What Is Financial Freedom And How To Reach It?
Never have to work again. Afford all the things you have wanted for a long time. Just pack your bags and travel for a long time. All of these things promise financial freedom. But when exactly are you financially free and how much money do you need?
What Is Financial Freedom?
First of all, it is important to know the difference between active and passive income:
Active income means that you can only get money if you have actively done something. So your 40-hour job is active cash flow. If you decide not to go to work from tomorrow, your salary will not be paid. Nowadays this is called the hamster wheel: you go to work so that you can buy nice things or do something. But you need money again and have to go to work again. So you’re a hamster, caught in the wheel of consumption and capitalism.
You can generate passive income through investments. When you buy stocks, you get dividends. If you are a proud property owner, you will receive rental income if you do not live in the property yourself. If you have a blog or online business, you may get revenue from affiliate links. This means that you have done something once and get regular money for it without being active again.
You can usually only get financial freedom through passive income. Except, of course, you inherit a few million. Because even with a well-paid job, it is difficult to save money simply by saving money, because financial inflation shrinks the real value of money especially if you took out a loan and pay it with another loan.
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How do you achieve financial freedom?
According to Bodo Schäfer, you can make the first million in just 7 years. Sounds tempting and I wonder why not more people do that. Since I do not read any books by Bodo Schäfer, I would rather quote the financial expert Gerd Kommer who refers to this book:
“Anyone who initially invests 100,000 euros needs an average return of 39% p. a. (after taxes and costs) to reach one million in seven years. Apart from the fact that such a return has only been observed at Alice in Wonderland for seven consecutive years, the question arises as to where the initial 100,000 euros should come from. If you start with less, the return has to be even higher. ”
To achieve financial freedom, you should start saving and investing as early as possible. Even if it is initially only small amounts that you invest in stocks or ETFs.
Financial freedom is not impossible, but it can be achieved in a few years.
How much money do you need for your financial freedom?
There are many great math examples that tell you how much money you need for financial freedom. The problem is that nobody can tell you how much money really needs to be. If you get along well with 1,500 euros a month today, it does not mean that you will do so in 10 years. The inflation rate lowers the monetary value, consumer goods become more expensive and your demands increase.
How much money you will need later depends on you personally and the economic development that no one can predict these days.
Financial freedom is a worthwhile goal. But it is also a state that contains a large number of variables and harbors different, individual hurdles for everyone. There is no universal recipe for this. And even if you cannot get financial freedom straight away, it is worth investing money in retirement provision. Because then you have the freedom and should also have the financial cushion to fully enjoy this freedom.