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Financial Freedom and How to Get it

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Financial Freedom - Heres how to get it-MakeLivingGood.comWhen I asked a friend of mine that how much money would he need to consider himself as financially free?  He promptly responded to me that “I need $100 million dollars to achieve financial freedom“. For a moment, I felt that he had been thinking of this number before and had his answer prepared before I had asked him my question on that day.

So, I asked him why would you think $100 million be sufficient to achieve financial freedom in life? He said, with this much of money, he can buy anything that he wants and live his life very comfortably.

I agree with him, $100 million is a huge amount of money and it would allow anyone to live comfortably for a long time unless that person goes crazy with money.

Before we move  further on this discussion with my friend, we must clear some basics in our head first.

What is Financial Freedom

Financial freedom means that you do not have to actively work to pay for your living expenses. You have enough income generating assets which take care of your day-to-day expenses.

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Why Financial Freedom is so Important

Think about the time when money wasn’t invented. People probably had some land to grow crops on and some animals for dairy and meat. Growing crop isn’t as hard work as the general perception is made today. In fact, if you can plough the farm land properly and sow the seeds once, you are done for weeks and months. Then repeat the process again after harvesting in couple of months.

In my opinion, our past generations had much more quality time than we do today. Even our parents had  more fulfilling life than ours today. Why was it?

Because life is actually easy but still everyone is trying to make it hard. If you think otherwise, watch this video before proceeding.

Today financial freedom is much more important to achieve than it ever was. But unfortunately very small percentage of people think about it and even smaller percentage works towards it.

Each one of us has more or less same routine today;

  1. wake up,
  2. go to work,
  3. dine,
  4. sleep,
  5. wake up,
  6. repeat

Is this really living? Think about it. It’s not living but a rat race. Something like this:

via GIPHY

We must come out of rat race as soon as we can and this is the reason I started writing about gaining financial freedom myself. So I can wake up more and more people.

We all should remind this to ourselves daily:

I must end my rat race.

In my opinion & with due respect to all readers; I think if someone is not pursuing financial freedom in his or her life, and just following the routine mentioned above; then he or she isn’t really living.

Financial freedom would let you stop running rat race and start enjoying your life. It doesn’t mean you would stop working after reaching financial freedom. I am sure you will still be working afterwards, but only on things that matter to you most. Will it not be just amazing? Think about it.

How much you really need for financial freedom?

I asked my friend, how much you really need to be financially free? He said, “I don’t know. I just like the sound of $100 million”. I told him, let’s find the actual number which you would need to be financially free, together.

Why?

Why do we need to find the actual number and why can’t we go with $100 million which sounds amazing? He asked me.

Well, I do not have any suspicion that you won’t be able to make $100 million in your lifetime. I believe you can do it and anyone reading this can do it if that’s what they truly want.

But the reason I want to find out the right number is because may be you need more than $100 million to be fully financially free and if you leave everything as soon as you have $100 million in bank, then you will be in problem after few years, isn’t it?

Or, another possibility is that you may NOT need that much of money and you might just be wasting your time to get there. May be you are ready to retire today and start second phase of your life where you are your own boss. May be you are already there to decide your day and not someone else for you.

That’s why it’s very important to find a number that is closest to what you actually need to take the next giant leap towards a new life.

How do we find out how much we really need?

I must say it’s not easy. There are many ways to screw this up. But it’s not impossible to reach to a closer number and then apply a principle which Warren Buffet always preaches and does in his business.

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The principle of Margin of Safety.

The margin of safety is basically a layer of cushioning in your calculations. In other words, if we come up with a number say you need $1 million to be free, we will add another 50% as margin of safety to avoid any mishaps in final outcomes, due to something we missed in our calculations.

When my friend told me he needed $100 million to retire, I asked him to find the real amount that he would need. Here’s what we both did next.

To get the real numbers, we need to find out how much he spends today and then multiply it with a factor to encounter future inflation and unpredictable expenses.

So, what are your living expenses today, I asked him. Here’s what he told me.

Financial Freedom - Personal Expenses - MakeLivingGood

Total Expenses = $4625 per month

My friends yearly expenses were around $55,500. That much of money he needed every year to pay the bills.

Travelling

After this, he told me when he would be rich, he would like to travel a lot; may be in a private jet or business class. So, I asked him, how much he would like to travel. He said about once in 2 months domestically and may be once every six months internationally.

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So, we came up with a ballpark number for his traveling plan as follows:

Domestic travel = 2 hours/flight within US

If he is traveling 2 hours (outbound)  x 2 hours (inbound/return) x 1 trip =  4 hours per trip for domestic flights and about 4 x 6 = 24 hours in a year.

