pay it later (for a cost). Yet if we owe it, it can also have power over us because then we have to get more to pay it back. Money can be a double-edged sword, yet it is clearly empowering for those who use it wisely. Because it can be used to acquire sustenance, there is a nourishing aspect to it as well. And because it can be fun to use, money can also be motivating.

To an Emotional Spender, financial freedom means having an endless supply of money to spend whenever the urge presents itself. These people tend to throw the best parties because they go all out. They tend to have large wardrobes, nifty gadgets, give generous tips, and have trouble paying the rent. Paycheques arrive just in time to buy a round for their friends, but not in time to prevent the new cell phone from being cut off. They often try to focus on earning more money so they won’t have to cut down on spending, and then go out and spend even more. But hey, these people are fun.

To an Avoider, financial freedom means never having to look at bills. So they never open them. Until the cable gets cut off. Then they pull out their checkbooks and pay all the bills at once. And are they ever relieved when they finish! They can now avoid the bills until they get caught driving with an expired insurance policy. When tipping, they might hide the money under a cup or a plate. Their mantra is, “out of sight; out of mind” which is why they hide their bills in drawers and shoeboxes rather than dealing with them promptly. They would rather let the bills pay themselves. But hey, at least they won’t pressure you to pay them back that $5 they loaned you.

To a Hoarder, financial freedom means having enough money tomorrow. The cost of something is money that could still be in his or her pocket if only it doesn’t get spent. Often, thrift will be more important than quality or emotional sentiment to a Hoarder. Even though they are diligent about paying their bills and covering their expenses, they are more likely to focus on cutting costs and dodging risks than enjoying the money they have. Somehow, there is never enough money even though their bank accounts are generally healthy and credit rating is good. When Hoarders visit restaurants, they feel a need to divide up the bill right down to the penny. Sometimes they will carry a calculator specifically for this purpose. They tend to question leaving even a minimal tip, the size of which may take longer to debate that it did to eat the meal. But hey, at least you know they can afford their share of the bill.

All three of these money mindsets tend to lead to overwhelming situations. The Emotional Spender eventually gets overwhelmed by how much effort it takes to keep up with eviction notices and ever-expanding debt. The Avoider is eventually overwhelmed by the consequences of pretending the bills don’t exist. And the Hoarder is eventually overwhelmed by his or her own lack of security and diminished sense of self-worth.

People with these mindsets often get stuck in a cycle of innocence and pain. When one (e.g. Emotional Spending) doesn’t work, they try switching to another one (e.g. Avoiding) with disastrous consequences. Although it may seem natural to resent money out of frustration from not having a lasting or workable solution to financial problems, it is just as natural to realize that money can be liberating if you manage it well. Still, it can be very difficult for someone with one of these mindsets to admit (or even recognize) their skills need improvement. They may simply be unable to perceive other mindsets, or they may find that other mindsets don’t serve their egos as effectively.

The Hoarder needs to learn the benefits of buying for quality, and how to find enjoyment in being generous; the Emotional Spender needs to learn how to get emotional well-being from preserving wealth, and find enjoyment in using it towards achieving long-term goals; and the Avoider needs to learn to deal with money matters as they come up. In other words, the key to having power over money is having the self-discipline to use it to your benefit over time. The Avoider, the Hoarder, and the Emotional Spender are all focused on satisfying immediate needs when they choose to avoid, hoard, or spend.

The inability or unwillingness to plan for the long-term use of money towards personal well-being; caring for others; or the enjoyment of life can cause people to become stuck in any of these three mindsets. When a person learns that money can be used to nurture without perverting; empower without punishing; and motivate without enslaving, that person gains a new level of insight and these three mindsets can be outgrown.

Employees

One nice thing about being an employee is getting a steady paycheck. It is so much easier to plan for the future when you know how much money is coming in. It is much safer to put something on a credit card when you have enough Cash Flow to cover the interest payments. And it helps provide a rhythm to life where one can pay the bills on a regular basis, and (hopefully) leave time to enjoy a few things money can’t buy.

For people with employee mindsets, financial freedom means having the security of a regular paycheck. It means having money to pay the bills, and perks that pay for luxuries. That’s why they like to get benefits such as medical or dental insurance, access to company cars, and employee discounts. Unions can sound like a good idea to employees when they feel like they have little or no power in the workplace, and pensions are popular because they are meant to reward years of loyalty and service. Employees are happiest when they believe their jobs serve a higher purpose, know the right way to do things, and can make sacrifices for their honor. They like to know their place, play by the rules, and hope to be rewarded with recognition, promotions, and bonuses when they do good work.

Unfortunately, the kinds of rewards that employees opt for are often red herrings. For example, pension plans tend have appeal for employees due to their incentives for staying with the company. Pension fund managers have discovered that retired workers live 2 less years for every year they work after age 55. By age 65 and depending on where they live employees who retire are only expected to live to age 67 (male) and age 69 (female). If they retire at 55, men tend to live to be 77 and women 82. But because employees expect to be rewarded for loyalty and service, pension funds offer graduated incentive plans to keep working after age 55. Not every pension is like this, but it is a real-life example (from Boeing) of what employees are willing to sacrifice: It seems they are often willing (in effect) to cut their lives short in order to get financial security for a little while at the end, and respect for keeping their jobs.

