What is Financial Freedom?

"Why live an ordinary life when you can live an extraordinary one?" Tony Robbins

“Financial freedom” has been a popular catch phrase in the financial education spheres in recent years.

However, financial freedom is NOT an illusion or a rhetorical slogan simply to gain emotional appeal.  It is concrete and easily computed.  It is a goal that can and should be MEASURED and tracked through basic math (yes, math!).  And it CAN (and SHOULD) be achieved by EVERYONE.

You only must first define a few metrics for yourself.  But the basic calculations of financial freedom are the same, regardless of your particular target destination.  In the simplest terms, financial freedom is achieved when your passive income exceeds your expenses.  The avenues behind “passive income” are many, and we will discuss a few of those in later articles.

But first let’s first wrap our minds around this concept.

You are financially “free” when you no longer have to depend on your unique ability to earn income, whether through active employment or active self-employment, to survive (or THRIVE) financially.  This does not mean that you have to, or ever will, want to stop working.  It does, however, mean that you are FREED from dependency on a particular job or line of work.  And that is incredibly empowering.

Think about it.  Whether or not you enjoy or feel passion for your work is NOT the question.  You may be a police officer who grew up watching episodes of Cops and yearning for the career and title you now hold.  You may be a leading businesswoman who feels immense worth and value from your title and corner office.  You may be an inner-city teacher who truly feels it is your life’s mission to impact the next generation.

But regardless of your position, think about the empowerment behind not HAVING to work.  By feeling free and secure with or without your job, your dependency is removed.  Imagine the FREEDOM.

Check out our next posts for more information on how to calculate that freedom number for yourself.

A short-term rental experiment…

This Bastrop bungalow has been one of my favorite projects. I decided to attempt a jump on the short term bandwagon with this house, with low expectations for how it that strategy might work in the Bastrop market. Fortunately, it has performed far beyond my projections and was such a fun project and a moderate flip.

Hosting STRs has been much simpler than I anticipated (after a few learning curves… check your propane tank! ), and I am thankful for a fantastic cleaning and repair crew who helped the house reach SuperHost and 5 status within a few months!

Renovations included popcorn ceiling removal, new flooring, paint, HVAC, appliances, fixtures, landscaping, and fencing. Full furnishing of a 4/2 was also quite an endeavor… but a fun one!

Project summary:

• Renovation time frame: November 2021 - January 2022

• Purchase price: $287,000

• Total renovation cost: $31,000

• Furnishing cost: $4,000

• Current Est. Market Value: $400,000

• Est. Monthly Gross Revenue: $3,000

• Year One Est. Cash on Cash Return: 11%

• Year One Est. Net Equity Return: 55%

What’s Your Number?

What are you working TOWARDS?  … Or are you?  Is there a forward motion design to your work life at all?  Or is the plan to trudge through your day, each day … pay your bills … incur more bills … make it to 65 … retire…and THEN reach all your goals and dreams and START living?  Is that THE dream?

Isn’t the American dream to keep growing, to keep elevating our lives?  But growing and elevating what exactly?  Our standard of living?  All of our “things”?  Most wage earners have a consistent growth in income over the span of their careers, yet many do not realize a consistent growth in net worth or capital.  But why?  I would wager that for at least some of them it might come down to a lack of financial planning and lifestyle creep.

I would propose that there is a more abundant life available.  That this dream of growing and elevating our lives centers around growing and elevating our FREEDOM… not just our stuff.  Now nice things in themselves are not the problem… the method of acquisition is.  Do you first buy ASSETS that generate cash flow, which can fund an elevated lifestyle?  Or, like all too many, do you just buy the stuff first because you want to and miss out on so many wealth-building opportunities in that intermediary step.

I would propose that the American Dream is really about FREEDOM.  In this case, financial freedom.  It is about taking OWNERSHIP of your financial present and future and protecting your family from unforeseen hardships.  We can all choose to be victims of our circumstances (literally everyone can manufacture a reason to be victimized) OR we can choose to be overcomers.  And the bigger the obstacles to overcome, the greater the reward. 

Financial freedom is about taking ownership of your life and playing an active role in the direction of your future and the future of generations to come.  It is not necessarily about quitting your day job, but it is about not being a victim of changing employment conditions and taking charge of your own future.  About not blaming your boss or your company or your manager for every financial misfortune you encounter.  You have the unique ability to control your own financial future.

So.. what is a financial freedom number?  It measures the total of true, income-generating assets you would need to support your required level of income.  For instance, if you need $5,000 a month to cover your expenses and live the life that you desire, your financial freedom number calculates the total dollar amount of cash-flowing assets required to produce that monthly income.

It is simple.  Divide your desired annual income by the rate of return you anticipate from your chosen investments.  I would advise to be conservative.  For instance, if you desire $90,000 a year and forecast a rate of return of 5% annually, you will need $1,8000,000 ($90,000 / 5%) in total assets (total equity in assets, not total value if leveraged).

Confused on what rate of return to use?  The rate can dramatically affect your financial freedom number, so it is a bit of a risk.  While some advocate a higher anticipated rate of return (8-12%), I personally am only comfortable forecasting a much lower rate (~4%).  To illustrate how this might affect your financial freedom number, if we take the same $90,000 a year at a rate of 12%, the number drops to just $750,000.  Considering yourself financially free on $750,000 in assets may be a bit of a risky move, depending on how you react to that information.

So … what’s your number?  How close are you to achieving it?  What will you do with that freedom when you do get there?