Some basics on what financial freedom is (and isn’t), and why I’m on this path.
I’ve been focused on the idea of financial freedom since the summer of 2018 when everything about my job became frustrating to the point where I was dreading getting up in the morning, yet I couldn’t just quit. There wasn’t a particular light bulb moment. Looking back, I think wanting to be financially free was something that had been in my mind for a while, and I just hadn’t been paying enough attention to my thoughts to recognise it. What’s clear to me now is that working for someone else to make a living wouldn’t have been my first choice if I’d known better.
I spent a lot of my early life simply doing what everybody else was doing. I followed the classic ‘go to school and get a job’ advice from grown-ups to the letter. I even continued my formal education up to the postgraduate level. After university, I had a few jobs in different companies.
The 9-5 grind and corporate work routine has dictated pretty much everything in my life, including what I can afford when I can take holidays, and even what time I get up and go to bed. Sometimes my day job even dictates how I should spend my well-earned weekend. When work’s frustrating and the pay isn’t great, that only makes the pill harder to swallow.
In 2018 I came to the conclusion that living from paycheck to paycheck is no fun: it’s restricting and sometimes frustrating. I wanted to be financially free, but I’d been walking this well-worn path for years because I couldn’t see any other way.
Does that sound familiar?
I started to look for ways to get out of the 9-5 rat race. Like many of us do, I began by firing questions at Google. At first, I was inundated by information, but I soldiered on and gradually started to educate myself about financial independence.
This blog is a result of my exploration. I decided to write about different aspects of the topic as I progress through my journey towards financial freedom. This first post is my interpretation of what underlies real financial independence, based on my personal experience and the knowledge I’ve gathered so far.
I hope you’ll find something useful in this writing. It will be interesting to see how this topic evolves over time, including my personal views on it as life goes on and the world economy continues to change.
But for now, here goes.
What is financial freedom anyway?
Almost all of us have dreamed of getting rich at some point in our lives. However, being rich isn’t necessarily the same as being financially independent. We’ve all seen examples of high-income professionals and rich businessmen who are tied to their jobs 24 hours, with no time to enjoy their hard-earned money or spend quality time with their families. Conversely, there are other people who are financially independent but happy with a modest life.
So what defines financial freedom?
Terms like financial freedom and financial independence may seem pretty clear on the surface, but it’s worth digging a little deeper to see how they translate to real life. Over time, I’ve come to the following definition:
Financial freedom is your ability to have one or more predictable, sustainable, regular and passive income streams that cover your living expenses for the rest of your life.
When we break this definition down, the important terms are predictable, sustainable, passive, and cover your living expenses. All of these concepts are worth looking at more closely when it comes to financial freedom.
Let’s start with the idea of predictable income.
Financial freedom is built on predictable income
Anyone who has a permanent job with a fixed salary has a predictable income. When the happiest day of the month—payday—comes around, you’re hopefully a little bit richer than you were the day before. Your salary is predictable and guaranteed to come around again next month as long as your employer can support it and you’re on good terms with your boss. Paid employment is the easiest and simplest form of income, and it’s how most of the world population gets by—but they don’t have financial freedom.
People who are financially free don’t rely on working for others. So where does their predictable income come from? The answer is: from businesses and assets.
Still, just owning a business or accumulating assets isn’t enough to generate a predictable income. For example, assets need to be managed, and a business needs to be stable with a clear plan for the future. Startups who make enough money but don’t have a clear sales forecast can’t be categorised as a predictable source of income. Similarly, even established businesses who’ve provided income for decades can’t be relied on if they’re not adapting to a changing, volatile or dying sector. Companies like Blackberry, Nokia, and Yahoo, who once dominated the tech industry, became insignificant over time because they couldn’t adapt.
The problem, then, is that like everything in the future, it’s hard to predict income. As a solution to this, many business owners and investors diversify their businesses and assets to maintain a sustainable passive income. For example, people who invest in index trackers often invest in bonds too as a hedge. Property investors may choose to invest in stocks as they’re more liquid than properties, and if you’re investing in high-risk crypto assets, it’s better to have some safer investments such as gold too.
In short, if you want to be financially free, you need a predictable level of income that gives you some peace of mind and allows you to plan your future.
Financial freedom is built on passive income
There are two main kinds of income stream: active and passive.
Active income means you trade your time for money, so your income directly correlates to your physical or mental labour. This is the most common type of income, and most people usually have an active income at some point in their life.
With active income, the market decides how much your time is worth after taking your skills, experience, and supply and demand into consideration. These things determine the price tag for an hour of your time, which translates into a weekly or monthly salary. Some high-income earners such as doctors, lawyers, accountants and senior managers have a high price tag because of the risk or the responsibilities involved in their jobs. People with a high active income can be rich, but that doesn’t necessarily make them financially independent.
Passive income, on the other hand, doesn’t involve directly trading your time for money—at least in theory. Instead, it derives from your assets. This means that with passive income, your time and active labour are invested not in a paid job, but in creating, building and acquiring assets. Usually, you only need to set up these income-generating assets once, and they generate income throughout their lifetime. If you like, you can hire other people to manage your assets for you, which frees up even more of your time.
Some people mistakenly think that income from a spare-time side hustle is passive income. Some examples of these jobs are filling out online surveys, taking part in research, pizza delivery, and testing computer games or software. While there’s nothing wrong with having an extra income, this is not passive income, as these jobs still take your active labour and time in exchange for money or credit. Real passive income is generated from assets that do not need you to trade your time on a regular basis.
Financial freedom means your needs are covered
An important part of financial freedom is having one or more passive income streams. This income should cover your expenses after paying taxes and meeting other financial obligations such as mortgages and car finance.
The bare minimum for financial independence is that your passive income covers your basic needs such as housing, food and clothes. However, in reality, it should also be able to meet other non-essential needs too—such as medicine, education, utility bills and entertainment—and keep some money in your emergency fund. You should also have some money left to invest back into your passive income generators.
This leads us to the idea of sustainable growth and stability.
Financial freedom is sustainable
Now we’ve established that financial independence means you have a passive income that covers at least your living expenses.
But even this isn’t enough for true independence. The truth is that this situation needs to be sustainable for an extended period—ideally for the rest of your life. Let me put it like this:
If you quit your day job today, your passive income should be able to support you and your entire family financially for the rest of your life.
Basically, if your income stream is going to dry up in the next five years, you aren’t financially free. When your business model becomes outdated, if you don’t have a plan to adapt then you can be worse off than someone who’s relying solely on a pension. This means that your passive income source needs to be sustainable and kept up to date with economic and social changes.
The takeaway
To come back to the theme of this post, what is financial freedom?
In summary, financial freedom mostly depends on your assets and how far they’re able to generate a sustainable, predictable income that covers your living expenses—with your management. Being rich and being financially independent are two different things, though there’s no reason you can’t have both.
if you have any comments, please drop me a message.I’d love to hear from you.