What is Financial Freedom?
While this number will vary for everybody, the basic math is: Cash Flow from Assets > Monthly Expenses
It is actually a pretty simple concept but it can be hard to implement. Think of it like trying to lose weight. To lose weight, you don’t need a fancy diet, supplements or a Bowflex PR3000 Home Gym. All you need to do is eat less and exercise more. Sure, you can starve yourself and lose weight while you can also spend 4 hours a day in the gym and lose weight. But, like with most things in life, a balance and combination of the two will result in the best and healthiest results.
So to have Financial Freedom, what we need to do is Increase Cash Flow and Decrease Expenses. Again, you can focus on only 1 side of the equation and still get results, but we are going for a more balanced approach.
Financial Freedom = Cash Flow from Assets > Monthly Expenses
The easiest place to start is with your expenses. No, not with your Starbucks Addiction or Netflix Account but with YOUR BIGGEST EXPENSES. Which for most people are Housing, Transportation, Healthcare and Taxes.
Housing is the easiest to fix. No, you don’t need to go run home to your twin bed in your parent’s basement but you do need to get a little creative. If your goal is to be financially free then you will need to make adjustments to your lifestyle which will seem like sacrifices at first. The first place to look is what city and country do you live in? Are you living in a big, expensive city like LA, New York or London? If so, your “number” to be financially free is going to be a lot larger than someone who is living in Pittsburgh, Dayton, Ohio or Bangkok. Also, what part of the city do you live in? If you’re living right downtown, then it might be wise to move a little further from downtown and get a cheaper place.
Next, if you’re living alone, you just made it that much harder on yourself, unless you live in a low cost city. (I pay about $250 for rent and bills in Kaohsiung, Taiwan.) So getting a roommate or renting out your extra room/couch/etc on Airbnb will greatly lower your expenses if you’re in an “expensive” city.
House Hacking is my favorite option because it will help build wealth in two ways. One, it lowers your expenses so you can save more and two it gets you started into real estate which helps build more assets/wealth.
House Hacking is when you buy a house and rent out part of it to cover your rent and in some cases give you extra cash flow. So let’s say that you buy a 3 bedroom house for $150,000. Your mortgage is $750 and you rent out your extra two rooms for $500/each. Now your cashflow is $1,000-$750 = $250. Just to be conservative, we’ll spend this $250 on home repairs in case something happens. You are now LIVING FOR FREE while having your roommates pay equity into your house. When you sell that house, you get the equity back PLUS the appreciation.