Financial freedom or not?

This is when you have enough income from sources other than your regular job to pay for your current lifestyle.

I guess a simple definition is that stage in your life when you don’t need to worry about money anymore.

The problem is that everything is a matter of degrees. What is ‘financial freedom’ for one person will not be perceived as the same for another.

Some people will think that they are only financially free when they can live a luxurious lifestyle without having to ‘work’. Of course, the meaning of ‘work’ can also be vague.

If you’ve found your passion and are doing what you want to do and making money doing it, it suddenly doesn’t qualify as a job for you, but you still need to do it to make money to live on. So this is not really financial freedom.

True financial freedom means you don’t have to ‘earn’ the money yourself.

Let’s say you need £1000 per month to pay all your bills and leave some for entertainment purposes. If you then rented a room in your house for £1000 a month, would you be financially free? (Let’s not consider tax and maintenance issues here).

I think the problem here is that your tenant won’t be there forever and for true financial freedom, you need pretty solid guarantees that the money coming in is for as long as you need it. Also, situations change. If you needed to move house, you would need to find another tenant to maintain your rental income.

Some sources of income are quite predictable and can be used to calculate your total “passive” income. These can be stock dividends or interest on money in a bank account. Reaching the stage of true financial freedom is getting your passive income to be more than your expenses.

The problem is that if you spend some of the money in the bank account or sell the shares, this income would change. Therefore, passive income based on an investment, such as renting out a portion of your home or stock, depends on you treating that money as a permanent investment and not available for your use. Ideally, true passive income shouldn’t include permanently investing your money, it should be something that is established and works at little or no cost and makes money.

Other sources of passive income are very erratic and certainly not predictable. Sales of a book, money from the Google AdSense program where people pay you when ads on your website are clicked, or Premium Bonus awards are unpredictable examples of passive income.

So ‘financial freedom’ means different things to different people. Sometimes it is very easy to become financially free, but usually it is quite difficult and can take a long time. Most of us become financially free by accident when we get older and inherit money.

Either way, you should focus on those things that make you money without having to earn it, and preferably without tying up any of your capital.