The Ultimate Guide to Financial Freedomby Scott Jeffrey
Like street vendors in New York City pitching fake Prada handbags in Time Square, credit card companies set up tables along South University Avenue in Ann Arbor.
Every September, the University of Michigan allowed these financial vendors to promote their brand of credit cards to students.
The cards were free. All you had to do was fill out an application, which they conveniently handed you on a clipboard. And in exchange, they gave you a cash-credit bonus for signing up—maybe $50 or $100, and some freebie, sometimes a pen or a frisbee. Now, what financially strapped college freshman is going to say no to 50 bucks and a frisbee?
I had three credit cards by my sophomore year. I launched my first business a year after graduating in 1997. And when that company failed to take off, I started another one a year later. Things were going well until funding dried up when the Internet bubble popped in 2000.
In the end, I racked up $45k in credit card debt by the age of 24. Feeling lost, angry, and confused, I resolved to eliminate that debt within a year. And I swore to myself that I would learn how to manage my finances and never be in that position again.
I’m going to share strategies and insights for achieving financial freedom.
First, let’s explore the psychology of money.
Table of Contents
- The Relationship Between Self-Actualization and Money
- Why Financial Freedom is Vital for Self-Actualization
- What is Financial Freedom?
- 5 Steps for Cultivating Financial Freedom
- A Quick Financial Checkup
- Why? Why? Why is Financial Freedom so Rare?
- 10 Reasons Financial Freedom is Elusive to the Majority of Us
- 1 – The Psychology of Scarcity
- 2 – We Are Conditioned to Consume
- 3 – The Delight of Spending
- 4 – A General Lack of Discipline and Self-Control
- 5 – Unconscious Childhood Programming About Money
- 6 – Limiting Beliefs About Money
- 7 – Negative Emotions Around Money
- 8 – Financial Homeostasis
- 9 – Money and Happiness
- 10 – A Lack of Financial Education
- Here’s One More Reason:
- A Quick Recap
- Book Recommendations From This Guide
The Relationship Between Self-Actualization and Money
Self-actualization is a quality of positive mental health. Most individuals pursuing higher achievements and financial success are driven not by personal growth, but by what Maslow called basic human needs, such as esteem needs like status and winning.
If we’re honest, most individuals who pursue personal development are also mainly driven by status-seeking motivations. That is, for most of us, our desire to “grow” is masked by the drive to achieve. There’s nothing inherently wrong with this as long as we’re honest and not deceiving ourselves.
Now, does this mean you can’t self-actualize and make lots of money at the same time? Of course not. But you’re unlikely to hear about these folks in the media. They don’t make “sexy” stories. Plus, these individuals aren’t seeking media attention. Why? They are too focused on pursuing their interests and developing themselves (that is, actualizing).
Why Financial Freedom is Vital for Self-Actualization
But, it’s very challenging to pursue authentic self-actualization when you’re struggling with money, or if you don’t have your finances in order.
A lack of money triggers unmet basic (neurotic) needs.
- When you don’t have enough money, you are concerned about your biological needs (like quality food).
- When you can’t afford a home or are stressed out about paying your rent, you’re not meeting your safety needs.
- Your belonging needs are in question when your social group is advancing in their careers, businesses, etc. and you are not.
- Your self-esteem is under attack when you’re not achieving at the level of your peers.
- And a part of you feels inadequate or incompetent if you’re struggling with debt and unable to generate wealth.
All of these external pressures draw your attention and energy. And this attention and energy are what you need to direct inward for the self-actualization process to switch on and build momentum.
So to summarize: financial freedom is a precursor to self-actualization. Getting your finances in order is a responsible use of your time and energy, regardless of your stage of life.
What is Financial Freedom?
Now, let’s define what we mean by Financial Freedom. To me, financial freedom means having the resources to cover all of your basic needs without creating any additional stress, fears, or concerns related to your finances.
