What is Financial Independence?

The formula to achieve financial independence and freedom.

Master Investor
May 18, 2024

Summary:

Start building a financial foundation with financial education.
Master what it takes to reach financial independence and how to build freedom.
We must sacrifice things in our lives to achieve our financial goals.

We must always begin with our vocabulary because words are the most powerful tools humans have ever created. Learning the language and mindset of the ultra wealthy is critical for one to build financial independence and freedom. For example; instead of saying, “we can’t afford that,” we shall reframe the question with the wealthy mindset then it will be, “How can we afford that?” At the end of our lives, we can leave a big cash flowing business empire and a lot of wealth. We can be financially independent and so our loves ones when we concentrate in the assets column.

Yesterday, we had an article where we talked about financial freedom which is not financial independence but it is a step towards financial freedom. Financial independence comes before financial freedom.

Many people have money but they are not free. We have to ensure that we are building our assets column with real assets that produce passive income and capital gains income to us today. If what we call an asset does not produce passive income or capital gains income then it is not an asset yet.

Knowing the difference between an asset and a liability is essential to build financial independence and freedom. Our return on investment should aways be determine by reading the financial statements and not base on opinions.

As young person we can wish to be wealthy and financially independent. There were many things we love and appreciate about being a wealthy entrepreneur and inside investor thriving in life on the right side of the cash flow circle.

We must choose which mindset we shall operate with in life. Two types of mindset when it comes to money: poor mindset vs wealthy mindset.

What precisely is financial independence, then?

So, the issue is raised: What exactly is financial independence? Is a high-paying job necessary for self-sufficiency? Does it stem from an expected inheritance? or perhaps spousal support? It really means, "He is going to work until he is 65, and then I'm going to retire," for a lot of people.

Sadly, these are inadequate definitions. A well-paying job is something a person could lose. Furthermore, awaiting retirement, an inheritance, or alimony basically, living in the assumption that someone else will provide for us won't assist us in defining financial independence.

Then savings must equal financial freedom, correct?

A common misconception is that conserving money is the first step toward financial independence. This is because, from an early age, the majority of so-called experts instill this in children. They come across it everywhere in the literature they read on money management, at school, from parents, etc. Save our money, which is the wrong advice for the ones who wishes to create wealth. The message should be, “Invest our money!”.

One million dollars is often considered the magic savings amount. It's a good round number as far as they go. Furthermore, a million dollars is far more money than most people have. However, it's also changed from before and being financially independent for the rest of their life is probably not enough. And even if we could live off of $1 million for the rest of our life, there's a gloomy mindset about how to get there and make ends meet.

Sacrifice money to achieve financial independence

We once came onto an article about Carl and Minday, a couple who determined one day when they woke up that they would save $1 million in four years. They felt strongly about why they should do this:

On a podcast episode, computer programmer Carl, 42, confided in Farnoosh Torabi, "He was having this horrific day at work." "At 38 years old, he thought there was no way he could accomplish that task until he reach the typical retirement age of 65 or 62.”

Many people feel stuck in their careers and take no action to change it. Well done for moving forward. Ultimately, though, it is still an act of a financially poor mindset person's attitude.

The pair examined their spending patterns first. Carl says on their blog, "His wife and him wrote all of our expenses in a book." They logged every time we came back from shopping or paid a bill."

They calculated that they could subsist on $24,000 annually based on their records. They increased that estimate to $30,000 year and included a $6,000 cushion just to be cautious.

They came to the conclusion that in order to retire by the age of 42, they would need to save $1 million. They followed the classic saver's guidebook to attain this: they reduced spending, worked side jobs, invested in their own home, and bought stocks.

Although Carl and Mindy's retirement was wonderful having $1 million in the bank is undoubtedly better than most I don't think their retirement plan is future proof.

They apply the so-called 4% rule, which states they won't run out of money provided they withdraw 4% annually from their retirement account.

