Financial Freedom in 1,2,3
What is financial freedom how much do I need and how do I achieve it?
What is Financial Freedom?
The journey to financial freedom is the ultimate quest for investors. In this article, I address the following key topics:
- What is financial freedom
- How much do you need, and
- How do you achieve it?
There are many definitions for financial freedom floating around, often accompanied by the notion that it means something different to everyone. However, the true definition of financial freedom is actually quite simple: it is achieved when the income generated from your assets is enough to cover your monthly expenses.
This is financial freedom:
Total monthly expenses: R20,000
Total monthly income from assets: > R20,000
What does this mean for you? It means you will have the freedom to do exactly what you want, when you want, and how you want. It essentially enables you to live life on your own terms.
How much do I need?
Now, the question arises: How much do you need to achieve financial freedom? Most investors work with the 4% rule, which suggests that if you withdraw 4% from your assets annually, they will last for at least 30 years. Using this rule, you can calculate the amount of assets you need to generate enough income to cover your expenses.
The calculation is as follows:
Monthly expenses x 12 / 4%
E.g., R20 000 x 12 = R240 000 / 4% = R6,000,000.
In this instance, if your monthly expenses are R20,000, you will need R6,000,000 in assets to generate that amount of income annually. It is a conservative estimate, so let's assume you need up to R6,000,000.
How do I achieve it?
Achieving complete financial freedom requires that the income from your assets exceeds your expenses. Here are the essential steps to get there:
1. Pay off your debt
The most crucial step towards financial independence is to become debt-free. Unfortunately, most people struggle to get past this step because they constantly increase their debt burden as their income increases. As they get salary increases, they buy more expensive vehicles and houses because they can afford the higher monthly payments, but they don't pay off their debt until it is too late.
2. Create an emergency fund
Another critical step to achieving financial freedom is to create a cash safety net, commonly known as an emergency fund. You should aim to save an amount equivalent to three months worth of expenses. This fund should be saved in an interest-bearing account that allows you relatively quick access to your money.
3. Build income-generating assets
The next step is to start building income-generating assets that will eventually cover your expenses in the future. This step is where most people focus their attention, as it involves deciding where to invest your money for the most growth with the least risk. The main asset classes are:
- Cash generates interest.
- Bonds generates interest.
- Property generates rental income and capital gain.
- Stocks generates dividend income and capital gain.
- Alternative investments, such as crypto, commodities, livestock, etc.
If you need assistance with your investments, book a free consultation with me: