Friday, August 5, 2016

How to Attain Financial Freedom?

Ability to maintain a simple lifestyle without having to work is financial freedom. A majority of people has no option but work to make a living. Only a minuscule proportion of the population can afford to live without the necessity for earning a living. One may wish to call this segment of people rich but this term is actually not correct. They have certainly attained financial freedom but they need not necessarily be rich. While all the rich certainly enjoy financial freedom, all those financially free may not be rich. Financial freedom is an important milestone on the way to richness.


Financial Freedom

What does financial freedom mean, technically?

We have already understood that financial freedom means a person need not necessarily work for a living. It means one should earn incomes that are not directly dependent on the persons labor. These incomes are called passive ncomes. Examples of passive incomes are:

 Passive Incomes

On the other hand, income earned out of efforts like salary, fees earned by professionals like doctors, solicitors, brokers, profits earned out of business are all active incomes. Active incomes stop the moment the earner stops working – they are totally and directly dependent on the skills, knowledge, competence and efforts of the person.


Every person will surely be earning some passive income in the form of interest from the bank on the savings and fixed deposit accounts. A few must already be earning rent from real estate like residential homes, shops, industrial sheds they own. In the case of a majority of ordinary folks, the passive incomes are not significant. They simply constitute a very small part of their total income. The passive income is just not sufficient to maintain the person’s present lifestyle without the need for that person to work.

When the proportion of passive income becomes significantly large and becomes able to sustain the person without he or she having to work, then that person is said to have attained financial freedom.

We will examine the income, expense and investment patterns of two individuals. One is already financially free and the other is not yet.

Passive Incomes per month
Not Free, Yet ($)
Financially Free ($)
Interest
100
2000
Dividends
0
1000
Royalty
0
3500
Rent
550
0
Active, occupational income
4000
1500
Total monthly  Income
4650
8000



Present monthly lifestyle expenses
4500
4500



Surplus
150
3500



Investment for generation of passive incomes in future
0
3000



Surplus Income lying in savings account in bank yielding low interest
150
500


 Proportion of Passive Income to Total Income

When we study the financial information of the two individuals we find that the financially free individual has passive income of $6500 as against his monthly lifestyle expenses of $4,500, leaving a surplus of $2,500 for investment and consequent creation of additional passive income. Please also note that despite having total income of $8,000, far in excess of present cost of living, the person has wisely not increased the lifestyle expenses. Also noteworthy is the fact that even though this individual has already attained financial freedom, is still having active income, indicating active pursuit of a career. On the other hand the other person has little investible surplus. This person has to increase the active income as well as reduce the living costs and has a long way to go before becoming financially free.





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