Given their youth, perhaps this makes sense for them right now. What will happen, though, when they become older and need more care? What happens, for example, if their property taxes increase dramatically over the following 20 years? What happens, for example, if inflation keeps rising at its current rate of 2% per year for the next forty to fifty years? What if, after all, they grow weary of leading such a frugal life?

They simply cannot make ends meet without a sizable wage.

Even while they are currently content with their $30,000 annual salary, it will not last them through retirement. Today the only way to beat inflation and down economies is by preparing through sound investing.

It not how much money we make, but rather how much money we get to keep to multiple in sound investing. Majority of people will work their entire life for earned income and avoiding active investing because of fear as they lack financial education. Any one who lacks data about a certain area will be control by fear. The best thing we can all do is to invest in financial education daily because that is where true financial power comes from as the investor is equipped with the wealthy context.

An actual assessment of financial autonomy

Taking out a piece of paper and making two columns is a very easy test to see if we are financially independent, even if a person has a high salary or a sizable amount of funds. Enter the monthly income we earn in the left column. List all of our monthly expenses in the right column. Now put our palm over the left column and act as though we are not earning that money anymore. What is our impression of the column on the right? If the person currently experiencing a mild panic attack, if they are like most individuals. Wealth is not measure with money alone, as we can see money only does not make one wealthy, but it is the cash flowing assets that we control with our companies that determines our wealth number based on our standard of living.

This is still valid if we are a low-income person. For taking out of our savings is not the same as making money.

All the person is doing is dragging down their assets. Furthermore, it's a really terrible financial mindset that views the world as scarce rather than abundant.

Remember having the wealthy context is key. In other words, having the proper beliefs, values and understanding of how money works today.

Consider the post "30 easy money hacks to get a little richer every single day this month" that read a while back. Which in our opinion is a horrible article with the wrong mindset building wealth. Whoever is listening to that and thinking they will become rich they will be confronted with the reality that such is not the way to create financial independence and freedom. Among the actions detailed in such article their are items such as:

Purchase generic.
Verify their eligibility for a health savings account.
Check their 401(k) expenses.
Cultivate their own herbs.
Make a weekly $10 IRA transfer.
Purchase a slow cooker while it's on sale.
Put on cloth napkins.

Just one of the 30 "rich" ideas on the list is related to making money. The remaining strategies are all methods to reduce costs and downsize, just like Carl and Mindy did.

If accumulating large savings or holding a well-paying career don't translate into financial freedom, what does?

Three different forms of revenue

We think it's important to recognize that there are three different kinds of income before we respond to our question.

Earned income: is the money a person makes if he or she work and get paid for their work. Someone else own and control their time.
Capital gains income: This income is one type of investment income we can have, as opposed to earned income, which is obtained by trading time for money. Capital gains income is taxed at lower bracket than earned income and many instances we can defer taxes by simply investing the profits into a new cash flowing asset. We must be aware of deadlines and requisites for lowering taxes on our investments’ profits legally.
Passive income: This is the other type of investment income we can obtain by investing. To explain how to make passive income, i.e., have our assets generate revenue for us constantly, our wealthy strategy or formula is to obtain cash flowing green houses, then trade them for one red hotel. Repeat the steps to achieve passive income through real estate. Passive Income is taxed at the lowest bracket of all incomes and it requires the higher level of financial education to achieve it.

Many people believe that having a big salary (earned income) will make them wealthy. However, as we already stated, jobs can be lost. Furthermore, the exchange our limited time for money. Our time shall no have price because is priceless.

Although capital gains income is taxed more heavily than passive income, it is still beneficial because we only profit from sales. As a result, we are dependent on the markets and give them a larger portion of our earnings. It is not a steady source of wealth.

The sole source of true financial freedom is passive income. It just requires three simple steps.

The three-step process for reaching economic independence

We are financially free by using this approach. This is the formula:

We build and purchase assets that bring in money (passive Income and capital gains income).
The positive cash flow from our assets covers our daily and future expenses.
We are financially independent once the monthly cash flow from our assets equals or exceeds our monthly living expenses since our assets are generating passive and capital gains income for us.

