Financial Security vs Financial Freedom: What's the Difference?

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For those who grew up financially insecure, confidently having short-term needs covered might be your ultimate goal. If you generate enough income to easily afford your home and household necessities, having extra money left over is the cherry on top.

However, while some view money as a means to pay for necessities, others have a different perspective. By planning ahead and looking toward long-term financial goals, it’s possible to create income in a way that will support your future even if your vision for the future changes as the years go by.

Having the ability to pivot without worrying about financial support is where financial security becomes financial freedom.

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Financial security is being 'in a good place'

Financial security is nothing to sneer at. It’s extremely comforting to have the peace of mind that comes with not worrying about whether there will be enough money at the end of the pay period to afford rent, food or utilities.

In short, financial security typically means that you are confident in your finances for immediate needs and the short-term future.

Some people are able to become financially secure not by pulling in a large paycheck but rather through careful planning and budgeting. Those with modest incomes and mindful planning might feel financially secure because they have action plans for potential hardships, such as job loss and health incidents.

However, financial security can remain elusive even for high-wage earners if one has poor money habits. Overspending can quickly drain resources. Excess funds sitting in non-interest-bearing accounts will only depreciate over time with inflation. Not keeping an emergency fund can require high-interest loans to cover necessities when hardships occur.

It’s very difficult to obtain financial security if you don’t have a clear picture of your needs and spending limits. If you aren’t tracking milestones for savings and retirement considerations, you’re unlikely to have confidence in your present financial habits.

Financial freedom is flexibility

To truly gain financial freedom, you should have enough funds to support yourself regardless of where you choose to live or how you spend your time. This doesn’t necessarily mean that those with financial freedom always have more money than those who only have financial security.

For example, a thoracic surgeon working full time in the southern region of the United States could realistically pull in $900,000 or more per year.

Unless that person has very irresponsible spending habits, it’s likely that $900,000 per year is enough for financial security. But to keep that security, the surgeon needs to continue doing a specific job at a specific location.

In contrast, let’s say there’s a woman in her late 40s who made savvy real estate investments throughout her 20s and 30s and is now able to generate a net real estate profit of $110,000 per year.

If she has chosen properties in a variety of locations with enough portfolio diversity to weather market fluctuations, her real estate should be a stable source of income long into the future.

The best part in the second example is that the real estate investor has far greater flexibility than the surgeon due to the passive nature of her income generation. The surgeon needs to be at a specific location on specific days to generate income. Assuming no other income streams have been established, the surgeon is required to work and/or reside near areas with surgery centers.

So when it comes to financial freedom, more money isn’t always better. It’s important to have enough money to support your present and future in addition to the availability of that money regardless of your location or daily routine.

Thrive instead of survive

While money certainly isn’t everything a person needs to be happy, it has a couple of very important functions.

Being financially secure means that your money gives you the ability to survive and take care of your needs. Being financially free means that your money is sufficient and flexible enough to support the life you want to live.

Disclaimer

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.