FOR THREE YEARS, I lived on Roosevelt Island, in the middle of New York City’s East River. It’s a wonderful place—a quiet, friendly, low-crime oasis in the middle of one of the world’s largest, most frenetic cities.
During my time there, the Franklin D. Roosevelt Four Freedoms Park opened on the island’s southern tip. The park is named after a 1941 FDR speech, where he articulated “four essential human freedoms”: freedom of speech, of worship, from fear and from want.
FDR’s speech was inspiring. Managing money is altogether more prosaic. Still, I’d argue that our pursuit of money is also about a hunger for freedom—with five dimensions:
1. Freedom from fear. We all want a sense of financial security—and yet all too many folks lead fragile financial lives. If our income barely covers our expenses, we may be okay if it’s a typical month. But so few months turn out to be typical.
We face frequent financial shocks, some large, some small. The car breaks down. The roof needs to be replaced. We lose our job. If we have scant savings and little financial breathing room in our monthly budget, such shocks can leave us scrambling to cover the bills and send our anxiety soaring.
As I mentioned last week, a Consumer Financial Protection Bureau study found that the sum we keep in liquid savings—meaning cash, checking accounts and savings accounts—has a huge impact on financial well-being. The price to escape much of our financial fear? All it may take is a few thousand dollars tucked away in the bank.
2. Freedom from financial dependence. We’re all dependent on other folks. Even billionaires need others to produce the goods and services they consume, to buy the investments they sell and to purchase the products their businesses make. But there are degrees of financial dependence—and the more dependent we are, the shakier our financial life can seem. I don’t like being financially dependent on others, and I can’t imagine many do.
Don’t get me wrong: When the day comes, I won’t have any qualms about claiming my Social Security check. But I would never want to be entirely dependent on a government program, a charity or family members.
Even working for others strikes me as a form of financial dependence, though it’s one most of us can’t avoid. It’s terrible to feel our livelihood hinges on a capricious boss. True, if we’re unhappy, we can always take our labor elsewhere. But switching employers is a costly, anxiety-inducing business.
3. Freedom from financial obligations. How much of your paycheck or your retirement income is spoken for, even before the money hits your bank account? Just as we can’t avoid all dependence on others, we can’t escape all financial obligations. But we should strive to ensure we get to call the shots on the bulk of our income, in part so we have plenty of money for discretionary spending—typically the spending that brings the greatest happiness.
That means minimizing our fixed monthly costs, such as mortgage or rent, car payments, cable, utilities, insurance premiums and streaming services. The lower these fixed costs, the more financial wiggle-room we’ll have. The key: Avoid excessive debt—and avoid committing to monthly costs that deliver little happiness.
4. Freedom from our own wants. Why do we end up with overwhelming monthly costs? It may be misfortune: We lose our job, get hit with big medical bills or need to help a family member. It may be circumstance: We’re new to the workforce, repaying students loans and living on a modest income in a high-cost city.
But sometimes, it’s our own miswanting. Instead of developing a well-calibrated sense of what constitutes enough, we foolishly hanker after a lifestyle we can’t afford and likely won’t make us happy. One result: We often end up taking on too much debt. When we do that, we get the fleeting pleasure of giving into today’s desires—but saddle our future self with monthly debt payments that will likely cause ongoing unhappiness.
5. Freedom to use our time as we wish. While we should minimize our financial obligations and our financial dependence on others, we should maximize our financial independence. How so? By making our money work for us.
Every dollar invested in the financial markets has the potential to grow into even more dollars—with little or no effort required on our part. Indeed, the more money we have at work in the markets, the less income we need to generate by working for others. Fingers crossed, we’ll eventually have enough dollars to stop working entirely, if that’s what we want, at which point we have the freedom to spend our days as we wish.