3 Stages of Financial Freedom (Part 3)

By | 03/16/2011

Financial independence means different things to different people. To me, it can be broken down into 3 stages.

Initial Stage.
True Stage.
Perpetual Stage.

Part 3.
Perpetual Stage:
 
Like the True Stage, except you have extra wiggle room to deal with emergencies, inflation, lifestyle 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.

note:
-assume all numbers are after tax.

Author: Liquid Independence

Editor in Chief at Freedom 35 Blog.

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