Financial Freedom is Not What You Think

Apologies, I have to admit that the title of this post is a bit misleading. 

I'm not here to tell you that financial freedom isn't all that it's cracked up to be. Since I haven't achieved it myself yet I wouldn't even be qualified to make that claim. So if you clicked on this link so you could tell whoever wrote this post he's crazy for saying financial freedom isn't a desirable goal, I'm sorry, I didn't mean to trick you! 

If you're an experienced investor, there probably isn't anything new here for you. You wouldn't have made it as far as you have if you didn't know what financial freedom truly was and how much easier it is to achieve than most people think. 

This post is for you if one of the following statements apply:

• I'm tired of the stress associated with living paycheck to paycheck.
• I want to spend more time with my family and I am tired of spending so much time away at work.
• I want to follow my passions, but my family depends on my income and I can't take the risk.
• I like to work, but I don't want to "have" to work.
• I want to know how to build passive income so that I can achieve financial freedom

So what does financial freedom mean?

Well, lets start with "what does it mean to you?" I want you to answer that question in your mind. Ask yourself "what does financial freedom mean to me?"... and then answer. 

A few years ago if you had asked me this question I think I would have said.... "Financial Freedom means having a million dollars in my bank account."

Maybe you thought something similar. Maybe instead of 1 million dollars you thought 10 million... or a 100 million. 

I want to propose something to you. For some, especially those already engaged in creating passive income streams, it will make sense right away. For those just starting their search for financial freedom, you may need to be a little open minded. 

I would like to propose this...

If your answer to the question "What does financial freedom mean?" had a dollar sign associated with it.... you're wrong. 

Wait what? How could the answer to "what does financial freedom mean?" be anything other than a dollar amount... finance=money right? So financial freedom should = a lot of money! Shouldn't it? 

Well... yes and no. Let's say I put 1 billion dollars in your bank account tomorrow... Nice right? 

Sure. You're financially free. I won't argue with that. You could spend 10 million a year and leave your kids a fortune. 

I think it's safe to say though that most of us don't have a mysterious benefactor looking to wire transfer us a billion dollars right? So I want to propose a new definition of what financial freedom really means for most of us normal people, and then I want to propose that it's actually somewhat easy to achieve. 

So... I called you wrong earlier for thinking of a dollar amount in response to my earlier question. I think I should at least give you what I believe is the right answer then, here goes:

Financial freedom is not measured in dollars.... it's measured in days. 

That's right! Financial freedom is measured in days. When someone asks you how financially free you are the right answer isn't the dollar amount in your bank account, because again, financial freedom is measured in days! 

This isn't my idea of course. Before going any further I have to give 100% credit to the man who has inspired millions to seek financial freedom, and to the book that 9 out of 10 investors will credit for starting them on their journey to freedom: Rich Dad Poor Dad. 

Anyway, let me try to prove my point. 

Ask yourself.... 

if I walked into work, and your boss handed you your last check and told you that your position had been eliminated, how many days could you go without needing to go get another job? 

If that number is 20... then you are 20 days financially free. 

There are people out there, lot's of people actually... who's financial freedom number is... infinity. 

How's that? Well... they've developed passive income. Their income does not require them to "clock in". So, assuming they can live on less than their passive income stream generates, they have achieved financial freedom. 

Let me give you two scenarios, and I'd like you to tell me who is more financially free. 

Case Study #1

Mike is an accountant who makes good money. He lives in a very nice house in a very nice neighborhood, and drives a very nice car. He is able to provide for his family, pay all of his bills, and even save a reasonable percentage of his income each month. By most accounts, Mike is very responsible and very successful, and I would agree with that. 

Mike's household income is 225k per year. His after tax income is about 140k due to high state taxes, federal taxes, and property taxes. After house and car payments he is able to save about 1500 per month. He has saved about 60k dollars to date. 

This means that Mike's cost of living is about 120k per year. 

Case Study #2

10 years ago Elizabeth got a job making about 50k per year. She lives in a pretty low cost of living area and low tax jurisdiction. Home values are pretty low in her area, however rents are pretty strong. 

When she got her new job 10 years ago Elizabeth started saving about 600 dollars per month and lives very frugally.

After one year of saving she had 7200 dollars. She was able to buy a duplex with 5% down and eliminate her housing expense by renting out the unit she wasn't living in. 

After this smart financial move Elizabeth was able to increase her lifestyle slightly while continuing to save 7200 per year. 

Each year, she buys a new duplex and moves there in order to take advantage of 5% down owner occupant financing. 

Today, Elizabeth owns 20 units (10 duplexes) and each unit cashflows 200 dollars per month. She now makes about 60k from her day job as well and is able to live on her after tax income of 47k dollars. She has 8k dollars in savings after her most recent duplex purchase.

So.... you know what I'm going to ask you next right? 

Who has more financial freedom? 

Is it Mike? Living in the nice neighborhood with the huge income? Or is  it Elizabeth? Driving her old toyota corolla to work through her blue collar neighborhood?

Well... we know how to measure financial freedom now don't we? Let's do the math.

Mike:

Cost of living: 120k per year

Savings: 60k

Passive Income: 0

Financial freedom number:  about 180 days (not bad)

Elizabeth:

Cost of living: 47k per year

Savings: 8k

Passive Income: 48k/yr tax free due to depreciation and interest deductions 

Financial Freedom number: infinity

So who would you rather be? Who do you think has more stress when they have a bad day at work? Who do you think worries more about money? Who could decide tomorrow that they are going to retire and travel with their family full time? Who is better equipped to pursue that new small business idea they've been dreaming of for years? 

I didn't even include Elizabeth's passive income stream during the ten years she was building her portfolio. In reality Elizabeth would probably be in an even more secure financial position. 

My advice would to be to seek the type of financial freedom Elizabeth has achieved. We aren't talking big numbers here. You don't need to make a million dollars a year to achieve this. You just have to make some different decisions that most people are just not willing to make. 

You can do it guys! 

I'm not there yet but since I started this about a year ago I can say my passive income is much higher and my financial freedom goes up every day. If I can do it, then you definitely can!