This definition is subjective. What one person needs to feel safe, however, is different from another. You can earn $60k per year and feel free. Or you can generate over $2 Million per year and feel enslaved. (I’ve worked with many clients who start out in the latter category.) So it’s difficult to tie financial freedom to a dollar amount.
Here are four vital components of financial freedom:
- The ability to generate money
- The competence to manage your finances
- The discipline to follow economic principles and practices to cultivate wealth
- A psychological mindset that doesn’t get in your way
Each of these pieces is vital. Leave out one of them and financial freedom is elusive.
5 Steps for Cultivating Financial Freedom
Here are five steps to take on the path to financial freedom:
Step #1: Develop a psychological foundation that removes resistance to wealth.
If you try to skip this critical first step, unconscious parts in your psyche will eventually hijack your efforts. And this is not a do-this-once type of thing; it takes ongoing vigilance to pay attention to different voices, attitudes, and emotions you associate with money and wealth.
Step #2: Clarify your purpose and establish clear financial goals.
Why are you investing your time to cultivate wealth? Knowing your why is very important (more on this topic later). You need to know your financial goals and what you believe these goals will give you.
Step #3: Develop the discipline to follow wealth-building principles.
Discipline and impulse control are essential for developing any skill or intelligence. Managing money is a skill. Cultivating wealth requires financial aptitude. I don’t anyone people born with this intelligence. Those who have it, develop it through education, willpower, and constructive habits.
Step #4: Design and execute a financial system.
First, there’s an education that takes place in the various areas of money management. Then you can develop a personal financial system that automates as much as possible. Automation is essential because it reduces the need for willpower (which is usually in short supply).
Step #5: Find ways to increase your earning potential.
This step happens in conjunction with the others, but to achieve financial freedom, you may need to increase your current level of income. You can accomplish this increase through a career promotion, marketing your skills, investing, starting a side hustle, or growing a business.
In this guide, we’ll focus on step 1 because if you don’t establish a psychological foothold in your relationship to money, you’ll eventually hijack your efforts on your path to financial freedom. The key is to learn how to get out of your way.
A Quick Financial Checkup
Here are some questions to consider:
- Do you have enough money to cover all your needs for food, clothing, and shelter for the next five years without worrying about it?
- If you get a flat tire or your car breaks down, are you sure you have the funds to cover it?
- Can you go out to eat with friends without worrying about the bill?
- Are you saving and investing sufficiently for the future? (Let’s say at least 10% of your income each year.)
- Are you debt-free?
If you answered “no” to any of the above questions, you’re likely to experience anxiety. Perhaps that’s another way to define financial freedom: the absence of stress about money.
And if you did answer “no,” fear not. You’re not alone. The majority are in debt. In the United States, for example, 73% are in debt when they die—an average of $62,000 in debt.
Why? Why? Why is Financial Freedom so Rare?
There are social, cultural, psychological and neurological reasons most individuals struggle with money. And while it’s tempting to jump to a solution, first we must understand the nature of the problem.
By bringing more consciousness to these triggers and conditions, we can unravel them. And once we do, it’s infinitely easier to adopt a new mindset and supportive habits around money.
Even though everyone desires financial freedom, most people struggle with financial responsibilities the same way they resist eating healthy. Why?
10 Reasons Financial Freedom is Elusive to the Majority of Us
Here are ten reasons people fail to take control of their finances and cultivate financial freedom:
- The psychology of scarcity
- Social conditioning toward spending
- Brain triggers from shopping
- A lack of discipline and self-control
- Unconscious programming around money
- Limiting beliefs about money
- Negative emotions associated with money
- Financial homeostasis
- An ill-conceived association between wealth and happiness
- A lack of financial education
I know, there’s a lot here. Let’s briefly unpack each one. And as we do, consider how these forces might be operating in your life.
1 – The Psychology of Scarcity
Scarcity is a mindset. When we lack something, it causes us to place our attention and focus on what we don’t have. Our focus is powerful because it can help us get things done, but when you’re focusing on one thing, you’re saying no to many others.
