Some key concepts regarding financial freedom

Let us try to understand some key concepts about financial freedom. Then we can take steps to achieve it.

What is financial freedom?

Financial freedom means that you can keep up the lifestyle you are comfortable with and not have to work. Financial freedom doesn’t mean that you have all the money in the world. It doesn’t mean that you are so fabulously wealthy that, no matter how foolish you are with money, you still would never have to work again.Financial freedom simply requires that you change your thinking and have money work for you instead of you working for money.You do it by having passive income, income that comes in whether you work or not. When your passive income is greater than your expenses, you no longer have to work. Then you are financially free.

“If you stopped working today and continued to live at your current standard of living, how long would you last? If you could last a month, then you are one month wealthy. If you could last five years, then you are five years wealthy. And if you could last forever, then you are infinitely wealthy.”- R. Buckminister Fuller

Say your total net worth is Rs 1.2 lakh. Your monthly expenses are 10,000. Then you will run out of money in 10 months.

However this is not the way to look at it. Let us say you have assets worth 1.2 lakh. This 1.2 lakh of assets produces passive income of 1.2 lakh every year. Your monthly expenses are 10,000. Then you can live forever on that income. This means you are financially free.

The other things to understand, apart from income, for achieving financial freedom are:

  • Assets
  • Liabilities
  • Expenses

Asset: Assets produce positive cash flow that comes to you . So anything in your life that pays you because you own it is an asset.

Example: A house that you own outright, that gives you monthly rent, is an asset

Liability: Anything you pay to own, however, is a liability.

Example: A house that you have bought with a loan, for which you need to pay the bank monthly, is a liability.

Expenses: This comes out of your income. The world will ask you to spend on the latest fashion, gadget, car, etc. Well, you can, if your passive income can take care of those expenses. If not, then your wealth will continue to decrease, and you will never become financially free. It is important to realise that having things and possessions are not what makes you wealthy. Wealthy, as we define it, means financial freedom.

Think about these things and see how you can apply them in your life. Then you will be on your way to financial freedom.

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