Now you can get a decent private jet for $2000 per hour. So, he would need $48,000 for his domestic trips every year.

Private Jet Cost - MakeLivingGood.com

For international travels, he can get $3000-$5000 per trip in business or first class category. So, for 2 trips in a year, he would need additional $10,000.

Let’s also add some other expenses that my friend listed down under luxury category. Here they are;

Financial Freedom - Luxury Expenses - MakeLivingGood

Let’s add everything to get the total:

$55,500 + $62,600 = $118,100

He needs $118,100 every year to retire and enjoy his life.

Let’s add some margin of safety to it and round it to $150k a year.

How to make $150,000 a year without work?

Now, the next question is how do we generate $150,000 every year for rest of his life without working ever. Does he really need $100 million to retire? Is $100 million enough money for rest of his life? Let’s find it out with some calculations.

If he can generate 5% a year (post tax), then to receive $150,000 in interest income, he needs to invest $3 million.

At 2.0% a year (post tax), he needs to invest about $7.5 million.

As you see, he doesn’t really need $100 million to retire. In fact, he just need 1/33 of $100 million. That is $3 million only. Even in worst case scenario, he would need $7.5 million at most.

Before I explain how to get $3 million or even $7.5 million in one’s lifetime, let’s assume we have this much money and want to know how to generate interest income for rest of our life.

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Can we really generate 5% interest in US?

Yes. There are many ways to do it. Here are few ideas;

Peer to Peer Lending (lending club and prosper)

Peer to Peer lending is the practice of lending money to individuals or businesses through online services that match lenders with borrowers.

There are two major companies in US that offer P2P lending:  LendingClub and Prosper.

Both offer same features and returns so let’s not spend time in comparing which one is better. In fact, some investors operate both accounts to diversify.

LendingClub-MakeLivingGood

source: lending club

You open an account as an investor and then either opt for auto investment (offered by both companies) or manually pick your borrowers yourself.

Lending Club Peer-Peer Lending - MakeLivingGood

source: lending club

Here’s a risk and return chart from Prosper. As you see, high risk (HR) returns are up to 11.79%. It’s better to invest across all rating classes to diversify and get overall good return.

Prosper-Peer to Peer Lending - MakeLivingGood

source: prosper

There is the risk of the borrower defaulting on the loans taken out from peerlending websites. Although it will impact their credit history same way it does with defaulting bank loans, but it’s something that we should acknowledge before investment.

Tax Lien Certificates

This is not a common investment as not many investors know about it. In US, if a real estate property owner forgets to pay property tax, then government’s county office of the area creates a tax lien certificate on that property for the amount due in taxes. In other words, if property A has tax due of $500, then county office will create  tax lien certificate of $500 for anyone (US Resident only) to purchase that lien and pay tax in lieu of the owner.

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What’s in it for the investor? As an investor, you will get a fixed interest on your investment. As of today many counties in US offer up to 18% fixed interest. Owner of the property won’t be able to sell the property until he pays the investor. If owner didn’t make payments within 3 years, then you as a lien holder have right to claim his property for tax amount due only.

This is one of the safety high yielding investment that I have found in US. I have personally made over 18% returns in my investments. The only disadvantage of TLCs is that; you can’t encash or withdraw your invested money in middle. You will have to wait for owner to pay it. So, your money is kind of stuck for a while.

Dividend Stocks

Today the markets are at their highest levels in many decades but even now many companies are giving very good dividend returns. Remember that the dividends may be reduced or ceased in future by a company so I always look for companies with good cash reserves and a track record of paying consistently growing dividends in last 10+ years. This is not a guarantee of protection, but just minimization of risk.

Here’s a map of S&P 500 dividend yields as of 2nd April’2018.

Financial Freedom through S&P500 Dividend Yields-MakeLivingGood

source: finviz

As you can see, there are few companies yielding over 4% (XOM) or even 5% (Ford) today. Please don’t consider this as an advice to buy these companies. You should do your own due diligence before investing.

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Foreign Investments

In US, the money market returns are quiet low around 2-3% (CD) before tax. But outside US, there are many countries which provide very good risk free investment returns. For instance, if you are a foreign national in US but originally from India, then you can invest in India to avail much better returns. Even if you aren’t Indian national, you can still open an account in India to invest in its growing economy.

