What is Financial Freedom?
Does Financial Freedom mean having lots of money? Maybe it means you have enough money to pay all of your bills?
Wikipedia Changes Financial Freedom to Financial independence and says it means you have enough wealth to live off of without working. So does that mean I have enough money in the bank to not go and get a job to earn a paycheck now? Not quite. Let’s break it down a bit further.
Financial Freedom is achieved through ensuring you have enough passive income to pay for all of your expenses, not just money in the bank.
We can look at these two situations to understand the difference.
Financial Freedom is not…
In our first example, lets say you have monthly expenses of $3000 a month and $9000 in the bank. So you can at this point choose to not work a job to earn an income but in 3 months you will be broke and need to find a job so you don’t starve. Your money in the bank only goes so far and interest earned in the bank isn’t nearly enough to make up the difference. Even if you had One Million dollars in the bank, it would eventually run out. I know I could spend it inside of a year easily. Just think of how many stories you have heard about people winning the lottery and when they get the last payment, they are dead broke again wondering what happened!
Financial Freedom is…
Our second example is where Real Financial Freedom exists. You have the same $3000 monthly expenses but you invested wisely in that new startup company you found on kickstarter and made a cool $100,000 last year. Then, since you don’t want to wind up like those lottery folks, you stopped yourself from buying that new Tesla S series for $90K and instead found a safe place to park your $100,000 where you can make $5,000 a month in interest income. Now you have “passive income”, income you don’t have to spend your time making, that is $2,000 a month more than your monthly expenses of $3,000. As long as you keep your monthly expenses below $5,000 and your investment continues to pay you $5,000 a month, you don’t have to find a job and can spend your time however you want!
And that leads us to Time Freedom which I will discuss next time!