What Is Financial Freedom? Financial Freedom Episode #2
What Is Financial Freedom?
Financial Freedom is different for everyone. Where some people enjoy financial freedom if they can purchase groceries and have one holiday a year guaranteed, others need to be able to shop clothes for $1000's a month and drive Porsche's and Ferrari's. Therefore I would like to describe financial freedom as:
"The lifelong financial security needed to guarantee a certain spending behaviour".
This means that a certain amount of money is needed to fulfil the spending needs of a person or family. We can calculate this amount of money needed, and assume different levels of financial freedom. We must also make a distinction between passive income and treasure chest financial freedom.
Treasure Chest
Just to get this out of the way, when I was younger I used to think millionaires had a lot of money in the bank, and that is why they were buying all this cool stuff. If you ever have had a large sum of money in your bank account you may have noticed that it can disappear quicker then you think. I therefore advise to create financial freedom in passive income, rather than by trying to earn a large amount at one time and then sit back.
You see the problem is, especially with low interest rates on your bank account your money would disappear. Have a quick look at this table:
Let's assume you have $1.000.000 in the bank, and (calculating with current Dutch (I live in The Netherlands) tax rates and inflation. 1,3% tax on everything in your savings account above 100K. 0.6% on everything between 30K and 100K. Let's therefore assume the 1,3% tax for the whole amount. Average inflation of 1.5%. And current bank interest of 0.01 % on savings. Also since you are 'a millionaire' let's say conservatively you spend $5000 a month. I think that is reasonable now let's see how long your million lasts you:
| Year | Money Left | Year | Money Left |
|---|---|---|---|
| 2018 | $1.000.000 | 2027 | $502.494 |
| 2019 | $937.650 | 2028 | $440.369 |
| 2020 | $875.370 | 2029 | $378.218 |
| 2021 | $813.148 | 2030 | $316.029 |
| 2022 | $750.973 | 2031 | $253.788 |
| 2023 | $688.832 | 2032 | $191.485 |
| 2025 | $626.713 | 2033 | $129.107 |
| 2026 | $564.605 | 2034 | $66.642 |
As you can see, spending over $60.000 in 2034 for the same living standards due to inflation, you would run out of money in 2035. I don't know about you yet I'm 28 years old right now, which would mean that if I could contain myself and not spend more than $5000 a month if I were to be offered $1M today, I would still be broke in 18 years..
I therefore advice to, instead of having a big pile of money and taking a little bit of dough every month, to rather make sure you have a guaranteed income stream of $5000 a month, which, would easily be obtained by simply investing that $1M in real estate and renting out the properties, about which we will talk in a later episode. This way you have at least $5000 coming in every month allowing you to live with certainty and not be compelled to spend more, since the income stream is restricted.
Levels of Financial Freedom
You can come up with as many levels as you want, and that is fine. All you really need to remember is, in order to reach a level, in 99% of the cases, you will have to go through the other ones first. Therefore, if you haven't achieved this yet, I want you to start to think about ways to achieve the first level of financial freedom, before moving on to the next :) Keep in mind I just made these level names up, as well as the numbers, yet they can help you give a good indication to what kind of financial freedom you are looking for:
| Level | $ Per Month |
|---|---|
| Worry Free | $5.000 - $12.500 |
| Careless Whisper | $25.000 - $50.000 |
| F U Money | $100.000 - $250.000 |
| Thomas Crown | $500.000+ |
Go ahead and pick a level of, and keep this in mind: Guaranteed Monthly Income that you aspire to achieve. (I will go in how to calculate this amount a little later, this is just the 'I have a Dream' phase).
Be Warned!
So far so good yet I have some bad news. In order to fully 'engage' a level of financial freedom you will have to stop the growth. This means, if you invest properly, there will be a time were you will earn a passive income of $5.000 a month. However, if you decide to withdraw $5.000 a month from your investment portfolio, and this is your current maximum withdrawal without everything collapsing, it means there will no longer be growth. Therefore if you choose a 50%-50% split in withdrawing and growing your portfolio to let's say $10.000 a month, you will only receive $2.500 a month. The other $2.500 is used to re-invest and start building towards the $10.000
Therefore you will always appear to be 'poorer' than you are, as long as you keep on lingering after higher amounts. There will have to be a moment for you to consolidate and surrender, and be happy with whatever amount you're earning, otherwise you will never fully enjoy the potential payouts of your investments. For me personally this will lay somewhere between the $25.000 a month and $75.000 a month region. Keep in mind, this means that if I were to choose a 50% split I would only be earning $12.500 a month for a long time, until I decide that growth is no longer needed and consolidate to a $25.000 a month that will not grow anymore. There will always be the dilemma between high payouts now, or higher payouts later.
Calculate your Level!
It is important to calculate your level now, and yes you will be able to adapt it later. However I find it easier to have a target to work towards. This allows you to think big enough, and plan properly. In order to keep things easy we simply calculate how much money we would need today in order to have the financial freedom we aspire, and the inflation will be added on top later.