So focusing single-mindedly on managing scarcity for long periods of time causes what the authors call “tunneling.” And this tunneling leads us to neglect other things of value; we fail to see the bigger picture. In the context of finances, the mindset of scarcity taxes our mental bandwidth. In the experience of poverty, the focus is on the shortage of money.
If you have limited mental bandwidth and high financial scarcity, you can’t think about saving for the future, for example. Instead, you juggle many pressing tasks, shifting around your debt. But eventually, the balls begin to drop.
To reduce the effects of financial scarcity, break up your goals into short-term, manageable chunks.
2 – We Are Conditioned to Consume
As you saw from the personal story above, I was tantalized by the world of credit before I entered the workforce. That is, I was conditioned to spend, but I learned how to earn, save, or invest.
Now, this conditioning starts much earlier than college. Any child watching a television commercial is being conditioned to consume. The purpose of an advertisement is to evoke desire. When the ad is successful, the child goes to the parent, “I want this!”
I’m trying to vilify consumerism or spending habits. I know from the data as well as personal experience doing so doesn’t lead to positive change. But it’s important to understand that we’re conditioned to spend and consume from early childhood. And we are not conditioned or taught to save, invest, or generate wealth.
So to create financial freedom, we must take full responsibility for our fiscal wellbeing.
3 – The Delight of Spending
Cultural conditioning only works when it plays on pre-existing psychological and neurological mechanisms. In the case of spending, similar to virtually all addictive and compulsive behaviors, the culprit is dopamine.
Dopamine releases in anticipation of a reward. This neurotransmitter gets triggered at the prospect of getting something, which is why online shopping can be so addictive.
Again, there’s nothing inherently wrong with this mechanism, except when there’s no self-regulation to keep us in moderation.
But here’s the real issue: we get a temporary neurochemical lift from spending, but not from saving. Said another way, we have positive associations with spending and negative associates to saving. Freud’s pleasure-pain principle is at work: we move toward things that give us pleasure while avoiding things that bring us pain.
For a penetrating look at how money influences our brain and behavior, see Your Money and Your Brain by Jason Zweig.
4 – A General Lack of Discipline and Self-Control
The topic of dopamine goes together to addiction and impulse control. In Willpower (audiobook), psychologist Roy Baumeister made us aware that we have limited reserves of mental energy or willpower each day (called ego depletion).
In each moment, you have an animal self seeking pleasure and a Higher Self seeking what’s best for your Future Self. Why does the animal self so often overpower our Higher Self?
In The Better Angels of Our Nature (audiobook), Harvard researcher Steven Pinker provides data suggesting the reason why the majority of people die with debt: most people tend to undervalue how long they will live.
That is, we tend to devalue our Future Self. And when we don’t value our Future Self, we inherently demonstrate this lack of value in our behavior by focusing too much attention on pleasure in the present: spending more than we should, consuming more than we need, overeating, and so on.
Baumeister’s research reveals that self-control is the single biggest determinant of success (including wealth). The good news is that willpower is like a muscle and you can increase your level of self-control around money. And, you can learn ways to automate aspects of our finances to overcome willpower limitations (which we’ll address later).
5 – Unconscious Childhood Programming About Money
Childhood programming is perhaps the most pervasive barrier to financial freedom. You can know everything there is about creating wealth—and even be a high-performing earner—but if you have unconscious aversions toward money, ultimately, you’ll lose whatever money you generate.
I’ve seen these patterns with many of my clients who are high-achieving entrepreneurs. Here are some of the sabotaging patterns I’ve observed:
- They navigate through the startup phase successfully, but then they start hijacking themselves as they begin to scale.
- After achieving moderate wealth, they start overextending themselves, buying real estate on money they don’t currently have.
- Fear begins to consume them, and they fail to pivot to ensure their business succeeds in the long run.
