“BEING RICH IS HAVING MONEY; BEING WEALTHY IS HAVING TIME.”
What really is financial freedom? It’s been overused by a lot of people and it seems like. What really is financial freedom? It’s been overused by a lot of people and it seems like most of everyone I know wants financial freedom but what is it really?
When you ask people what do they really want in life you will often hear about financial freedom. But what is financial freedom it seems like everyone wants it but what is it really?
Financial freedom is a stage when your assets provide you with enough income to cover your expenses to maintain your current lifestyle.
Step 0 – Financial Dependency
Financial freedom is the most commonly used term. Although it seems like the holy grail or ultimate destination, it is actually a journey to get there. This means it will take time, effort, and discipline to get there.
This stage means that you are relying on a job (W2 Income) to maintain your lifestyle and cover your living expenses. Let me introduce you to a hypothetical character named John. He works as an analyst for an Oil and Gas company and earns $90,000, which is his only source of income. After taxes, his take-home pay (the money going to his bank account) is about $62,400 per year or $5,000 per month. He pays $2,000 on his mortgage, $500 to pay his car note, another $1,500 for his basic needs (housing, food, utilities), $500 for other expenses, and paying off credit cards (Netflix, night outs, luxuries) and invests the remaining $500. John loses his job due to an economic downturn, it will be very difficult for him to maintain his lifestyle because he is financially dependent on his job.
Step 1 – Financial Security
This is a stage wherein one can cover their basic expenses. Let’s assume that John started listening to Dave Ramsey and reading Rich Dar Poor Dad by Robert Kiyosaki. He cut down on his other expenses and paid off all his credit card debts, which took him 12 months. On top of that, he built up an emergency fund, worth 3 months of his take-home pay. Additionally, he bought he started a side hustle that brings him an additional $3,000 per month. He also purchased the first rental property that pays him $500 per month. The $3,500 is enough to cover his basic needs. Now, if John gets laid off, he will be fine with his emergency fund and additional income streams. He is now entering the realm of financial security. Keep in mind that this only covers John’s basic expenses to SURVIVE. This does not include Netflix, dining at fancy restaurants, or even the internet.
Step 2 – Financial Independence
In this stage, an individual can cover his basic needs from her/his passive investments and additional income streams. Going back to John, he continued investing in assets that provide him with the cash flow. He started investing in several other real estate assets that provide him not only cash flow but also property appreciation and tax benefits as well. For several years, he accumulated 12 properties that generated $500 per month. The passive income he generates can well cover his monthly expenses plus a little extra such as his Starbucks coffee, Netflix, fancy dinners, and occasional trips. At this point, even if John loses his job he can MAINTAIN his lifestyle and he is no longer dependent on his job to cover all his current living expenses.
Step 3 – Financial Freedom
Financial goals are different for everyone. Many people are satisfied with being financially independent, yet, many others want to pursue the next step. Getting to this stage means that you can cover your basic expenses, maintain your lifestyle and fund the life of your dreams. You can fly first class, live anywhere you desire, and not worry about having to go to work or worry where the money will come from. John continued to invest in Real Estate, and the more properties he acquires, the more his cash flow and equity grew. With discipline, time, consistency, and perseverance, John’s income from his assets far exceeds a life he ever dreamt of. He spends time cooking breakfast for his kids, takes his wife out for fancy dinners regularly, and travels the country to visit all the National Parks. He does not have to worry about going to work, nor does he have to worry about getting laid off in the next recession. He is truly financially free.
Conclusion
Being financially free won’t happen overnight. Heck, it may even take decades to get to that point. Although it is possible and can be achieved way before you reach the age of 65. One can start small by paying off debts, saving an emergency fund, investing in assets that either provide cash or value appreciation and continue growing their asset portfolio until their passive income well covers their lifestyle.
When you ask people what their goal in life is, many will say “To be Financially Free”. And if you peel that answer by asking the question “why” several times, you will often get to the same result – people want to build margin in their lives so they can do the things that they love with the people that they love.
Onward and Forward! Until next time!