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 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 do we make this work for you? First,
email
us at info@abundancebound.com, with “Chart
of Expenses” in the subject line. We will
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.
Completing the Chart 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?
