Embrace Financial Freedom, Leave The Rat Race
Financial freedom is a destination within the grasp of all of us. We only have to reach out and embrace it. For this, we first need to understand what financial freedom means and then take the right steps that shall take us there.
Many people worry it will take them quite a while to achieve financial freedom, and whether they will be able to make it. Even as they strive to realize this elusive goal, most folks do not have a clear idea what financial freedom actually means. Just to make their daily grind more bearable, they tell themselves, “Some day I’ll be financially independent”.
Financial Freedom is defined in the following way: “For a person to have his or her regular expenses met for the rest of the life without having to work for a single day”.
To become a financially free person, the annual returns from your invested money need to meet, or exceed, all your annual needs. And, the returns keep increasing over the years to keep pace with inflation and the rising cost of living.
How much money should you invest to achieve this financial freedom?
Actually, there are ways to achieve financial freedom with a small investment if you go in for the right investments and tax-reducing moves.
You first have to determine how much money you need annually to meet your needs or desires. Let us assume this is $100,000 every year. How much money should you invested to get this return?
The sum to be invested depends on three factors. Factor 1 is the average annual return that your investments will generate. Factor 2 is the percentage of taxes that are to be paid on the returns. And, Factor 3 is the cost of living, which varies with the country one lives in.
The higher the returns your investments generate, the lower the amount you need to invest to be financially free (Factor 1). Also, the lower the taxes that need to be paid, the less will be the investment required to achieve financial freedom (Factor 2). And finally, the less your annual income needs in dollar terms, the less the capital investment required (Factor 3). (As we shall see, one way to make use of Factor 2 and Factor 3 is to relocate to a new place where one can have the same lifestyle and comforts for less expenditure and less taxes.)
Here are some formulas you can use to calculate the capital you’d need or the annual income to give you Financial Freedom.
N = annual net income (e.g. 0,000)
N = C * r * (1-t)
We highly recommend that you take ample time to calculate the exact amount of capital you need to achieve financial freedom.
Factor 1: It is our firm belief that an overall annual return of 12% to 15% can be realistically achieved if your investments are diversified and at least 50% of them are made in opportunities recommended by the club (On the other hand, if an investor makes all investments as per our opportunities, an average return of 20% to 80% per year is not unrealistic.)
Factor 2: The required capital amount can be further lowered by engaging in tax-saving strategies and/or relocating to a country that has no income tax.
Factor 3: By physically moving to a country that has a weak currency and low cost of living, annual expenses can be lowered, which further reduces the amount you need to invest to achieve financial freedom.
To give you an example, if a person living in USA relocates to Brazil, the same lifestyle will cost him half the money. Relocating to South Africa will yield the same lifestyle at 65% expense and to Australia at 72%. A tidy saving of 18% is possible even by relocating to Canada. If relocating to another country is an option you're considering, the Country Factor (cf) is one more variable you can add to the Financial Freedom Formula.
C = N / (r * (1-t)) * cf
For Brazil, the Country Factor (cf) is 0.50 for 50% and for Canada it is 0.82 for 82%. There is a detailed table for more countries given below.
Let us look for an annual “Financial Freedom” income of $100,000, an annual return of 20% and the need to pay no taxes at all by obtaining residency in a tax-free country and/or dividing time between several different countries in order to pay taxes in none of them, officially staying as a “tourist”. (On the path to Financial Freedom, it is sensible to accept nothing less than 0% tax). Consider spending six months each year in Brazil and Australia, paying taxes in neither country! The average cf of Brazil and Australia is 61. In this case, here is the amount of capital needed to achieve Financial Freedom:
C = 100,000 / ((0.20) * (1-0.00)) * 0.61 = 305,000
With a capital of just $305,000, the actual annual income would be just $61,000. But the choice of countries would give you the same lifestyle you would get in the US with a $100,000 net income.
Let us look at another scenario. What if one is not that luxuriously inclined and would be happy with an annual net income of $36,000? One can choose Argentina (cf = 0.49) and Brazil (cf = 0.50) which are neighbouring countries yielding savings on the bi-annual airfare. The investment required would be:
C = 36,000 / ((0.20) * (1-0.00)) * 0.495 = 89,100
In this case, a capital of $89,100 would yield a tax-free annual income of $17,820, which due to the choice of Argentina and Brazil would give you the same lifestyle as a $36,000 net income in the US.