We will be free to work for ourselves once the formula is finished. We will be financially independent when we don't need to work for earned income because we have passive income and capital gains income flowing into our lives from investments.

The practical method for achieving financial independence and freedom

We shall all learn how to invest n real estate and the other asset classes that exist today such as business, crypto, paper assets, and commodities in order to become financially independent and free. To be honest, we may lack the funds necessary to carry out this. Rather, we paid ourselves before we could create the money. What does this signify? It indicates that we prioritized and treated investment as our initial outlay of funds. After paying our investing costs each month, we would then have to figure out how to pay for everything else. Though it is occasionally nerve-racking, we always manage to find a solution, and we can become quite skilled at allocating the money in places to grow rapidly. With the money being generated by our investment, it will pay for our liabilities and expenses.

When we use the formulas of the ultra wealthy and adopt the way of investing for passive income, then we can obtain anything for free legally by simply building or acquiring aa cash flowing assets that will cover for the expense of the liability we want to have in our lives. As a wealthy entrepreneur and inside investor we have the ability to solve problems via systems. When we do, we can be rewarded with financial freedom which comes after achieving financial independence.

We also reached out to additional resources. For example, we have digital course and eBooks. Which we have them being sold daily with systems. To this day, we still receive sizable royalty cheques from books. Additionally, Master Investor, our company, provides financial education through books, coaching, seminars, and digital products. Every month, it also puts money in our pockets.

We will never have to work for earned income a day in our life because our costs are fully covered by the cash flow from our assets. This is not the same as savings, for example. Money can run out in savings. No matter what, cash flow is constant. The value of savings might decrease in relation to inflation.

If one is saving, then that money shall have a plan to be use for an investment and that is the reason for the savings. But if it is to feel secure by having money in the bank then that strategy is a loosing one for investing. Saving money, is loosing money. Investing saved money is key to reach financial independence and freedom.

Value of assets increases in tandem with inflation. We become truly financially independent because of this.

Our perspective on money matters

As we said in the opening of this talk, poor people would often remark, "They can't afford that." But the one with the wealthy mindset has a very different query. We ask the following, "How can we afford that?"

The wealthy mindset and poor mindset have very different financial philosophies, primarily on earning vs saving.

Poor mindset people instead of investing they will be cutting expenses and saving money. But the wealthy mindset always is focus to be making investments to enhance our wealth and standard of living.

Which mindset, in our opinion, had a happier and more fulfilling life? It is our wealthy mindset.

It is really difficult to witness others financial struggles, lack of wealth, and extreme bitterness in their later years due to lack of money. But that is why masterinvestor’s community is here to empower the world with finical education. Despite their lifetime of hard work, the financial perspective ultimately proved to be detrimental to them. Money is very important element to master in this life we all have because money does answers all things and it is a tool to get what we want out of life.

Spenders and good debtors win, while savers lose

All of this proves that if we want to be truly wealthy, we need to comprehend the Master Investor adage that "savers are losers." Spenders profit in today's financial environment, while savers continue to lose out. Of course, by spenders, we mean people who invest in cash-flowing assets or utilize our money and OPM (Other People’s Money or debt) to grow our businesses’ passive income and capital gains income.

The new rules of money are here and we must master them to be able to win at this game of money. We can see that majority of people in the world do not experience everything they wish for because they have a problem of lack of money rather too much money. Which comes from the way they make money in their lives which is through earned income only. Working hard for earned income is not the way to become wealthy and financial independent.

Additionally, we need financial knowledge that extends beyond cost-cutting and downsizing in order to spend intelligently in this manner. We have to know how to make money grow on trees, or at least how to build wealth in our own unique way.

For us, what does financial freedom mean?

Three steps that we took are shown to us here. It happened, even though it took some time to happen. All we need is a strategy to create cash flow and the willpower to use that cash flow to pay our bills. We can all achieve financial independence when our monthly costs are met by our cash flow.

But for us, that is the strategy that works to build financial independence. What steps are we taking right now to move toward our goal of becoming financially independent?