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Financial Freedom vs. Financial Peace

October 11, 2022
Angelica Carrillo

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Financial Freedom vs Financial Peace
Financial Freedom vs. Financial Peace

We’ve heard about financial freedom being the overachiever’s millennial bucket list item.  From side hustles to venture-backed startups, we subscribe and strive for achieving financial freedom.

But sometimes we are not aware of the cost we are paying for hustling harder. The all-nighters, the coffee quantities to the vein, costs we are willing in the short term to endure, especially in your twenties.

In the long term, it costs too much to get ahead at the expense of our own health. The cost of we cannot see, our own mental health. Stressing about money, net worth, achieving a new shinier bigger money goal, work and hustle equal stress. When will it be enough? When you will be actually free? What’s your number? There’s a financial freedom formula and we are sharing it here.

Financial Freedom

A simple calculation you can use is this

Financial Freedom Formula: Annual Expenses x Withdrawal Rate

Annual Expenses to include:

  • Housing: mortgage or rent, home insurance, electricity, utilities, cleaning services.
  • Transportation: car expenses, public transportation, car maintenance, gas, parking, flights
  • Meals: groceries, eating out, snacks
  • Health: insurance, annual checkups, lab work, hygiene products, wellness, vitamins, workout classes, and gym memberships
  • “Fun” stuff: hobbies, travel, experiences, dog or pets expenses
  • Beauty: Hair, nails or skincare procedures, clothes, shoes
  • Education: student loans, Masters or MBA loans, learning, courses
  • Tech: annual renovation of tech stack, tools, software

Now let’s look at the withdrawal rate.

Each year you are spending is considered a withdrawal. The rate is calculated A healthy withdrawal rate is around 3% to 4% according to FIRE financial independence, retire early enthusiasts. Here you will choose the rate for you. 

1 ÷ 4% = 25

1 ÷ 3% = 33.3

If you choose 4% then you will multiply your annual expenses x25, if you choose your withdrawal rate to 3% then you will multiply your annual expenses x33.

Let’s look at an example:

Let’s say your annual expenses are 50,000 USD. And you choose a 4% rate.

Following our financial freedom formula that means:

50,000 x 25 = 1,000,000 USD 

That means that in order to become financially free you need 1 million USD, that’s your number.

Let’s say that right now that number looks overwhelming. Especially when healing our bodies, financial freedom, starting a business, and side hustle could feel like way too much to handle and it’s okay, but how to plan for the first step? Here is where financial peace comes.

Financial Peace

Financial Peace is when you are earning enough money to have an OK life, covering your expenses, and putting yourself first. This sounds like settling, but it’s not. Let me explain.

Financial peace is a period to invest in yourself and start making a habit to invest. If you are in debt or in a position where your Financial Freedom seems far away, then taking one first step into healing your financial habits can be a great place to start.

Here are some steps to take in order to get closer to financial peace.

  1. Get clear where you are. List all your debt, expenses, income, and salary to get clear where you are. No judgment, everything can change and you are taking the first step.
  2. Plan for non-stress income streams. Brainstorm a list of skills and abilities. Evaluate your job or income source. Negotiate your salary.
  3. Start a solo 401K and don’t overcomplicate investing. Investing in an index fund that tracks the overall stock market. We are going for peace, not stress here. 
  4. Plan to save for a 6-month expenses emergency fund. And open a High Yielding Savings Account to keep your emergency fund.
  5. Lower the stakes, not every job has to be the end-all-be-all career move. Getting a job or freelancing that won’t be your ultimate calling, but covers your expenses, supports a healthy lifestyle, and allows you to save for your emergency fund is a good option.

Back to our example, if our annual expenses are 50,000 USD. The goal for financial peace is just half of that 25,000 USD. This number in comparison to the 1,000,000 from the Taking it back to our financial freedom formula looks much more achievable. If the financial freedom pursuit has you overworked and burnout then looking at financial peace as your goal can help redefine that.

There’s nothing wrong with pursuing financial peace instead of financial freedom.

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Fueled by passion, and too much coffee. I'm here to help ambitious founders, and entrepreneurs create their perfect business. Grow your business, your network and your net worth.

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Hi! I'm Angie and I'm here to help women who are ambitious create their perfect business and grow a bigger network and net worth. I run a blog where I share my tips on business growth, investing, travel tips, feminism, and life in general.

Fueled by passion, and a little too much coffee.
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About angie
Fueled by passion, and too much coffee. I'm here to help ambitious founders,  and entrepreneurs create their perfect business. Grow your business, your network and your net worth.
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