The typical entry level employee gets few (or no) benefits, low paychecks, and a sense of being disposable. This leads to an employment arrangement wherein the employee does just enough not to get fired, and the employer pays just enough so the employee doesn’t quit. Obviously, employees in this situation are not going to be very happy about going to work. But at least they have jobs.

At the other end of the spectrum, there are employees who have high-paying jobs with plenty of perks and benefits. They are typically willing to sacrifice their families, their health, or even their self-respect to make that bonus or get the coveted title of “rainmaker”. They are loyal, committed, and demonstrably competent. They take orders well, understand the rules, and occasionally have constructive suggestions. These employees usually get put in charge of the employees mentioned in the previous paragraph, and are often expected to train them. They usually like being ranked higher than others, and are willing to enforce social hierarchies. People below them may or may not like them, but at least they get to keep their jobs as long as they please their bosses.

These days, job security is mostly a myth. Employees sometimes get downsized or shuffled out. They may lose a job because there are fewer positions to fill and the least competent employees are being let go. This happens quite regularly as a result of business and economic cycles. Those employees who were just holding onto jobs in order to pay the bills are often the first to go because they are less willing to work as hard or as well as other employees. Social assistance and employment insurance programs are intended to help people already committed to the employee mindset.

Independently Self-Employed

There are times when having a job can make a person feel like an automaton. And while the stability and security of a regular paycheck can make life a little easier, a growing number of people would rather not have to look to employers for work. These people are quick to point out that the word job is an acronym that stands for ‘Just Over Broke’. They are eminently practical, and refuse to buy into the myth of job security. Being masters of their own destiny is far more important to them than perks and benefits. Besides (they point out) those perks and benefits are coming off your paycheck anyway. Why not be the one who controls that money, instead of your boss?

Financial freedom means not having a boss to these people. It means making your own decisions and serving your customers in the way you think best. It also means taking responsibility for one’s final output. In order to get repeat customers, the Independently Self-Employed person must cater to their needs and deliver on his or her promises. So while the boss is out of the picture in a hierarchical sense, the customer takes the boss’s place. The connection to the customer is often much more direct than for Employees.

Often, people who are tired of looking for work or have recently lost a job will attempt to go this route. In fact, since 1972 the number of Independently Self-Employed people in Canada and the United States has grown from an all-time historical low to being surprisingly common. This has corresponded with the rise in the number of specialized knowledge workers; increased numbers of women in the workforce; corporate downsizing; and governmental reorganization. A person who has been put out of work; who craves independence over stability; or simply can no longer buy into the employee mindset, is likely to entertain the idea of becoming self-employed.

Independent Self-Employment is a strategy that is shunned by the school system because it means stepping out of the hierarchically structured world of academics. It is not favored by churches and religious organizations because it means being willing to question authority and make decisions for oneself. At times it can fly in the face of traditions, and create a sense of insecurity when it comes to child-rearing. It is not an easy social path to take, and yet people who take it commonly report that they are happier and more fulfilled by their work than employees.

Less people succeed at Independent Self-Employment than at being an employee. Many find that it is much harder to succeed financially without the benefits of a regular paycheck. But others find that they have more time and money than they did while working at a job. They also find that personal habits, especially regarding health, have a magnified effect on their financial situations. Without the structure a job provides, they go through periods of floundering mixed with periods of clarity and focus. The successful ones spend more time focused than floundering, whereas the rest tend to flounder until they have no choice but to go back to having a job. Independent Self-Employment requires a clear vision of what you want to do, persistence, and knowledge of who will pay you to do it.

Team-Oriented Self-Employed

These days, specialized knowledge is often needed to complete projects. But once a project is done, the person with the specialized knowledge is no longer needed. Ad-hoc teams are often formed to complete projects, and the people who get selected for the teams must be able to collaborate effectively. There is rising demand for people who can fill roles on such temporary teams in today’s global economy, and they do not fit the profile of employees in the traditional sense. They move on to other projects, with other teammates and customers, when projects are complete. They are simultaneously team-oriented and self-employed.

To the Team-Oriented Self-Employed person, financial freedom means having options available to work on new projects that pay. They want to work with other talented, specialized people. It is often (but not always) a prerequisite for these people to be independently Self-Employed first, and have proven abilities in there chosen field. They also need to be able to work well with others; participate constructively in group decision-making processes; respect the value of what others contribute; and be willing to share the in the spoils of a team effort.

People with this mindset tend to be highly adaptive and enjoy creating connections. To them, independence is a prerequisite for interdependence. Alone, they are subject to the same challenges as the Independently Self-Employed. But as part of a network, they are more robust and can respond to opportunities more effectively and profitably. As a result, they tend to make more money; take longer vacations; and spend more time with their children than either Employees or the Independently Self-Employed. They also tend to be more interesting conversationalists.

