What is financial independence?
Financial freedom means having enough money & control over it to live a life the way you want to. You can do what you like, with the people you like, & at the time you like.
Whether it’s spending time with loved ones, traveling the world, enjoying your time at home, or pursuing your passions.
Once you achieve financial freedom, you’re no longer strict with a schedule. You can wake up when you want, eat what you want, wear what you want & sleep when you want. There’s no need to schedule your daily routine according to your boss’s timetable.
Financial independence designs a lifestyle of stress that brings happiness & fulfillment.
What do you need to achieve financial freedom?
As we discussed earlier you need to have enough financial strength to cover your monthly & annual expenses. That means having investments that make money for you without needing to work.
The money from investments we called passive income. Once your passive income can cover your all expenses you are ready to get your financial freedom.
How much investment do you need to get financial freedom?
The first thing you need to do is figure out how much you spend each month. How much money do you need for a month? Multiply that monthly expense by 12 to know your annual expenses.
Once you know how much need every year to live, you can now look for suitable investments that can give you that much money. Let’s do some basic calculations to understand this.
As the latest data shows the average monthly expenses for one person in 2022 were $3,693. Let’s multiply this number by 12, then we get annual expenses for one person. $3,693 * 12 = $44,316. One person’s annual expense in the USA is around $45,000.
If you are a person who has a family this number may be different. The average household’s monthly expenses were $6,081 in 2022 which gives the annual expenses of $6,081 * 12 = $72,972.
The next step is to find investments to cover this annual expense.
Investment Returns in Different Asset Classes
When we talk about investments, you can put your money in stocks, bonds, real estate, or gold. To reach financial freedom, you need to earn passive income.
That means your investments should give you money like every month, every three months, or yearly. Stocks pay you dividends, bonds give you interest, and real estate gives you rental income.
All these returns are passive income. But gold doesn’t produce such passive income, so let’s leave that out for now. Next, we need to compare how much investment return, and passive income each of these investments generates for us.
The average annual return on the S&P 500 for the last decade or so is 15.3%. This means if you invest your money in the S&P 500 you would get a 15.3% annual return for your investment.
The 10-year treasury rate in the USA is 4.61% now.
The average annual return on real estate in the U.S. is 10.6%.
Let’s say you are going to build a diversified investment portfolio that includes stocks, bonds & real estate. Let’s say the average annual rate of return is 10%.
If you are a single person you need $44,316 annual income to cover annual expenses & your diversified investment portfolio gives you a 10% return. The total investment you need to build to cover this expense is $44,316 * 10 = $443,160.
How to build an investment portfolio?
Once you see a big number like this the first thing that comes to your mind is you would never be able to build an investment portfolio & get financial independence.
But the truth is this is not a very big, impossible goal to achieve. This is not rocket science. But you have to build some basic very important skills to climb this ladder.
The first basic skill you need to develop is saving skill. No matter how much money you make the important factor is how much money you save.
Let’s say you are an average American citizen & you earn $60,000 per year. You need to at least 10% of your income, $6,000. The person who does not save $6,000 when he gets $60,000 income will never save $60,000 when he/she gets $600,000 income.
Most people fail beginning of the journey by not saving money. You have to start now, you have to save money no matter how hard your life is. The very next thing people do not care about is they do not invest their money, they gamble with their money.
They want to spend $10,000 money today & make it $100,000 in next year. That is not how this world works. You have to be very patient to get results from your investments. You will get lucky to multiply your investment by 10 times within a very short period, this is just pure luck & you can’t expect this luck forever.
You must let your compound engine do its work year after year. In that period only thing you need to do is invest regularly, invest every month, invest every year.
If you are an active stock picker you would have to study about each stock/company before you invest. You have to read a lot of books, and financial reports, and listen to great investors’ lectures. A lot of work to do. Without doing hard work you cannot become a successful stock picker.
If you are not a stock picker you can invest your money in an index like S&P 500. All you need is to put some portion of your paycheck month after month no matter what economic condition is. A lot of people are not able to do this & that is why they never achieve financial freedom.
