I hear the term financial freedom used a lot in many different contexts. They use it to describe pensions, savings, investments and passive income. But what is the proper definition and how does it apply to me.
Financial freedom and financial independence go hand in hand but are not the same thing.
Financial freedom is when a person’s assets generate income that is at least equal to their expenses. Financial independence means you have enough wealth to live on, without working. Income earned without working if referred to as “passive income” as opposed to “active income” which is the money you earn by working.
For both of these cases, you need to know your monthly income and expenditures well. Here is an example spreadsheet that you can alter to do the calculations for yourself.
How to become financially free?
Let’s go back to the definition first. When your assets generate an income that is equal to your expenses. So, first of all you need to know what your monthly expenses are so you can match it with how much your assets would have to generate.
Let’s say for example your expenses are £3000 a month, for you to be financially free your income generated by assets (passive income) how have to also be £3000. Its that simple, the part that isn’t simple is getting there. If you want more information on passive income, go to the section titles passive income or read this article on “What is passive income? Explained”.
How to become financially independent?
Like financial freedom your passive income has to be equal to your expenses, but it has to also generate enough for your savings. Financial freedom is great, but it doesn’t give you any wiggle room. Financial independence on the other hand accounts for savings other investments so you have the wiggle room and potentially room to grow.
When calculation your financial independence unlike the other you should be calculation it to your ideal lifestyle not your current one. If you want to take 6 months off a year and drive a Ferrari these are the expenses your passive income needs to be calculated to be financially independent.
Active income is money earn by trading your time. The 8 hours you spent at work today is active or earned income. This income in capped because you can only earn so much in a 24-hour day without killing yourself.
If you earn £10 and hour and work 8 hours the most you can earn in a day is £80. This is why the preferred method to becoming financially free if with passive income which you can read about below.
The art of making money whilst you sleep! Passive income is by far the best way of earning.
Quick fact: Most millionaires have 7 passive income sources.
Passive income is when your time is not directly traded for money like active income. This is through sources like Rental income, investments, stock, bond and aray of others. These sources take an initial investment but then will generate a recurring income.
Benefit of not having to trade your time for this source of income is the you can then use that time to make more investments and compound your steams of income. Example of this is real estate of rental income. One you have a rental property bringing in a stable income there is no reason you can have 2, 8, 12 ,200 rental properties all bring in the same income.
So hopefully I answered your question and you now know what financial freedom is and how to achieve it. Please download the work sheet and try it for yourself even if you aren’t looking to become financially free just yet it will help you tack your finances much better.
If you are interested in passive income sources bookmark this page because we will be bringing out a work sheet with all the best ones listed so you can get on your way to becoming financially free. In the meantime, search for passive income sources and you’ll have many options to choose from.
5 Quick tips to financial freedom
1. Track your expenses
Use the worksheet provided to take a handle on your finances and calculate how much passive income you need to generate to reach your goal.
2. Pay off your debt
Use your new-found sources of passive income to pay down any high interest debt that might be mongering over you. This will free up more to invest into your income.
3. Build passive income streams, lots of them
Once you have a good stream of passive income don’t stop there. Use the technique again and double or triple your income.
4. Don’t raise your expenses
Growing your income comes with the eager to spend more as well. This will keep you stuck in the same situation just earning more money. Set a clear goal of the life you want to live and then live it. Don’t raise your expenses unnecessarily just because you have more income.
5. Enjoy it
Building income streams and living your best life should be fun. Make sure you don’t take it too seriously. Seriously!