Fixed Costs
In order calculate our monthly amount we need to have a look at our fixed costs. If you always want to have a house, a car, and dental insurance that's fine with me, yet how much is that gonna cost you? Add these numbers up. How much do you regularly spend on food? How much would you like to be able to spend on food. Kids going to private college? Do not calculate the costs of what you currently spend, calculate your future costs. If that dream car on your driveway is a Volkswagen your fixed costs will be lower than when you have a BMW, a Lamborghini and a Rolls Royce sitting there. If you only want to purchase organic food, your groceries will be more expensive. Also, calculate the costs for your family, not just for yourself.
Variable Costs
These are the fun things! Going out for dinner, holidays, theme parks, purchasing clothes. How much would you like to be able to spend on this? How many months a year would you like to travel. Which type of clothes would you like to be able to purchase? Are you eating a pizza or a Michelin star 7 course meal on Friday night? How many beauty treatments are you or your spouse receiving every week? What about massages? Would you like to be able to purchase art? Blow money in the casino? Own a racehorse?
Take it easy!
I'm not asking you to decide your whole life right now, just write down a couple of things you really want to be able to spend your money on if you would have financial freedom. And then read that list a couple of times now, and a month from now, and a year from now. Ask yourself, is this really what I want? This list will give you an indication as to which level of financial freedom you have to achieve in order to meet your financial goals.
Achievability
If you're shooting for the Thomas Crown level you've got some work laid out for you, and of course it is way harder to reach than a 'Worry Free' level. Yet it is important to know this up front because it determines how much money you are going to withdraw from your investment portfolio monthly. If you're aiming for Thomas Crown you probably won't able to withdraw anything for the next 20 years. I'm personally not withdrawing anything until I'm35 at least, which is in 7 years. It takes this kind of determination and perseverance. Now, knowing I want to achieve a$50.000 a month target, I have way more motivation to let my money sit and compound than if I would only go for $5.000 a month, which I'm almost at anyway, (or at least could have been with a few adjustments to my strategy, however it is not what I want and that's the whole point).
Give It Time
Ey, I know I've given you tons of info and things to think about, I want you to take some time, I will release a new blog and video next week so you at least have the whole week to think about what it really is you want. Also ask your spouse if you are in a relationship, ey honey, what would your ideal week look like? How often would you like to go out for dinner? How often would you like to be able to go on holidays. Talk this through and you will discover that maybe, you don't need as much money as you currently think you do. For now, just sit back and dream and wait for me to be back in a week, when we are going to concretise things a lot more!
Reply here what your monthly income goal is:
$15,000, mix of earned and passive income
Good goal! :) I think with that amount you can have a very pleasant life, and be comfortable about your financial situation :)
Most people don't need that much money to live comfortably month to month. The key is spending way less than you make, and then what you make doesn't matter as much. In other words someone on a lower income can still become wealthy. Making more certainly helps, and it makes the process MUCH faster. I tell my children to learn a profession, a trade, and at least a second language. Then learn basic economics. That's an easy formula for success. Following that plan, you should be making plenty of money to build wealth.
I know lots of people who stay poor because they love to travel when they don't really have the money to do it. Then I know lots of other people who have tons of doodads, but they too are always broke. All their extra money goes into those doodads. Avoid those things. Only own vehicles you need. Don't go on vacation either unless you have the extra money (once your investing plan is completed for the year).
It's all fairly simple and common sense, but most people unfortunately do not have the discipline required.
@finnian. Yes the spending is one of the factors to keep in mind. I will address this in the episode 2 weeks from now I think (I don't remember the schedule of by heart). Yet to me, it is also important to be able to do what you love. If you are happier spending all your money on travelling rather than becoming rich, please do so. I like to do both. I'm just back from Sri Lanka and I absolutely loved it. Yet I'm also making sure my investments work :)
Financial freedom can also lead to hapiness, better life and confidence. Good post indeed..keep it up
@charles1 absolutely! I feel that especially with a bit more spending power, as well as investing power (actually it is kind of the same as STEEMPOWER here) I feel more free to make my daily choices :)
Nice post
Thanks @minpine! :)
Give it time Yeah !! patience is key but I never had it. But motivation keeps us up :D
I'm currently reading the compound effect which is of course very basic but I mean it just gives to show how patience can be very important ;)
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thanks!
@markdeheide “To achieve what 1% of the worlds population has (Financial Freedom), you must be willing to do what only 1% dare to do..hard work and perseverance of highest order.”
― Manoj Arora
I think that there is a lot of hustle that goes into achieving what you describe, but realizing that good health is the most valuable asset in being able to continue to hustle is probably the greatest factor in success.
@chefcryptoshark well I totally agree. Yet for me it is not just psychical health, it is also mental health. Knowing that I could have achieved more, or way more makes me feel depressed all day. Achieving something small like earning $2 on steemit can make me feel on top of the world.
Then there is also the situation where people say money doesn't make you happy. Hey, I get that, but being poor also doesn't make you happy. What if one of your closest friends gets diagnosed with a disease that isn't covered by health insurance? :) wouldn't you want to be able to provide him with the medicine? It's unforeseeable things like that, that motivate me to earn enough, not just to take care of myself, but people in need that are close to me :)
Amen, brother.