Way to financial freedom

When reading other financial blogs, very often there were questions on how one can achieve financial freedom and most of the time the bloggers just gave some vague indication. In fact, it is not a very complicated issue. State of financial freedom is a vague concept though. So let's put everything in figures.

Financial freedom depends on the level of requirement. Some consider financial freedom means he/she can buy things with whatever price tags. While others just want to be free from the salaried job. So there is actually quite a large range of state of financial freedom between the two ends of the spectrum.

There is also one very important concept behind financial freedom. Usually it does not rest on the state that one is inherited a large sum of legacy but indeed he/she has secured a steady stream of income, usually passive one, that can support his/her life without working.

The amount of this passive income could vary a lot as laid out in paragraph two but let say an hypothetic amount of $100,000 a month meaning an annual passive income of $1.2 million. Let's assume this $1.2 million is generated by a working capital with an humble annual yield of 5%. This requires a working capital of $24 million. In other words, as long as one got $24 million, finding an investment with 5% return is rather easy so he/she can enter the state of financial freedom. Isn't that easy?

Now it seems the question goes to how on earth one can get $24 million working capital. Again let figures tell the story.

Except those who were born with silver spoon in their mouth, usually people has to accumulate the seed fund through building it from scratch. Assume one finally has built a seed fund of $1 million through different ways. Then he/she can start thinking of financial freedom and seriously looks into ways to achieve it. Again assume he/she keeps adding $100,000 every year to the seed fund and at the same time he/she managed to achieve 10% compound annual return on the seed fund. After 26 years this seed fund will grow to $24 million when he/she can stop making contribution. This is the time this person no longer needs to work meaning to enter the state of financial freedom

Naturally getting the working capital of $24 million is just the beginning, one still needs to get a steady income stream out from it to support his/her living. However, with this amount of working capital, just a 5% annual return will contribute a monthly cash income of $100,000 but of course one must bear in mind that this $100,000 after 26 years actually has a today's purchasing power of $46,000 only assuming there will be inflation rate of 3% over 26 years.

In short, if one is satisfied with a monthly passive income of $46,000 present value and as long as he/she has a seed fund of $1 million now. Achieving financial freedom in 26 years time is not a dream but just a matter of self -discipline.

Some might say 26 years is too long. Yes, it is indeed. If one kicks off the plan at 30 years old then it will be 56 years old when he/she reaches financial freedom. However, the above example is based on the assumption that during the financial freedom period, the working capital is kept intact but just use the income only on the expenses. If there is no need on passing the wealth down to children, actually the capital fund could also be depleted along with the passive income. This can significantly reduce the size of the capital fund thus the length of the time to build it. The downside is the smaller income amount that follows a smaller working capital. But in fact when the working capital grows over $8 million then the path will become much easier because there are more investment choices with higher return for professional investors. On the other hand, leverage could also give a hand as long as proper risk management is in place. So it is quite possible financial freedom can happen within 26 years.