Financial freedom is one of the most important concepts in our life. However, I had never learnt this in school, neither in university. I guess that most of people don’t really know or even heard of such term before they started working for money. Millions of kids in our world are told by their parents that they must study hard and then get a good job with a decent pay. But, is this the only way of life? Why people must work until 60 or 70 years old? Why cannot we have holiday everyday instead of working days? When people retired at an old age, do they finally make much money or are they too old to work? How much money is enough? As a child, having all these questions in my mind, I felt that life is not so interesting in a foreseeable future, though studying is fun to me in many ways.
In fact, there are a very low percentage of people who actually work in an area which they really like in this world. They are extremely lucky. However, majority of people don’t have this luck. They have to work to make a living. Given choice, they would rather go for vacation, or do anything fun to them, but work. Do they have the choice? Do they have to be super rich to have the choice?
The key to these questions is the concept of financial freedom. To put it simple, financial freedom means you don’t have to work to make a living or to keep your life style. Sounds excellent, isn’t it? But wait a minute. Do I have to have a lot of money in the first place? Will the money eventually run out in my life time? Well, here is the formula of financial freedom:
Financial Freedom = your expenses <= passive income
What Passive Income Mean?
The American Internal Revenue Service categorizes income into three broad types, active income, passive income, and portfolio income. It defines passive income as only coming from two sources: rental activity or “trade or business activities in which you do not materially participate.”
To me, as long as the income generated not by an individual’s active participation, it’s passive income to the person. Therefore, passive income should include rental, dividend, interest or capital gains.
It’s up to you
With the above concept, life is suddenly become more interesting, if not easier. If you are satisfied with a moderate life style, you don’t have to have a very high passive income to achieve financial independence. Or at least, you have a reasonable goal, which you are able to achieve in your life time, or even in relative early stage of your life time. Now, you do have a choice. You don’t have to be a slave of material things, especially luxury items. In fact, many people live between fear and greed. They fear of losing their income and their desire of material things have no end. With the concept of financial freedom in mind, you can choose to be the master of your life, so long your living expense is not too high and you can build your passive income to match your expenses.
The next question is how to gain financial freedom and what the best way is.