The concept of "Financial Freedom" is, understandably, a popular one. But what does it actually mean? The answer is simple, but truly understanding it will change your financial focus. Everyone dreams of financial freedom. It doesn’t matter if you are waiting tables or the CEO of a large company, the illusive concept of financial freedom calls to us. We want more time and more money, so that we can do things we want to do as opposed to what we have to do.
But, generally speaking, that is where we stop. At the “Wouldn’t it be nice if…” stage. We never really bother to think about how we could achieve freedom in our life. What this would look like. How things would be different.
What do people actually mean when they refer to “Financial Freedom”? There is this vague concept of it being about “money in the bank” (as I thought), or earning much more than they are spending. In truth, it has nothing to do with either of these things (although the first answer at least moves you in the correct direction). No, the real definition of financial freedom is this:
Having enough passive income to cover all your living expenses indefinitely.
That’s it. Nice and short. That is (or should be) the is the purpose of all financial strategies. Every time you make a financial decision, in the background should be a little voice whispering “Does this increase my passive income?” Now sometimes that answer may be no, and for good reason, but the question needs to be asked none-the-less. Otherwise, just like any other goal, it will be nearly impossible to hit.
So how does one achieve raising one’s passive income over one’s living expenses?
First, for clarification, we need to review passive income briefly. Passive income is money that comes to us whether we work or not. It can (and should) come from a number of sources, but some of the most common ways of earning it are: rental income from real estate you own, dividends from stocks, insurance, network marketing, and interest on loans you make (there are many other ways, of course, but that covers what most people can go out and actually do). Many successful artists also have sources of passive income: Actors earn residuals from commercials, films, and television. Musicians are paid when their songs play on the radio and from album sales.
The opposite of passive income is active income, and is where you get paid for the work you do, either as an hourly wage or a salary. The problem is, and this applies whether you are making minimum wage or $500 per hour, if you have to work for all your money, then the moment you stop working, you stop getting paid. You want to take a month off? Your yearly income just dropped by 1/12. Three months off? It just dropped by ¼. Not pretty.
Passive income, however, keeps coming in whether you are punching a clock or on a beach in Belize. For those of you who currently rent, do you know where your landlord is every month? Probably not. But you still pay your rent by the 5th of each month, right? It doesn’t matter if he is sweeping the corridors or sipping a cocktail, that money is coming into his bank account every single month. And not just from you, but from the tenants in all the other properties he owns as well.
SO, how to make this work for you? Firstly you need to break down all of your monthly expenses and income, which can be done easily on Quickbooks or Quicken (if you don't have either of these programs, email us at info@abundancebound.com with "Chart of Expenses" in the tag line, and we will send you a detailed excel spreadsheet to help with this process). Doing thing will give you a current “snapshot” of your financial situation, and will include rent/mortgage, groceries, utilities, artistic expenses etc.
Completing this process will give you a number, let us say $4,000 per month, that you need to earn to keep your head above water. This amount would become your first passive income goal, because the second that you are earning $4,001 per month, you are able to live, indefinitely, at that standard of living, for the rest of your life.
The question then becomes how to reach that goal, and develop that level of passive income. That is where financial education comes in.
Let’s say, just for an example, that you decided to focus on rental real estate. If you do your research around different rental markets in the country, it becomes entirely possible to find properties for sale at a reasonable price that will generate $200 per month in positive cash-flow (money left after all taxes, mortgage etc has been paid). So you purchase one of these – with money you’ve built up over time in your wealth account – and now add $200 per month to your passive income. Four more properties like this, and you are ¼ of the way to your first goal.
Does it start to make sense? I hope so, because I remember my own sense of shock and excitement when I realized that financial freedom was something tangible and obtainable, by steadily working to get my passive income over my expenses.
We’re not suggesting that you can run out and start buying rental real estate tomorrow. But you have to stop thinking investing is impossible for you and start learning how to get started.
Just remember – time is going to pass whether you get into action on any of this or not. Where will you be five years from now? Will you still be in the same place, doing the same thing? Or, will you have done the work necessary to make sure that you are living, creatively and otherwise, the exact life that you want?
