 |
Warren Buffet the most famous investor of all time once said '' if you dont find a way to make money while you sleep you will work until you die'' .You gain financial freedom when you make money and cover your life expenses without you, needing to work for them . This means you are not financially free when you can make a lot of money from your job or you have a lot of money waiting for you in your bank account, but you are financially free when
you have a sum of money invested in assets that in return make you
enough money each year, to be able cover your annual living expenses.
Let's examine 2 objections that some may have on the statement of being financially free only when you dont have to work for money and only if your money can produce you more money.
1) What if i love my job?
It's great if you do something you love, getting paid for it and be able to support your lifestyle with it. But would you do it for free? and if you would, how many hours of your life would you dedicate doing it for free? how sure you are that you will always be able to follow the required schedule your job needs and always be in mood doing it? How safe you feel betting your life on the income you get from your job? What happens if for whatever reason you must stop? that's why loving your job is not the same as being financially free.
2) What if i have so much money that can last till i die?
You dont know the value of your money in the future, new money is being printed in the market all the time that's what always was happening, current nominal value of money lose their actual value in time. No one feels financially free when he gets poorer as he ages, this happens by 2 ways, one is by inflation (currency losing value) and the other one is by your annual expenses that are only about to increase every year.that means your bank account will have less money each year. Even if you dont care about leaving any inheritance behind you, human nature is always seeking for more not for less. You may think you are different but more or less you belong in one of 2 categories of people. If you dont make money your survival instincts will hit you and that will make you feel fear as you see your buying power and bank account value diminish every year, on the other hand if you are one of those people who dont care about making money and feel safe of having a lot , then you will end up spending it faster than you think. That's why many people who have won a lottery or have inherited a big fortune ended up bankrupt, no one who is ignorant about his wealth can keep it. You dont want to spend money faster than you make.
Finally i need to add , you are not financially free just by covering your expenses with money you make from your investments, these cash flows must also be safely produced and be predictable. Risky investments may produce higher returns in general but are not predictable.
The ideal scenario is to make money each year that can cover your expenses and leave you some money to re-invest, this will increase your cashflows each year.That's how you get financial abundance.
All in a small equation how much money do you need to have financial freedom?
yearly cash expenses = safe returns from Invested Capital
so what are considered safe returns from investments? generally anything under 4%.
Check the post about the 4% rule here!
Posts
