This is when you have enough income from sources other than your regular job to pay for your current lifestyle.
I guess a simple definition is that stage of your life where you no longer need to worry about money.
The problem is that everything is a matter of degrees. What is ‘financial freedom’ for one person will not be perceived as the same for another.
Some people will think that they are only financially free when they can live a luxurious lifestyle without having to ‘work’. Of course, the meaning of ‘work’ can also be vague.
If you’ve found your passion and you’re doing what you want to do and you’re making money doing it, it suddenly doesn’t classify as work for you, but you still need to do it to make the money to live. So this isn’t really financial freedom.
True financial freedom means that you don’t have to ‘earn’ money yourself.
Let’s say you need £1000 per month to pay all your bills and leave a little for entertainment purposes. If you were to then rent a room in your house for £1000 per month, would you be financially free? (Let us not consider tax and maintenance issues here.)
I think the problem here is that your tenant won’t be there forever and for true financial freedom you need pretty solid guarantees that the money coming in is for as long as you need it. Also, situations change. If you needed to move house, you would need to find another tenant to maintain your rental income.
Some sources of income are quite predictable and can be used to calculate your total “passive” income. These can be stock dividends or interest on money in a bank account. Reaching the stage of true financial freedom is getting your passive income to be an amount greater than your expenses.
The problem is that if you spend part of the money in the bank account or sell the shares, this income would change. So passive income based on an investment, like renting out a portion of your home or stocks, depends on you treating that money as a permanent investment and not available for use. Ideally, true passive income should not include the permanent investment of your money, it should be something that you set up and run at little or no cost and make money.
Other sources of passive income are very erratic and certainly not predictable. Book sales, money from the Google AdSense program where people pay you when ads on your website are clicked, or Premium Bonus awards are all unpredictable examples of passive income.
So ‘financial freedom’ means different things to different people. Sometimes it is very easy to become financially free, but usually it is quite difficult and can take a long time. Most of us become financially free by accident when we get older and inherit money.
Either way, you should focus on those things that make you money without having to earn it, and preferably without tying up any of your capital.