Financial Freedom

This post will focus on financial freedom, where for some, it could mean achieving it by age 40, 50 or 60… To me financial freedom is not being dependent on my 9-5 job, though I love my job. Here I will explain what financial freedom is, and then list out the steps to achieving it.

What is financial freedom?

Someone is financially free if they can do what’s most important to them, without being constrained by finances. For many people, this is the freedom to retire. For others, it’s the freedom to work on whatever they want, regardless of salary. Others may want the freedom to travel wherever and whenever they want. Financial freedom, and the amount of money required to achieve it, are therefore personal—they depend on what you want.

Steps to financial freedom

Minimize expenses. Key things to consider include (1) share rent, (2) avoid expensive apartments/housing, (3) live close to work, (4) avoid expensive cars, (5) eat out less often, (6) pay off high interest debts. Studies show that expensive cars and housing do not add significantly to your happiness long term (they usually just feel good the first few weeks). You can live happily on a small budget.
Continuously improve. Regardless of your path in life, continuous improvement is something great to strive for. Learn as much as you can and develop the skills to be your best. Make use of available resources (local library etc) and make contacts (join professional groups) and discuss with them.
Purchase real estate you can live in and rent out. When you live in the property you are renting, you can more efficiently fix problems and handle your tenants. As soon as you’ve saved up enough money for a down payment (and an excess emergency fund), purchase real estate that can serve the dual use of housing you and a tenant. Do a proper due diligence before doing this.
At this point, your monthly cash flow should be improved significantly thanks to your rental income and probably higher salary increase in your day job. You should be saving more money each month. You’re also building equity in a home that is hopefully appreciating over time. This will eventually facilitate the next step.
Acquire assets that will enable financial freedom. As your income far exceeds $100,000 per year, you should begin investing wisely. Once you reach a critical mass of assets (normally about 17 times the amount of money you want to spend per year), the interest on these assets could provide you with financial freedom.

Planning for financial freedom

Key is to have a game plan. A set of goals…The first step here is to be clear about your goals, including how much money you will need and when you will need it (studies show that people who are clear about their goals are more likely to achieve them). And do not forget to include inflation—the price of goods/services will likely increase 2-3% per year.

Once you are clear on how much you need and when you need it, you can work back to your current situation. (If you are not comfortable doing the math here, you may want to consult a financial advisor who can estimate how much you need to save to reach your goals).

When doing this, it may also be good to set some goal posts. For example, look at where you need to be in 2 years, 4 years, …. Write these intermediate goals down, save them, and check yourself against them periodically. If you do not measure your progress, you are less likely to achieve your goals. Again, you will need to do some careful math and may want to consult an advisor for help.