Business Owners

The main drawback that employment and self-employment have in common is what happens when you get sick? When employees and self-employed people are unable to work, they stop making money. For a Business Owner, that sounds like insanity. Money should keep coming in whether one is working or not, especially when one gets old! Business Owners set out to establish cash flow that is independent of their presence.

To the Business Owner, financial freedom is the ability to take time off and still have money coming in. So they set up self-running systems for that earn money for them. Those systems are called businesses, and usually take the form of corporations. It has been said that you are not truly a Business Owner until you can go away on vacation for several weeks, and when you come back your business is running better than if you had stayed home. Sanity, to a Business Owner, is working towards this goal.

Business owners don’t work in businesses, they work on them. Yes, they are very likely to be able to perform every task in a small business. But they do not see performing those tasks as an effective use of their time. They would rather work out how to perform those tasks and then get a person or a machine to carry them out. Once the system is up and running, they find incremental ways to keep making it better.

Some business owners set out to leave a legacy. They are interested in taking the profits from their businesses and putting them towards worthy causes. Examples include Paul Newman’s line of salad dressings; the line of fine cheeses and wines called “Monks Own” started by Sir Murray McCans; and the Bill and Linda Gates foundation.

The Holy Grail for the Business Owner is to develop a business to the point where it can be sold. Some businesses are sold on the stock market; some are sold to other businesspeople. What they all have in common is that they are systems that not only serve customers’ needs, but also produce money whether the owner is there or not.

Investors

Investors are interested in owning pieces of businesses. Owning a business can be profitable, but Investors are not usually interested in starting, running, or working on a business. They are more interested in finding ways to get their money to grow. In this sense, Investors are more like farmers than Business Owners. The money they put into a business is like a seed that they hope will grow and produce fruits.

To an investor, financial freedom is a technical term. It is a state of being where your income from investments exceeds your expenses. In other words, your money needs to be planted where it will grow and produce enough fruits for you to live comfortably. Of all the meanings people ascribe to financial freedom, this is the one that is actually based on something that gives you freedom. It meets more of the various definitions of freedom than any other mindset, and provides a person with a clear goal.

The Investor’s definition of financial freedom is easy for many people to understand in principle, but terrifying in practice. Lack of knowledge, moral shackles, fear of poverty, and low self-esteem can all play roles in the mistakes people make while learning to invest. Nonetheless, investing is a skill and finance is a technology, so most people can learn to apply them effectively. It’s just a matter of putting your mind to it, and letting go of the mindsets that have held you back.

Choosing Your Money Mindset Wisely

Money Monks find it exceedingly difficult to achieve financial freedom because they must maintain the illusion that money is somehow beneath them, all the while having to use it. Emotional Spenders are constantly destroying their financial freedom because they spend everything they’ve got, and more. Avoiders miss the ball on financial freedom because they refuse to learn how to get their money to work for them. Hoarders are trapped by the fear of poverty, and so never risk losing what they’ve squirreled away.

Employees cannot stay employees and achieve financial freedom because they have to go to work in order to get paid. Self-Employed people, whether Team-Oriented or Independent, are always looking for the next contract and so they find financial freedom to be fleeting. Business Owners are in a similar situation until their businesses can run themselves.

But when a business runs itself and pays the owner enough to live comfortably without working, the Business Owner attains financial freedom. Investors develop skills and expertise in making money grow and bear fruit, which makes achieving financial freedom more likely for them in the long run than any of the other mindsets.

Not every mindset will result in a long, healthy life of freedom. The mindsets you adopt and apply in your own life are your choice. How your financial situation changes over time tells you how well your money mindset is serving you.

* This is the first in a three-part series on achieving financial freedom. The second article can be found here.

Bibliography

The following materials can help you to enjoy the benefits of a healthier Money Mindset, as well as understand the impact your mindset has on your family and community.

Books
- Rich Dad, Poor Dad
- Cashflow Quadrant: Rich Dad’s Guide to Financial Freedom
- Get Smarter: Life and Business Lessons
- Secrets of the Millionaire Mind: Mastering the Inner Game of Wealth
- The Millionaire Mind
- The Millionaire Next Door
- The Richest Man in Babylon
- Who Moved My Cheese?: An Amazing Way to Deal with Change in Your Work and in Your Life

Documentary and Other Video
- Richard St John – Success is a continuous journey (video, free online)
- Buffett and Gates Go Back to School (DVD for purchase)
- Dan Ariely asks, Are we in control of our own decisions? (video, free online)
- Nobelist Daniel Kahneman on Behavioral Economics (video, free online)
- Philip Zimbardo prescribes a healthy take on time (video, free online)
- Philip Zimbardo: The Time Paradox (video, free online)
- Robert Shiller’s Full Lecture On Behavioral Finance (video, free online)
- Dan Ariely on our buggy moral code (video, free online)
- The Drunkard’s Walk: Leonard Mlodinow (video, free online)
- Stuart Wilde – Mastery Of Money (video, free online)

Audio
- The Science Of Gullibility: Why We Get Duped (free online)
- Using Psychology To Save You From Yourself (free online)