As we celebrate our Independence Day with family and friends this 4th of July weekend, I thought it would be a good idea to look at what exactly does it mean to achieve “Financial Freedom or Independence?”
If you are a fan of Dave Ramsey then you would know that Dave would define Financial Peace (Freedom) as having completed all of the baby steps. While most of us can only dream what it might feel like to be completely debt-free (including a paid off home), have 6 months of expenses in savings, and millions of dollars in our 401K or IRA account.
What if we pondered a new way of thinking that can bring peace and hope for financial freedom for those of us that don’t live in a rural area where you can buy and payoff a home for the price of a Disneyworld Vacation. Don’t get me wrong, I am all for paying off your home and buying a home for cheaper if you happen to live in one of those areas. But realistically for most of us, it may take 20-30 years to payoff that urban home. Does that mean that Financial Freedom is not attainable until such time?
What would it look like if you were in the process of paying off debt (decreasing your liabilities) and growing your assets (saving and investing monthly). What would it look like if you had enough money being generated each and every month by your investments alone (stocks, bonds, rental property, limited partnerships, etc.).
What if you still had a $2,000. monthly mortgage payment but you also had (assets) investments that were generating (paying you) $4,000. a month.
What if you were paying $40. a month for your cell phone but you also owned stock in your cell phone provider and the dividends were paying you $120. every quarter.
What if you had the money saved and invested to pay cash for a new car but also had the option to finance that car for zero percent interest over 5 years? You could pay cash and not have the debt, certainly. But, you could also keep investing that cash and use the investment income derived from it to make the monthly payments, even if you are tapping into some of the investment capital.
Yes, of course there is always the risk that your investment could go down, dividend may be cut, etc. You would need to not only be aware of possible risks, but also be comfortable taking that risk. Don’t get me wrong, I am not implying that this is right or best for everyone. The point is that while most debt is “unwise,” not all debt is bad or wrong.
Perhaps we can “redefine” Financial Independence as having enough passive income (money coming in that you do not have to actively work for that pays you even while you are sleeping), to cover the expenses to support your desired lifestyle.
For you math geeks out there:
FI = PI – E ≥ 0
So, while you enjoy your Fourth of July fireworks, hot dogs, and hamburgers (maybe even some grilled carne asada with salsa and guacamole and a nice hoppy IPA) with those that you love or maybe just tolerate. May this post not encourage you to go out an splurge on a new luxury vehicle, but bring you hope and more importantly, a practical goal to start working towards a realistic Financial Independence.