How much does it take to reach financial freedom?
Out of all the post I’ve written, I reckon this title should be the most attractive to look at.
However, when many people face the goal of financial freedom, there is an idea in the subconscious: "This goal looks good, but I have no hope in my life."
When facing a goal, no matter how impractical it is, the first step before completing it is to define it clearly.
The goal of financial freedom is too general, and different people may have different understandings. It is estimated that most people have not thought of this seriously. Even if it's really asked, it's basically a really big number.
And to specifically find a way to estimate it, the obtained value may be more practical, more clear.
This is the first step towards completing it.
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Define criteria
Financial freedom can be roughly defined as the state of not having to work for the sake of living expenses.
You can think it as an institution or individual that is very nice to you and is also very reliable, sending you money at a fixed time each month, with an amount sufficient for your expenses every month. This is basically the state of financial freedom.
There is a special term for these: passive income. That is, you don't need to work to earn that income.
You usually will put the money in the bank and earn passive income from the interests, but that is generally not enough.
If the annual passive income exceeds the annual living expenses, then that is financial freedom.
Now the definition is clear, now look at the standard.
The cost of living differs for everyone, and the cost of living will be different when you have more money and when you have less money.
Although everyone is different, it can be simply divided into three levels:
Meet essential expenses for basic living, such as clothing and shelter.
Meet the current quality of life requirements of the expenses, live however you want.
Meet your dream expenses, travel around the world, mansion, and yachts.
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Estimated annual expenditure
For different standards of financial freedom, a year's spending is naturally different.
But it can still be estimated more accurately.
For the first level of the estimation, we only need to check the previous year's basic necessities’ bill. Exclude all the unnecessary expenses. In this way, it is estimated that a year will not cost much money.
Like $100,000 a year.
The second level of estimation is simpler, and if you spend most of your expenses with mobile payment, you will able to see your total bill for a year from the payment app, which has almost a relatively accurate value.
Like $200,000 a year.
You will need to do a survey for the third level of estimation. Based on your own specific dreams, verify the price of each individual, and finally, add up to estimate a value.
Like 1 million every year.
Of course, if you want to buy a private jet, or buy a big asset like a holiday island, you don't have to calculate the price of buying it. And it only takes to calculate the price of a life that enjoys this quality over the year.
For example, renting a private jet plus the money spent by the entire service team for two weeks is still very different from buying it, the former is much cheaper.
For your dream life, it is important to enjoy this quality of life services, rather than owning the asset.
Evaluate the speed of asset appreciation
The way the average person gains passive income is by investing.
And investment has an indicator that easy to refer to which is the annual rate of return.
No matter what type of investment you choose, you need to review your investment data from previous years and not overestimate your investment and financial skills.
After a careful assessment, you will get an annual rate of return on investment, such as 5%.
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Calculate
At this point, the values needed to do the final calculation have been estimated, and all you have to do is a primary school math problem:
Total money needed for financial freedom = annual expenditure/annual rate of return on investment
If you only ask for the first level of financial freedom, by bringing in the above value, you will need:
$100,000 / 5% = 2 million
If you want the third level of financial freedom, by bringing in the above value, you will need:
$1 million / 5% = 20 million
Of course, the above calculation is just an example. You might have a bigger dream, and you might want 10 million a year, you may also want to be able to invest comparable to Buffett, the annual return on investment rate of stable reached 20%.
It doesn't matter, bring in the formula to figure out how much it will cost to complete your financial freedom goal.
After figuring out the target amount, no matter how far away it is from it now, you can at least see it.
All that remains to be done is to make a plan and find a way to achieve it as soon as possible
It’s the end of the post, what are you still doing here? Hurry up and start making money!
