Financial freedom is the idea that you no longer need to work in order to maintain your desired lifestyle. Which means that all your expenses are covered by your cash flow, this income should be passive in one way or another. It needs to be passive so that the cash flow is not tied to your work, if you stop working the cash flow needs to keep coming.

One common misconception about being financially free is the idea that you need to be debt free, this is not the case. You should instead look at debt as though it is an expense, and should counted as an expense when calculate your income.

There are essentially 2 different ways to reach financial freedom. First you can build up enough passive income so that you receive an equivalent amount of money from passive income that you would have made from working.

Method number two, and the far more common method of reaching financial freedom, is build up a nest egg of savings that can be used up over time for expenses.

So how much income do you need to be financially free? This all depends on your desired income, for some it could be $60,000 for others it could be $250,000 it all depends on how many expenses you have.

A very rough rule of thumb is to multiply your desired income by 12.5, to figure out how large your nest egg would need to be if you were to stop working right away and never have to worry about money again (no matter how long you live). You should be able to earn 10% on your money annually fairly easily, and the additional 2.5% (12.5-10=2.5) should be enough to cover inflation for the long haul.

It is very important to conclude inflation in your calculation, so that you quality of life does not change with time.

Thats it, a simple introduction into the Utopian world of financial freedom.

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Filed under: Investments, Retirement, Saving