All of us dream of attaining financial freedom, but only a few of us will ever get there. What’s financial freedom, you ask? It’s a bit different for everyone. To me, financial freedom means I can enjoy a comfortable life without having to work or worry much about money. I’m not there yet, but in 5 to 10 years our passive income should cover our cost living. We’d need a bit more time to build up a cushion to account for inflation and that would be financial freedom for us. Mrs. RB40 will be able to retire without any worry at that point.
Financial Freedom Formula
How do you attain financial freedom? It’s easy; you need to generate passive income. For most of us, this means investing. It’s easy in theory, but you would need to invest a lot of money to generate enough passive income to cover your cost of living. The personal saving rate of Americans is around 5%. This statistic is pretty dismal and it is exactly why so few of us will reach financial freedom. You need to increase your saving rate so you can invest more.
Saving = Income – Expense
1 – Grow your income
Here is the first path to financial freedom – grow your income. This is pretty obvious. If you make more money, then you’ll have a better chance of saving more. The tough part is that it’s difficult to grow your income. Here are a few ideas.
- Accomplish more at work and get promotions and raises
- Actively seek better job opportunities that offer more pay
- Get advance degrees or certifications to increase your pay
- Change career if you’re in a low paying field
- Start a business
- Work on the side
- Rent out a spare room
- Learn about investing
Steve Chou from My Wife Quit Her Job is a great example of this. He is making good income from his day job. He and his wife have an online store that generates over $100,000 per year. He also has a popular blog, podcast, and a great online course that generates over $100,000 per year as well. Wow, Steve is raking it in! If he keeps his spending reasonable, he’d be able to save and invest a lot of money every year. I’m sure he’s on track to reach financial freedom very soon if he’s not there already.
2 – Live a frugal lifestyle
Of course, not everyone is as good as making money as Steve. I think you should keep trying to increase your income, but if you can’t then you need to focus on the expense side of the equation. While not everyone can make a lot of income, everyone can learn how to live more frugally. Living frugally doesn’t mean you have to eat ramen noodles every night, you just need to spend significantly less than you make so you’d be able to save and invest more. A 5% saving rate isn’t going to cut it. You’d need to save at least 30% of your income to reach financial freedom in a reasonable timeframe.
Personally, I’m much better on the frugal side than the making more money side. Luckily, I made decent income for 16 years as an engineer. We lived a modest lifestyle and invested a significant chunk of our income every year. That enabled me to leave my engineering career behind and live life on my own terms. Even now when I don’t make much money, we are still able to save over $50,000 per year. Here are some ways that we save money.
- Cook at home
- Share one car
- Take public transportation
- Live in a modest home
- Delay purchases until we’re sure about them
- Use Republic Wireless instead of more expensive cell phone plans
- Cut my own hair and the kid’s (for now)
- Try to fix broken things myself
- Ignore the Jones
- Live in a mixed income neighborhood
- Seek out free or cheap entertainment
3 – Create Something Valuable
Lastly, there is the unconventional way. You’ll have to figure this one out for yourself. One example is Ernie Zelinsky. He semi retired when he was 31 with a negative net worth. He didn’t actually start saving for retirement until he was 40 years old. He used his creativity and wrote many books including The Joy of Not Working and How to Retire Happy, Wild, and Free. Now, he is making more from book sales than most people from their day jobs. Ernie was able to leverage his creativity and achieve financial freedom on his own terms. I’m sure if it’s important enough for you, you can come up with something too.
- Mr. and Mrs. Frugal Woods are planning to go homesteading in a few years.
- Mr. Money Mustache blogged once a week and became a sensation. I’m sure the site is making a lot of money. He also is a one-man house building company.
- JD Roth blogged about his finance and it became Get Rich Slowly, one of the early successful personal finance blog. The income from the site eventually eclipsed the salary from his day job and he sold it for a nice 7 figure sum. These days he’s giving interviews and works on whatever he wants.
- Many people achieved financial freedom through rental properties. This is a great way to go if you can handle being a landlord. I think everyone should try this one out to see if they can make it work.
Financial Freedom isn’t that difficult
When it comes to financial freedom, you have to go with your strength. If you are good at making money, then work on increasing your income. If you’re good at living frugally, then focus on minimizing lifestyle inflation. Of course, most of us will fall somewhere in the middle. The key is to grow your saving so you can invest more every year. The more you can invest, the faster you will achieve financial freedom.
The third path is definitely interesting. If you think outside the box and have the courage to follow your creativity, then good things might happen.
How will you achieve financial freedom?
Image by zak suhar
Passive income is the key to early retirement. This year, Joe is increasing his investment in real estate with CrowdStreet. He can invest in projects across the U.S. and diversify his real estate portfolio. There are many interesting projects available so sign up and check them out.
Joe also highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help DIY investors analyze their portfolio and plan for retirement.