Financial Freedom - What is it?

With the current state of the economy, many Americans wonder if they wake up one day without a job. Bank of America had recently cut thousands of jobs as they restructure their organization. The government has threatened to shut down multiple times within the last three months. The DOW had dropped over 500 points in one day just last week, a historical record. Congress and Obama have increased the Government debt while cutting spending in essential areas and threatening to the increase the American income tax. The class structure may soon be changed forever as the poor and middle class get lumped into their own class while the rich continue to get richer without being phased with high income taxes and soon darkness will consume our markets as our world is plunged into another depression.

The few, the prosperous, the educated, know of the light in tunnel. They've passed around a phrase that represents an ideal lifestyle, that of which is free from the constraints of stress and worry over tax and job issues. These few know of how to survive like the fittest in the best of times and the worst of times. This phrase I'm speaking of is: Financial Freedom.

What is Financial Freedom?

Financial Freedom is the state of living in which you are free of any financial obligations. It is living life without any worry of a job or bills. Generally it's the rich and wealthy people who have financial freedom. They can go day to day without every stepping into an office and wake up whenever they want. They can eat whenever they want, go to the bathroom whenever they want, and they are the ones who have complete control over every little aspect of their life. Their biggest problem on a daily basis is deciding where to eat.

So how can they live so freely without having to worry about work? Well that's because they own assets, enough to generate an amount of income every month which is sufficient to cover any financial expenses they may have. The easiest example I can provide (and something I thought about as a little kid, although now that I'm older, I realize it's not feasible) is imagine that you have a savings account offering a 3% return in interest. If you had a million dollars in your savings account, you would accrue a couple thousand dollars per month off interest alone. That money could then be used to pay off any and all of your monthly bills including food, rent, utilities, and debt with some change leftover. Because your necessities are paid for every month automatically without a requirement of a job, you are financially free.

How is Financial Freedom Obtained?

So how do I obtain financial freedom?

There is no one straight answer to this question. You could, as mentioned in the example above, accumulate large amounts of money into multiple savings accounts and live off interest. However, savings accounts today are unable to keep up with the rates of inflation so you would be bleeding money out every year without even realizing.

You could also win the lottery and then be paid on a periodic basis, whether monthly or yearly, and then that money would automatically go towards covering your bills. Although this is a very unlikely situation.

The basic way to obtaining financial freedom, as Robert Kiyosaki's Rich Dad stated, is to buy assets. What is an asset? An asset is anything that puts money into your pocket. This is the strategy of the rich and this is how the rich literally get richer: because their assets bring in more money every month after month after month...

The majority of Americans do not have assets. Instead they unknowingly burden themselves with liabilities which causes many of them to live from paycheck to paycheck in an effort to pay off the expenses that the liabilities produce.

Take a look at the balance sheet below. It represents the lifestyle of an average middle-class worker:

As you can see, the majority of the traffic comes from liabilities to expenses. These are the most common forms of liabilities found today: mortgages, loans, and credit card debt. These people have only one source of income: their job or jobs. And only as long as they continue to work these jobs would they continue to have a source of income. If they were to lose their job, there would be no source of income left to pay for these monthly expenses and then they would be required to dive into their one asset, their savings account, if they even have one.

The balance sheet below shows the lifestyle of someone with Financial Freedom:Notice the drastic difference in the boxes. Instead of a large amount of liabilities, there is a large amount of assets. That is because the rich do not put money into purchasing materialistic possessions. Instead they pour their money into items that can generate more money. Because of this, they now have enough assets generating money for them that they do not need to worry about working a job in order to put food on the table, their assets do that for them.

Take my friend Ted Tran for example. He currently owns a condo and is living in a 3-bedroom townhouse which he has a mortgage on. He has to make monthly payments on his townhouse on the amount of $1700. His condo he completely owns so he pays a few hundred dollars per month on utilities and fees. He rented out his condo to a single family who pay $1500 a month for rent. That's $1500 that Ted pockets which he then uses to pay almost the full payment on his town house. He has two roommates living with him at his townhouse who pay $500 per month for rent. Ted's townhouse generates $1000 total and his condo generates $1500, each of these recurring every month. And because of these assets generating income, he is able to sufficiently use that money to cover his townhouse payments while having $800 leftover for food and bills.

In addition to that he also does trading on the stock market, generating between $500 - $1000 per month. Another asset bringing in more money.

Because of these money generating assets, Ted does not need to work a job. He has all of his necessities for living paid for by his assets. Thus, Ted is living, financially free.

Financial Freedom is a slow emerging concept. As this economy turns for the worst, more people are excavating to find ways to escape this disaster. Many turn to investing, to real estate, and few turn to the arduous journey of obtaining financial freedom. Keep in mind this is no quick fix, this is a long-term solution which may potentially change the life of your family and your children forever. But once you've obtained financial freedom, never again will you be required to go to school in search of a 40+ year job until your retirement while living paycheck to paycheck. It is the knowledge of how to obtain financial freedom that will sustain your family generations to come.

Move over people, this has become the new American Dream.

Financial Freedom Blog: Financial Freedom