Low Lifestyle Costs and High Passive Income Lead to Financial Freedom

Financial Freedom is the most sought after and at the same time elusive condition in the world. But is financial freedom so unattainable actually?  This post, a slide briefly depicting the formula or equation actually, postulates that if I keep my lifestyle simple and enhance my passive income streams I will be able to attain financial freedom. This post is an integral part of a closely knit group of posts/ articles that explain the various related ideas and ingredients which I have explained briefly in this post and have provided links to other articles for detailed elucidation. 

What is Financial Freedom?

Financial Freedom means a financial condition where an individual can enjoy life without bothering about working for a living or taking up job or profession or occupation to support a certain personal lifestyle.

Importance of Keeping Lifestyle Costs Low

Meaning lifestyle can be defined as the habits, attitudes, tastes, economic level, etc., that together constitute the mode of living of an individual. The focus phrase is economic level. Marketers out there are ever enticing us with products, luxuries, aspirations, deals and offers - attempts to make us part with our money and thicken the wallets of their organisations/ clients. However in order to attain financial freedom, we need to live a simple life.

What is Passive Income?

Passive or residual income is the income that accrues to an individual without that individual physically or mentally exerting any efforts to earn that income. Examples are rent, interest, dividends and royalty.

Formula for Financial Freedom

Create passive income streams through hard work, maintaining a simple lifestyle and prudent investing and attain financial freedom.

Links to Related Ideas and Detailed Descriptions

• How to Attain Financial Freedom?
• What Is Passive Income?
• Pamper Yourself or Invest in Stocks?
• If you buy things you do not need, soon you will have to sell things you need
• How Will My Lifestyle Affect My Children?
• Gift Your Child Financial Freedom!

Conclusion

Financial Freedom is a wonderful gift one can have but at the same time is elusive. Financial freedom is surely and certainly attainable by my creating passive income streams, keeping my lifestyle simple.

What Is Internal Rate of Return or IRR In Simple Terms?

‘Internal Rate of Return (IRR)’ is used by organisations for comparing the returns obtained from internal or in-house projects versus investing the same funds in instruments available outside the organisation. For example suppose a company’s expansion project is projected to yield an average return on investment of 7% over its lifetime, this is called the project’s ‘Internal Rate of Return’ or ‘IRR’.

Suppose by investing the same amount in fixed deposit the organisation can earn 7.25%, then there is no financial sense in undertaking the expansion scheme. After all the expected return of 7% per annum from the expansion idea is just a projection fraught with innumerable execution risks, whereas the 7.25% interest income is certain and risk-free and therefore it makes more economic sense to invest the funds in a guaranteed, risk-free instrument like fixed deposit. Extending the logic further, even if the interest on fixed deposit with a bank is lower than the projected IRR is marginally lower, say 6.50% per annum, still the corporation may most likely decide to take the fixed deposit decision for the simple reason of risk avoidance. Only when the project is expected to generate a significantly higher IRR, say 20-25, compared will a 7% on bond or fixed deposit will a business risk making an investment decision.

So, in simple terms, IRR is the expected rate of return from an in-house project.