Oct 16, 2012
This episode is a about the significant milestones along the way
towards achieving financial freedom. In my opinion, reaching each
of these milestones brings you closer to being financially free and
it is useful to take a step back and consider what the steps along
the way of your journey will be. Some milestones to consider are
Financial independence or "paying your own way", whereby you are sustaining yourself from your job or work income on a month to month basis. You are not living off parents, not living from significant subsidies from your family, not accumulating student debt and not accumulating credit card debt. It's important to note role how going to college significantly delays reaching this milestone and how many people do not achieve this milestone until they are in their 30s or later.
Achieving positive net worth, whereby your assets are greater than your liabilities. This is often what people mean when they talk about "getting out of debt" (although that is not exactly the same). It is important to be aware that consumer credit and mortgate debt can significantly hinder or delay you reaching this goal.
Making your first investment, for example by purchasing an income producing asset like shares or bonds. The key distinction is that this is not just money you haven't used yet which you are putting aside until you spend it, it is money you do not intend to ever spend. You are putting this money to work for you creating income. Although a lot of people consider purchasing a house with a mortgage as their first big investment, a property for your own use is really a consumption item.
Net worth surpasses annual expenses- in other words, your savings (assets) could keep you going for 1 year if you needed to. This means you have a significant safety buffer, but if you did have to use your savings it would mean that you consume your capital and you would be back to square 1.
Annual passive investment income becomes larger than your annual expenses: this is real financial freedom, as you can now live off your passive income. For this to be sustainable it needs to take into account the effect of inflation, taxes etc. However, once you can sustainably live from your passive income, you are financially free.
This podcast and blog summary contains only my personal opinions, it does not constitute financial advice and I am not a financial advisor.