What comes to your mind when you hear Financial Freedom?
Is it a picture of a corporate boardroom, private planes, or mansions with luxury cars?
Is it an image of couples or families traveling the world in luxury without thinking about money?
Everyone Can Achieve Financial Freedom
Financial Freedom is not limited to the top 2% of the population.
It is achievable by everyone even for those earning minimum wage.
Financial Freedom is more than the money it is a personal decision.
You Don’t Need To Have A High Net Worth To Be Financially Free
Haven’t you noticed that Forbes Magazine has a list of the wealthiest people on the planet but does not have a list of the most financially free?
The reason is that wealth is measured by net worth (assets – liabilities)
Financial Freedom, on the other hand, is measured not only by money but by the personal decision of the lifestyle you would want to live.
Definition of Financial Freedom
Financial Freedom is achieved when your expenses are shouldered by your passive income.
Two important words to remember: PASSIVE INCOME and EXPENSES.
According to Robert Kiyosaki’s book “Rich Dad Poor Dad”, there are two types of income: 1) Active Income and 2) Passive Income.
Examples of Active Income are salaries and wages, professional fee, and direct commissions.
You need to exert effort in order to receive the income. If you don’t work, you don’t earn.
Examples of Passive Income, on the other hand, are rental income, investment income, royalties, and indirect commission.
These sources of income require minimal to no effort in order to earn. Meaning, you can travel the whole week and at the end, you still earn.
Business income can be either active or passive.
If you are needed in your business in order for it to operate, it is active income.
But if you can travel for 3-6 months without thinking of your business because it already has a system and there are people running it, then it is passive income.
The great part of the definition is that it states expenses and not net worth.
It might take awhile before one can increase one’s net worth but managing your expenses can be easily adjusted.
If the definition of financial freedom is at least P100 Million pesos, then not everyone can achieve it.
But because it is defined by your passive income shouldering your expenses, the goal is not far as it seems.
For example, you have a rental property (apartment) that gives you a monthly income of P30,000/month and your monthly expenses is just P25,000/month.
You might not have P1 Million cash, but based on our definition, you are already Financial Free!
What Lifestyle Do You Want to Live
The example above shows why Financial Freedom is a personal decision.
If you live an expensive lifestyle but your income is barely coping with it, then it is very hard to achieve Financial Freedom in the near future.
But if you live a simple lifestyle and you are earning pretty well, then Financial Freedom is within reach.
The decision is yours.
4 Steps to Achieve Financial Freedom
Now that you know the desired lifestyle you would like to live, below are 4 steps in order to achieve Financial Freedom.
STEP 1: Compute How Much Is Your Monthly Expenses
Compute your annual expenses by multiplying your monthly expenses by 13 months.
Why 13 months?
Because we usually spend more during the Christmas Season. And most of the time, the 13th month we receive is not really placed in investments but in expenses.
Hence, it is safer to multiply your monthly expenses by 13 months instead of 12 months.
Let’s say your monthly expenses is P30,000/month.
Multiplying it by 13 gives an annual expense of P390,000.
It’s up to you if you want to increase your expenses or lower it further.
STEP 2: Compute for Your the Target Nest Egg.
The rule of thumb is to have at least 10x of your annual expenses.
Given the example above, your target nest egg is at least P390,000 x 10 = P3.9 Million.
The idea behind this is if you have P3.9 Million in investment that gives an annual return of 10% which is P390,000 per year, then the interest of the capital can already sustain your lifestyle.
STEP 3: Have Multiple Income Streams and Invest
Find ways to increase your income through part-time jobs or small businesses and start building multiple streams of income especially multiple streams of passive income — start investing in financial assets, real estates, and businesses.
STEP 4: Stick To Your Budget Until You Achieve Financial Freedom
To know more about budgeting, you may read my article Budgeting The Easy Way (Money Jar System)!
Included in your budget is a Play Fund.
The road to Financial Freedom shouldn’t be lonely and boring.
It should be exciting and fun!
You can achieve Financial Freedom at same time #YOLO.
Your Millennial Wealth Planner,
Harold Q. Gardon, CWP, CEPP
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