Definition of Financial Freedom
When you look up financial freedom on Wikipedia you get this definition: a well-planned lifestyle where one no longer is required to work for income to cover their expenses. Contrary to popular belief, it does not require being free of debt, as a debt payment is just another expense. Typically, “Financial Freedom” can be attained in one of two ways (or a combination of the two): 1. Enough passive investment income to cover one’s expenses. 2. A large enough “nest egg” that can be liquidated over time to cover one’s expenses.
So what is my definition of financial freedom? I want my expenses to be covered by income. This income must have a passive component to it so I can utilize my time to do what I want to do.
Given that definition, what is my goal? I think the best way to form one is to make a S.M.A.R.T goal (a goal that is specific, measureable, attainable, relevant, time-bound).
My goal is to be able to retire by the age of 35. By that age I will have accumulated enough wealth in various forms that it can produce a revenue stream of 100,000 per year (or 8,333 per month). [ETA 06/30/09 - The 100,000/yr number is before tax. Assuming a tax rate of 35.8% this results in 64,236 per year (or 5,353 per month) after tax.] This revenue stream should be more or less consistent year to year and be able to increase with the rate of inflation (so that my standard of living will not need to decrease over the years after retirement).
What are some forms of wealth? This list is not all inclusive:
- Cash, money market
- Stock & bonds
- Real estate investments
- Royalties & patents
- Small business ownership
- Inheritance
- 401k/Roth IRA
- Retirement pensions
Some of the above types of income can be combined. Eg. open up a small business in which you manage various real estate investments that you own.
Now that I have set the rules for success, it is time to build the foundation so I can accomplish my goal.
Note: The after-tax calculation of income was calculated from PaycheckCity.com
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How much are you making at your current job to save up for this?
Currently I make in the mid 70s (not including rental income) and I use the majority of my income (+60% and not including 401k contributions) to either increase assets or decrease debts. I plan on continuing to live in a minimized lifestyle well below my means while also finding ways to increase my income output (TDYs should help in this aspect). You can check out my retirement blueprints to see how much I need to save up to attain my goal.