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Financial independence or ‘freedom’ is the ultimate goal for many. But what is it, exactly? We take a look at the role of passive income and intelligent financial management in building financial freedom.
Building a passive income is something many people dream of, but few achieve.
For those who do manage to build a passive income, enjoying true financial freedom becomes more realistic.
It’s easier than you think to build a passive income stream.
Before we get into that though…
What is Financial Freedom, Exactly?
The truth is that financial freedom means different things to different people.
One person might say they only need a million dollars to feel financially free.
Another might say a billion.
Generally speaking, though, financial freedom means collecting a comfortable income from your money, instead of having to trade your time for money.
If you have enough savings, investments and liquid funds available to live the lifestyle that you and your family want, then you have financial freedom.
In other words, you might say it’s having the ability to choose how you spend your time, rather than having to devote your time to making money.
Few people achieve that goal.
A survey by GoBankingRates found that 69% of Americans have less than $1,000 in their savings accounts.
In Australia, savings.com.au reports that about half the population has less than $10,000 in savings.
Saving for a rainy day is the first and most important step to financial freedom.
Think of it as the foundation for financial freedom.
Once you’ve created a firm foundation, you can start to look at building up passive income.
What Are The Best Ways To Earn Passive Income?
The idea of having a passive income is often dismissed as a ‘get rich quick’ scheme.
Perhaps that’s because many people don’t like the idea of parking a substantial amount of money in an investment for a long period of time.
The truth is that passive income is the opposite of ‘get rich quick’.
It’s more like ‘get financially free slow and steady’.
There are, however, ways to make the money you are already earning work harder for you and generate a passive income through interest or an investment portfolio.
The average annual return of the stock market over a 10 year period is 9.2%.
That’s far higher than a typical savings account.
If you follow the golden rule of personal finance and pay yourself first by saving some money — even a small amount of money — then the returns you’d see investing in the stock market over the long term could be life-changing.
Imagine you invested $70 per week, every week, for a decade.
With returns of 9.2% per year, compounded, your $33,600 deposits could earn an extra $21,726 in interest, making them worth $55,396.
That’s a pretty impressive return for a relatively modest investment.
The 20-odd grand of interest is your passive income.
If you were able to invest $10,000 a year for 20 years, for argument’s sake, you can see how you’d create a substantial passive income over time.
This long-term, passive income-focused investing can become the path to financial freedom.
How Much Money Do You Need To Be Financially Free?
Financial independence is a very personal thing. How much money you need depends on your own lifestyle.
In general, if you want to be able to live off the interest on your savings you should aim to be drawing down no more than 4% per year.
So, you should aim to save enough to be able to do that.
If you want to withdraw $40,000 per year, you would need savings of $1 million.
If you live more modestly, you could get away with smaller savings.
Do I Have To Be Rich To Achieve Financial Freedom?
You don’t have to be rich to start saving.
Simple things like cutting your outgoings and building a modest emergency fund can help you avoid expensive borrowing.
Once you have a safety net you can start investing while looking to increase your income.
Even if you feel like the amount you can save now wouldn’t make a difference, it’s worth making a start.
Consider the snowball cliché.
Even the greatest avalanche starts with a single flake.
And if you’re serious about investing to create passive income and financial freedom, platforms like Navexa give you the tools you need to make intelligent decisions for your portolio.
