I know most of you aren’t currently in this type of financial situation, but bear with me for a second.

Imagine that you’ve spent years getting into credit card debt, or maybe you financed a degree, or maybe a car. We won’t include a mortgage in this list, for reasons that will become apparent soon. You’ve scrimped and saved, sacrificing things like vacations or meals out with your friends, all in the name of paying down debt. Finally, after years of hard work and sacrifice, you’ve finally done it. You’ve paid off that debt. The crowd goes wild!

You tell the world of your accomplishment, whether it’s on your very own blog or to all your friends on Facebook. Finally, you proclaim, I’m financially free! I’m so excited, here are three exclamation marks!!!1 That 1 was for show.

Aside: this reminds me of one of my favorite tweets, which I now can’t find. It said, and I’m paraphrasing, “People with debt blogs realize that >99% of the population pays off their debt WITHOUT starting a blog about it, right?” Really, I’m not opposed to the whole concept of debt blogs. I just find they struggle when the debt is gone. There are a few exceptions, some of which I currently read.

Anyway, today’s post is going to be me taking issue with the concept that consumer debt free somehow equals financially free. Nothing could be further from the truth.

The only difference between someone who lives paycheque to paycheque and someone deeply in debt is the amount of interest paid. It’s really hard to argue that someone who is forced to exchange time for money is financially free. A financially free person should be able to quit at any point. The vast majority of the population must continue to work or else they’ll starve. I’m not sure how you can argue that’s freedom.

Somewhat unrelated emergency fund rant

As we’ve discussed before, emergency funds are a pretty poor idea for a lot of people. They’re especially destructive for folks just starting out. If you have a net worth of $12,000 and $10,000 of it is earning you 1.4% in some “high interest” savings account, you’re doing a pretty poor job of getting wealthy. A diversified portfolio of preferred shares and REITs could at least yield your emergency fund 5%, with pretty good capital protection and the potential for some growth.

End rant

But even if you have a fully stocked emergency fund, you’re still forced to go back to work after six months. And in the meantime, you’ll frantically be searching for another job because you know the emergency money will only last so long. I’m not sure how that’s financially free either.

Most people should just take the risk free return and pay off their debt. Sure, the market has the potential to return more than what the interest rate is on the debt, but it also has the potential to go down. Besides, comparing stock market rates of return to the guaranteed rate of return from paying off debt is just plain wrong. They’re completely different asset classes. Paying off debt has a 100% chance of getting the specified return. The stock market will return 6-8% over time, but not in a straight line.

Saying that you’re financially free after only paying off consumer debt is the equivalent of calling yourself a pastry chef after mixing up an egg, some water, and a brownie mix into something resembling food.

To be truly financially free, you have the choice to stop working, and either have enough saved to cover expenses, or else have enough income from investments. That doesn’t mean you stop working, but that you have the choice to do so. You can’t have a spouse working in the background to pick up the slack. You can’t be continuing to pay off the mortgage. And you certainly can’t be chained to your job.

Financial freedom is fantastic. I can see why people are striving to get there. But unlike some of those early retirement guys, you can’t take shortcuts to get there. It cheapens actual financial freedom when everybody who has ever paid off their student loans considers themselves free. Don’t change the definition of the term. Work at it, and it’ll become all the sweeter when the goal is finally accomplished.

Tell everyone, yo!