- Even if their business is doing well, they fail to master their finances (neglecting to invest in their Future Self).
All of these behaviors stem from unconscious programming we often pick up during childhood.
How do you know if you have negative associations and beliefs about money?
First, look at your financial situation. If you’re currently in debt, this is one clear sign. Second, consider the economic circumstances of your parents during childhood. If they struggled financially, you observed and absorbed their beliefs and emotions about money.
Cultivating financial freedom is chiefly a process of unraveling these unconscious programs and freeing yourself from your past. This process can spontaneously unfold as you develop self-awareness.
6 – Limiting Beliefs About Money
Most of the “wealth mindset” literature focuses around limiting beliefs people have about money.
If you’re familiar with The Secret or the “Law of Attraction,” you’re probably already familiar with this stuff. In my experience, however, I’ve come to question a great deal of this material as it seems disingenuine and Pollyanna to me. It appears like the main people profiting from these ideas are the ones who promote them.
I prefer to approach these beliefs with objectivity and to foster a more comprehensive understanding of their nature. Doing so increases your awareness, grounds you to reality, and removes resistance around the belief (if you have any).
Here are two examples:
Belief: “Money is the root of all evil.”
We’re all familiar with this saying. Now, you’re supposed to refute this belief and substitute it with something like, “Money is an abundant resource to do good in my life and for others.” But before we try to replace the original belief, let’s examine it. Is there any truth to the idea that money is the root of all evil?
If you’re a student of history, you’ll find a governing economic motivation behind virtually every war (including WW1 and WW2). Turn on the news to hear about what some unscrupulous bank executive or Fortune 500 CEO is doing. For example, remember when three auto CEOs flew in private jets to ask for money during the 2008 financial crisis? Or how $1.6 Billion of the bank bailout money went to executives?
But maybe money itself isn’t evil. Could it be that greedy people do evil things with money? I thought so too.
Social psychologist Kathleen Vohs’s research on money priming has ended the debate in my mind. In her paper, “The psychological consequences of money,” Vohs shows the results of nine experiments demonstrating how money evokes a “self-sufficient orientation” in people’s unconscious behavior.
The mere exposure to money, called priming, evokes selfish tendencies in humans, leading participants to “play alone, work alone, and put more physical distance between themselves and a new acquaintance.”
For example, when people pass a table with money on it, and a box of pencils drops, they are less likely to help pick them up. Or, they will pick up fewer pencils than they would if they aren’t primed with money first.
Now, does this make money inherently evil? Not really. But it does show how partial truths form our beliefs. And as adults, it’s necessary to examine these beliefs instead of haphazardly changing them. Otherwise, we will unconsciously adopt behaviors that go against our better nature.
Belief Illustration 2: “The rich get richer, and the poor get poorer.”
Is this belief true? Do the rich get richer? Yes, for the most part, it is true. The middle class has been disappearing for decades. The rich tend to get richer because they have the capital to invest. Their money works for them. They can generate income while they sleep.
If you have any debt (including a mortgage), your money is working against you.
Refuting such a belief without looking at the evidence is Pollyanna; it only fosters delusion. The issue isn’t with the idea itself, but our orientation towards the belief and the understanding that results from this orientation.
Change Your Orientation Towards Beliefs (Instead of the Beliefs Themselves)
How do you respond when you read the statement, “The rich get richer, and the poor get poorer?” If you feel poor (or identify yourself with being poor), this statement likely angers you. And that anger can be a useful tool if you can channel this anger into your will to transform your financial future.
If, however, hearing this belief enrages you or makes you feel helpless, then it puts you in the position of a victim because you identify with being poor. Then, you have a problem.
My point here is that it’s not the beliefs themselves that are influencing our actions and behaviors, but our orientation toward these beliefs. Usually, we have negative relationships towards these beliefs that limit our ability to create financial freedom.
But change your orientation toward these beliefs (which you’re beginning to do as you reflect on these ideas), and you change your financial destiny.