In order to invest you will need to open an account called – Portfolio Investment Scheme (PIS) which allows eligible entities, such as foreign institutional investors (FIIs), non-resident Indians (NRIs), persons of Indian origin (PIOs) and qualified foreign investors (QFIs) to invest in shares and convertible debentures of Indian companies, and units of domestic mutual funds, on any of the Indian stock exchanges. You can also invest into government issued bonds which give up to 8% returns (~5% after tax).

As in any country, government issued bonds are the safest of all investments and in developing countries for instance, you can get unto 8% returns on your money risk free.

I also want to suggest you that whatever investments you chose, make sure you diversify your funds across few different investments. This will protect you from downfall in one asset.

Disclosure: As I am not a certified financial advisor, I recommend you to seek professional help before making any investments.

As we learned, there are ways for generating $150,000 a year if you have $3 million to invest. Now, the question is how do we get $3 million in first place. Let’s look into that now.

Do you still need $100 million to be free?

Before we look into ways to make our few millions to retire early, I want to share what I told my friend who originally wanted to have $100 million to retire.

Do you still think that you need $100 million to get your financial freedom? I asked my friend. “Ofcourse not, I never thought about it this way. Why wait for $100 million, if I can do it with just $3 million and may be much sooner“. He replied.

That’s exactly my point. In our mind, we make false targets and goals which are often too big for what we actually need them for. We just learned that my friend can do all what he wanted to do when financially free with $3 million rather $100 million he originally set his mind to. I am not saying, we should dream big or shoot for 100s of millions or even billion. But what I am saying is you may achieve your goals much sooner if they are set realistically considering actual cost of achieving them.

How to make $3 million to invest

This is the key question for most of us. If we do not have $3 million in first place; how can we generate a consistent stream of income ($150,000) every year to be financially free? I told my friend. I will try to provide some ways to make $3 million next.

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In post How to Get Rich Doing Nothing I shared some ideas to accumulate lots of wealth by practically doing nothing. For instance, by enrolling into 401(k) plan with your employer, you can save much more than $3 million by the time you retire.

Those who doesn’t know what 401(k) is, 401(K) is a retirement plan offered by US employers to their employees. In other countries its known by different names for instance in India its called provident fund where Government mandates employers to match up to 12% of employee’s basic salary in retirement plan (aka provident fund). In US, employers typically match up to 6-8% of employee’s base salary.

It’s free money by the way and if you haven’t enrolled into 401(k) plan with your employer yet, then you are losing a golden opportunity to get lots of money for free. Here’s a quick example of investing $10,000 (50% you + 50% your employer) every year for 45 years at 9% yield would turn into $6.2 million.

Create-wealth-in-401k-MakeLivingGood.com

The 401(k) retirement plan has some disadvantages as well such as; you will get this money at age 65 or later otherwise there’s a steep penalty of 10% + federal taxes. So, you have to wait for it. Another disadvantage is that 401(k) is taxable income, so any withdrawals will impose individual taxes on it. In spite of all this, it’s a good way to accumulate great wealth over time and possibly achieve financial freedom.

I recommend you to checkout below posts to get some more ideas to save and grow money:

Before closing this post, I want to tell you about another interesting research that I did sometime back.

you can find detailed analysis on how long you can generate first million dollar or more towards your financial freedom by doing simple monthly investments. Below is a quick recap of my findings.

Retirement Calculator - MakeLivingGood.com

In above table, you can see by investing $1000 a month at 9% (S&P 500 index funds) would give you first million dollar in 23 years. 2 million in next 11 years and 3 million in next 5.5 years. If you increase the $1000 to $2000 a month at 9%, you will have your first million in 16 years, second million in next 8 years and third million in next 4 years. So, in 28 years, you will have your $3 million to generate regular income of $150,000 a year for rest of your life.

This is the magic of compound interest. It needs time to start showing its magic. In initial years it appears not moving much and often disappointment short-term investors but in long-term, it beats everyone. Thats why it was referred as The Eighth Wonder of World by Einstein.

If you are looking to buy a home in future, then I highly recommend you to check out The Real Process of Buying a House Followed by Value Investors. This can save you ton of money for your financial freedom.

I hope you learned a lesson or two from my conversation with a friend. He is currently focusing on his $3 million goal because according to him it’s far easier to achieve compared to $100 million that he had set for himself. I encourage you to do this exercise for your Financial Freedom as well and get a realistic number then work towards achieving it.

In the end, I want you to know that knowledge is the real wealth specially when it comes to your finances.

If you liked this post, please share it with as many people as you can and help them be financially free. They will love you for their lives once they reach financial freedom. So, let’s start sharing. 🙂

You know how to share your thoughts and comments in section below. I will be waiting for your feedback.

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Financial Freedom and How to Get it

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