Perusing through some of my older posts I found three mini entries where I talk about how we must go through 3 increasingly difficult milestones to reach the pinnacle of financial freedom. I think it’s worth posting again to remind anyone who wants to be financially free some day to ask themselves what freedom really means to them, and then create a plan to make it happen. I’ve combined the contents of all three posts into this one entry here for easy navigation.
To me, financial independence can be broken down into 3 stages.
You can quit your main job (primary source of income,) but still have to do some other kind of work, albeit less demanding, to make the same as you spend.
You literally don’t have to do ANYTHING to make money and still get to enjoy your current lifestyle.
Like the True Stage, except you have extra wiggle room to deal with emergencies, inflation, and unforeseen future expenses.
Example: A school teacher spends $30K/year. He has a $2,000,000 income fund portfolio giving him a 5% return every year. However, he will only use 2% of this income for spending, and put the remaining 3% back into his portfolio to counter the effects of price inflation and lifestyle inflation. The 2% income he can spend is $40K ($30K for his expenses plus an extra $10K for emergencies if he needs it, or it goes back into his investments if he doesn’t.) He is now truly financially independent and can ride the ups and downs of the market and theoretically should never run out of money for as long as he lives.
-assume all numbers are after tax.
Original entries from March 2011