As you can see, Financial Freedom could be well within your grasp, with a less than $90,000 investment if you make the right choices. It means never having to work for a single day for the rest of your life, and to do what you want to do. Of course, not everyone can relocate. These examples do, however, provide the roadmap to Financial Freedom.
Yes, it is possible to be Financially Free in a reasonable span of time.
Designing an Investment Plan
Everyone who wishes to have a financially happy future must pursue an
investment plan designed to take care of his needs as they arise over
the months, years and decades of life, generating returns from the
resources at his or her command while minimizing the risks of
Patience Pays - The Power of Compound Interest
Tiffany, Economy and Patience were three good friends. They shared the dream of having a great lifestyle, holidaying in Europe, buying their own house – all the perks that go with financial freedom.
Every week they would regularly buy a lottery ticket in the hope of winning some money. One day they got lucky. They won $36,000. The three were thrilled. They split the money three ways – each of them got $12,000.
Although Tiffany, Economy, and Patience had been close friends for years and had done everything together, when it came to spending the money, they trod three very different paths.
Tiffany treated herself and took her fiancée to a fancy restaurant for dinner. She then went shopping too. Thrilled with her good fortune, Tiffany went through all the money that she won and charged a couple of things to her charge card also. Thus she blew her good fortune in a matter of hours and put herself in debt as well.
Economy was conservative with her money. She invested her money with an international finance company at the monthly rate of 1.75%. Within a month, she had added $210 to her original investment. She withdrew her interest and bought herself nice dresses. She did this every month, thinking happily that she was going to enjoy the fruits of her good fortune over and over again.
Patience, on the other hand, followed a very different path. She also invested her money in an international finance company at the monthly rate of 1.75%. However, unlike Economy, she did not withdraw the interest - but reinvested in! In the first month, she earned $210... and in the second month, $213.68.
As the months flew by, Patience’s capital continued to grow, while Economy’s capital remained stuck at one place. All she had to show for her investment was a closet full of dresses. She seriously began to question her financial acumen.
At the end of the first year, Patience’s capital stood at $14,777.27 and at the end of five years, it had grown to $33,981.80. Patience had managed to more than double her money, with no effort at all. Her capital rose to $96,230.20 after 10 years and to $2,185,277.61 after 25 years.
Eventually, Patience became a millionaire. She travelled widely and set up her own fashion business. She even figured in Time as one of the youngest successful millionaires.
What about Tiffany? She had fallen so far behind on her credit card payments that she was paying interest on interest and could only scrape together the minimum each month. The interest on her debt was compounding, so she had to pay interest on the interest. And interest on the interest's interest. And so on.
Every month, as Patience got wealthier, Tiffany got poorer. She was eventually forced to take on a new loan to pay off her existing loan.
She finally realized that she was caught in a vicious circle of debt from which there was no way out. The financial "hangover" that started on her 18th birthday harangued her for the rest of her life! She lived her life from one loan to the other and eventually had to work two jobs and still was unable to meet both ends.
Economy was stuck in the rat race and couldn't find a way to get out. She kept spending the interest she received on her investments, yet she was never able to pay the interest on her debts on time! As a result, she never really was able to enjoy her money.
With the constant tension of the Damocles sword of debt over her head, she developed severe asthma and spent more than half of her life in a sanatorium, where she eventually died in debt and loneliness.
Three friends. Three kinds of investment. Three kinds of returns. But here's the catch: Patience’s success was powered by exactly the same force that sent Economy into death and Tiffany into life-long poverty!
What is this force? It's compound interest, and you can harness it to your advantage or ignore it at your peril. It can be your best friend or your worst enemy.
Would you like to be like Patience living life in style – or would you rather wallow in drudgery like Economy and Tiffany? The choice is entirely yours. It all starts with a decision-- a decision you can make immediately.
If you decide wisely you will be able to give yourself the financial freedom that you have always dreamt of but never really had any hopes of achieving. Your money will come back to you many times over, again and again.