7 – Negative Emotions Around Money
Many of us have negative emotions like guilt and shame related to money. Often, this guilt arose from religious programming that told us that “money is evil” and “only bad people are rich.”
Let’s look at two common ways negative emotions influence our ability to generate wealth.
Guilt About Possessing Money
I noticed this pattern in myself as well as many of my clients. There’s a certain level of annual income and net worth that’s “okay,” but if you begin to stretch beyond it, you start to pull back because of these suppressed emotions.
Unrecognized guilt and shame associated with having money prevent many individuals from staying open to new opportunities. And because of these emotions, they fail to develop critical skills or learn how to manage their finances.
If many people in your environment are struggling with money, and you begin to develop wealth, two things tend to happen:
- Unconsciously, you’ll start to feel superior to your peers.
- Your peers will begin to hate and envy you (again, this often occurs unconsciously, and is partly spurred by your unconscious feeling of superiority).
And these two things will threaten your basic need to belong, which can cause you hijack your financial achievements.
Or, you could be holding the belief that only “bad people” are rich, or something similar, and this unconscious guilt about being bad limits your wealth potential.
Guilt and Shame About Being in Debt
Creating debt is as simple as adding extra pounds to your body. We’ve all made poor financial decisions. We’ve all spent money on things we know we didn’t need (or even really want). And whether you’re conscious of it or not, you feel guilty about these decisions. The guilt is there, sitting somewhere in your body, nagging you, making you feel bad, and draining your energy.
Now, because emotions like guilt and shame are undesirable, we do whatever we can to avoid these emotions. We push them away, escaping into distractions to avoid the feeling.
The problem with our aversion tactics is that they tend to reinforce the behaviors that created the guilt in the first place. That’s why compulsive spending behaviors stick around.
We start to feel regretful about making a purchase (buyer’s remorse) and then to avoid the feeling, we seek another dopamine kick. “Hey, let’s go shopping!” (Or play a game, or eat junk food, or check social media, or drink, or watch porn, or so on.)
The alternative is simple:
- Stand and face your guilt and shame. Let the emotions pass through you.
- Fully own your mistakes.
- Accept yourself and your current limitations.
- Breathe it all in and feel yourself rooted in your body.
- Resolve to change your behavior by setting up the conditions (environment) to support different behaviors.
- And take action right now. (Not “someday” or “after I…”)
Integrating emotions including guilt, shame, fear, inferiority, and superiority is vital if you’re committed to realizing financial freedom. See this guide on emotional intelligence to get started.
8 – Financial Homeostasis
Homeostasis is a driving force in all biological systems. I provide a detailed explanation of how homeostasis influences our growth here.
To illustrate, if you are living with $20k in credit card debt for many years, this is your “financial homeostatic set point.” You’re comfortable with this debt because it’s known to you. Being debt-free represents an unknown, and we all tend to fear the unknown (even if it’s better for us).
So, as you begin to eliminate this debt, psychic alarms start going off. To relieve this internal tension, you may revert to old habits to rebuild your debt and return to your comfort zone.
Once you establish a new wealth set point, this homeostatic mechanism will help you maintain it. But until then, you’ll want to set clear financial goals and stay conscious of this internal tension.
9 – Money and Happiness
Does money buy happiness?
Is it true? And if not, why are so many people in a mad rush to get rich?
The Results Are In! Kahneman’s Compelling Data
Perhaps you’re familiar with Daniel Kahneman. He’s one of the world’s most influential psychologists; virtually every modern book on happiness cites his research. Kahneman is the founder of behavioral economics, a Nobel laureate in economics, and the bestselling author of Thinking Fast and Slow (audiobook).
Kahneman’s team’s analysis of the Gallup Poll results of approximately 600,000 Americans revealed that over an annual salary of $60k, there’s no difference in one’s level of happiness. In an interview following his TED Talk, Kahneman said,
“Below 60,000 dollars a year, people are unhappy, and they get progressively unhappier the poorer they get. Above that, we get an absolutely flat line. I mean I’ve rarely seen lines so flat. Clearly… money does not buy you experiential happiness, but lack of money certainly buys you misery.”
