Financial Freedom: What Does It Really Mean?

Everyone dreams of financial freedom. It doesn’t matter if you are waiting tables at Chillis’, the CEO of a large company, or a stay-at-home Mum, the illusive concept of financial freedom calls to us. We want more time and more money, so that we can spend some of that doing 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. Let alone the fact that, due to a crumbling social security system, financial freedom is something we need to achieve. Not want. Not dream of. Need to.

But that still doesn’t answer the question of what do people actually mean when they refer to “Financial Freedom”. People have this vague concept of it being about “money in the bank” (as I did), 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). 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 do we make this work for you? First, you need to email us at mailto:info@abundancebound.com, with “Chart of Accounts” in the tag line, so that we can send you an excel spreadsheet that will help you work out where your money is going each month, and how much you need to cover your bills. This will give you a current “snapshot” of your financial situation, and will include rent/mortgage, groceries, utilities, artistic expenses etc.

From this you will have 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, and to answer that, let us look at the list we started earlier. The first item was rental real estate, and let’s say that this was what you decided to focus on. 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 from your wealth account), and now add $200 per month to the acceleration of your “wealth cycle”. Four more properties like this, and you are ¼ of the way there. Then you start to look at dividend paying stocks, and some Oil & Gas, and maybe a business or two…

Does it start to make sense? I hope so, because I remember my own sense of shock and excitement when I realized that the goal of all my financial dreaming was something tangible and obtainable: I just hadn’t realized what it was. Because this really is the financial goal of life: get your passive income above your expenses. Some people wait to do it until they are retired, and pensions and things of that sort kick in. Most never achieve it, and either work some kind of job or rely on somebody’s charity, until they die. But with some education, some planning, and a little courage, we can all have it three to five years from now. Five years time is coming, whether you get into action on any of this or not. The question is, will you still be in the same place, doing the same thing? Or will you greet five years from now on the beach, drinking champagne, knowing that everything is paid for whether you go home next week or next month.