I have covered the topic “financial freedom” in detail in my book “My strategy to retire early” but today I want to go over on a few angles of this topic.
What is financial freedom?
For me, financial freedom means that you attain a certain level of wealth that you don’t need to work for money anymore. This can be achieved in various ways. You can win the lottery. You can inherit more money you’ll ever spend. Maybe even sell the company you’ve built from the ground up and get a nice exit. Or you can do what I am doing: save aggressively, invest wisely, and ultimately build a nest egg that pays you enough money to live off.
If you ask people whether they want to be financially free, most will say yes. However, they lose site of this by putting other things first. Most people get themselves into huge debt for a home and a car (not to mention college debt). Others keep using their credit cards to buy stuff they really don’t need, just to have a spike of excitement (I will not even call it happiness) when they buy it.
If you want to achieve financial freedom, you will have to adopt a whole new set of rules for your life and eventually become a different person. And to truly do and embrace that, you’ll have to assess whether this is a true priority in your life. Otherwise, my experience is that it won’t work. Ask yourself questions like “am I OK with living off of 30% of my salary for 10 years?”. Or “am I strong enough to make my own meals and coffee (instead of going out) every day?”. I can’t tell you exactly what it will take for you to become financially free. However, questions like these will give you a good idea of what it really takes.
What is necessary in order to achieve financial freedom?
Piling up money is probably not the best strategy to attain financial freedom. Technically, you can achieve financial freedom if you pile up enough money to live off of, but this is a very hard way to do it. It is simply extremely difficult to pile enough money to live off of, for the rest of your life. To start off, inflation will remove transactional value of your money every single year. The idea is to save and invest, and make more money on your saved and invested money. Think of it as buying your own salary by pieces, if that makes sense. There is one especially popular chart in the ER community that works magically well:
(taken from familymoneyplan.com)
The chart basically represents a trade-off of how much you save and how many years it will take you to retire. For example, if you save 70% of your salary, it will take you about 10 years to retire. Interestingly enough, this works regardless you make 300k or 30k! The key idea is that you can live off a certain amount and you have to build a nest egg that will pay you that amount every year (ideally you want to grow it a little just to be on the safe side). Of course that this means that two people living off of 300k and 30k will have very different annual spending figures.
I like to think about in a slightly different way. To live comfortably well in Portugal, I will need a net “salary” of about €20k/year (as of April 2017). In order to net 20k from my investments, assuming a 8% return rate and 2% inflation, I would need a portfolio of about €333k. Now, let us consider a more conservative return rate, of 6,5%, and 3,5% average inflation. This means that I will net 3% of my portfolio, every year. To get €20k net per year in these conditions, my portfolio would have to be at €670k. This is, in fact, my first goal.
Having children changes things a little bit. If I were to have one child, I would have to increase my living costs by $1000/mo. With a return rate of 6,5%, and a 3,5% inflation rate, I would need a little bit more than one million bucks to net 32k/year.
Why do I want to achieve financial freedom?
If you follow my blog of you have read my book, you know that I want to retire because I have the Chronic fatigue syndrome and sometimes I just drag myself to the office. But even if I were absolutely healthy, I think I would trying to retire as well.
Whether you want to achieve financial freedom is up to you. Look deep inside and find out if you really wanna do that. Even if you already know you want to achieve financial freedom, looking deep down for the actual reasons will give you strength to fight. And boy, this is one heck of a hard road!
How do I imagine my financial freedom?
Just because I plan to retire early it doesn’t mean I will stop working. As I said, what I really want is to be able to do whatever I want, whenever I want. Maybe surprisingly for some, I love to work. In fact, most of my time is spent working on stuff I love. If you didn’t achieve financial freedom yet, you won’t be able to work on what you want. You will have to work for money. This may come in the form of a boss or your own business, but there are many things you must do even when you don’t feel like it. And that is the whole point of financial freedom. Here are some examples of stuff I will do after I achieve financial freedom:
- Blogging. I’ve always loved to write, but blogging is a lot more than writing. If we consider the tasks underlying a blog, writing is one of the smallest tasks of a blogger. Content creation involves much more than simply writing. But content creation is not even the bulk of one blogger’s tasks. I want From cents to retirement to become a reference for personal finances and early retirement. In order to turn a blog into a reference, you need to work very hard.
- Going into nature way more often. I love to hike (especially in not so popular wood trails), find hidden lakes and waterfalls and what not.
- Working out more often. Between 2010 and 2012, I used to workout 3 times a week every week. My shape was amazing. I ended up giving up of that due to lack of time.
- Write more books. I wish I had the time to write two books every year.
- Give back to the community. I plan to help those in need, especially those with CFS.
- Coaching other people. I have a few clients right now (I have a partner who is generous enough to send some clients over), and I coach a few friends. However, I would like to coach and help people on a much more broader scale.
If you liked this post, then I recommend you to check out the resources down below.
Ben Davis