This conclusion links back to what we discussed in the beginning: If you don’t have sufficient funds to meet your basic needs, you’re going to be unhappy (neurotic).
But what about above $60k? By Kahneman’s analysis, whether you’re making $60k or $600k, your level of happiness won’t change. Do you believe it? While most of us intuit the truth that money doesn’t buy happiness, we secretly assume it’s true. Perhaps you know the truth from your experience. I can say from my experience with many high-performing clients that it is indeed true: money doesn’t buy happiness.
What Does Money Buy You?
If money doesn’t buy happiness, why do so many of us pursue wealth with such vigor?
One answer is status. Images of the “good” or “glamorous” life fill our minds. A part of us seeks celebrity status. And we believe a big bank account is the way to make it happen. For most of us, more money translates to a more luxurious lifestyle—one that we can promote to our peers.
Another answer is comfort. The more money you have, the more decadence you can establish for yourself and your family. You don’t have to cram in the back of the airplane anymore. With sufficient funds, you can fly first class. Bigger seats. More legroom. Better service. Does that make you happier? Nope. But it does make you more comfortable. And to certain archetypes in our psyche—the Tyrant, in particular—comfort is king.
And once again, I’m not suggesting there’s anything wrong with status or comfort—as long as we’re conscious of our motivations and we understand what money buys and what it doesn’t.
10 – A Lack of Financial Education
I graduated from University of Michigan with a concentration (major) in economics. I had close to a 4.0 GPA (straight A’s) in this major and yet I still managed to be $45k in debt within three years of graduating.
How is this possible? The reality is that there’s nothing in our formal education system that teaches us about personal finance. Finance is a critical topic for adulthood, and yet, we receive no formal training.
So as I developed my plan to get out of debt, I simultaneously began a self-directed financial education. I read over fifty volumes on personal finance, investing, wealth mindset, and tax strategies. I also attended every financial seminar I could find.
Investing in Your Financial Education
Books on wealth, achievement, and personal finance include:
These books helped change my views about money, saving, and investing. They shifted my thinking about wealth in constructive ways.
Even though I didn’t have money to invest yet, I started my investment education early on too, consuming books like:
The Intelligent Investor (audio)
A Random Walk Down Wall Street (audio)
Market Wizards (audio)
The New Market Wizards (audio)
You Can Be a Stock Market Genius (audio)
Value Investing: From Graham to Buffett and Beyond
The Motley Fool Investment Guide
How to Make Money in Stocks
These books opened my mind to what’s possible with stock investing. They provided sound principles and practical methods. Even though I had been an economics major, this was an entirely new financial education. And it helped create a foundation for a profitable future in stock investing.
Reflecting back over 20 years later, this education helped me establish wealth strategies and practices that I maintain to this day.
Here’s One More Reason:
Many people do not achieve financial freedom simply because they lack the energy to cultivate it. That is, they have depleted their sexual energy and no longer possess the internal resources to change their financial situation.
This guide on sexual transmutation will show you how to change that.
A Quick Recap
Financial freedom is your birthright. If you’re struggling with money, reasons may include:
- Unconscious programming
- Limiting beliefs
- Spending habits
- Poverty mindset
- Negative emotions
- Insufficient discipline
- A lack of education
Spending money can trigger dopamine in the reward center of the brain. Saving does not. But can rewire your associates, change your orientation toward money, and adopt a new relationship toward wealth and financial freedom.
Besides mastering your psychology around money, there are other areas we must understand to achieve financial freedom.
Next, we’ll explore how to:
The fastest way to move toward financial freedom is to increase your earning potential. That is, find ways to boost your monthly income.
Book Recommendations From This Guide
Your Money and Your Brain
By Jason Zweig