A Simple, Comprehensive and Realistic Guide to Financial Freedom
The only goal I’ve ever had as a personal finance writer is to share with my readers everything I have learned from years spent obsessing over personal finance.
My writing has largely reflected the financial issues I am focusing on in my own life.
- In 2018, when I first started writing about personal finance, I focused on paying off debt and investing in low-cost index funds.
- In 2019, when my debt was gone, and my income kept steadily increasing, I turned my focus to the Financial Independence, Retire Early (FIRE) movement. For the first time in my life, I could actually see a realistic road map to financial independence.
- In 2020, I wrote a lot about side hustles and “scalable income.” I spent a tremendous amount of time and effort into growing my side hustle into a side business.
As I write this in 2021, the financial concept I am obsessed with is Financial Freedom, which I define as being able to spend my days doing work I love when I want, how I want, and where I want.
This article serves as a summation of every major financial issue I have ever written about within the context of how each of these issues has moved me closer to my above definition of Financial Freedom.
Reality-check: I’ll never stop working
Work is an important part of our lives. Apart from earning an income, it can give us a sense of purpose, fulfillment, and connectivity with other human beings, which we all need.
The problem so many people have with work is that they haven’t found the right work.
The majority of people fall into one of two camps when it comes to work.
- Many people are doing work that they hate; these are the people who have a feeling of dread on Sunday night in anticipation of another week of work.
- Many more people have a different view of their job; they land somewhere between “tolerating” their job and “liking” their job.
From a certain point of view, people in camp two (the people who tolerate/like their job) are in a more dangerous position than those who hate their job.
If you hate your job, you are motivated to make changes as soon as possible. If you like your job and are well compensated, there is no incentive to make a change.
This is how people spend 40 years doing “good” work but never taking a swing on doing something particularly meaningful to them.
There is nothing wrong with doing “good” work at a job you “like.” I am not advocating anyone go out and quit their job to blindly follow their dreams. There is nothing wrong with working a job you like for years or even decades, especially if you have a family to support.
Being a responsible provider for people who depend on you is one of the most underrated choices people make. We should be singing the praises of the people who are grinding it out 40 hours per week to provide their loved ones with a great life.
I am saying that at some point in our lives, it’s important that we dedicate ourselves to pursuing work that meets the following criteria.
- Is meaningful.
- We derive joy from doing.
- We are “great” at.
- Gives us energy rather than drains our energy.
- It can be done when, where, how, and with who we want.
Retirement will never be my goal; doing work that meets the criteria listed above is, whether that happens in one year or 10.
To me, that is Financial Freedom. If you agree with me, I invite you to keep reading as I will lay out what I believe are the steps to creating Financial Freedom.
Part 1: the 5 essentials concepts of personal finance
If you want Financial Freedom to be anything more than a pipe dream, you must have a firm grip on the six essential concepts of managing money.
- Tracking where your money is going.
- Building a strong emergency fund.
- Paying off debt.
- Adopting a simple investment strategy.
- Create a goals-based budget.
Let’s dive into each of these in detail.
1. Tracking where your money is going
How can you better manage your money if you have no idea where your money is currently going every month? You can’t; money is a zero-sum game.
I’m not saying that spending money is bad. What kind of life would you have if you saved every penny?
Not a very fulfilling one. Life is about more than hoarding money.
What matters is what you spend your money on
A dollar spent on the things you value most in life is not only a good use of money, but you could also argue it’s the only use of money. The point of saving and investing is to ensure you will be able to continue spending money on things you value in the future.
A dollar spent on “stuff” that provides no value to your life and does not move you closer to your goals is a dollar wasted.
Tracking your spending is not complicated. All you need to do is review your financial records like bank and credit card statements and tally up your monthly spending into categories.
I break all of my spendings down into one of three categories.
- The “big 3”. Essential spending on housing, transportation, and food.
- Values. Any money you spend on things that make you happy.
- “Stuff.” Any non-essential spending that does not provide any real value.
Tracking your spending is a lot of work, which is why most people don’t do it. Herein lies the problem; managing money is both challenging and simple, which is why the right mindset is more important than technical knowledge.
If you truly want to obtain Financial Freedom, don’t think of the cost of things as a unit of money, but as a unit of time. Every dollar invested moves you closer to being able to achieve Financial Freedom.
Again, I am not saying you should hoard every penny. But by tracking our spending, most of us will find we could easily cut back our spending without reducing our happiness.
The real trick, is finding a level of spending you are happy with, and increase your income while keeping your expenses constant.
2. Building a strong emergency fund
This is a straightforward math problem.
- Step 1: Figure out how much you need in your emergency fund.
- Step 2: Figure out how to save that amount of money in a reasonable time frame.
When people think about managing money, they typically think of investing or paying down debt. You might be surprised to learn that the first thing you need to do once you’ve started tracking where your money is going is to build an emergency fund of cash savings.
An emergency fund provides financial stability
Even if you have a pile of debt that you are eager to pay off, that might need to take a backseat until you have built up an adequate emergency fund.
Your goal is not merely to pay off debt as quickly as possible. Your goal is to pay off your debt and never fall back into debt again.
To ensure you don’t fall back into debt, you need financial stability, which means having some cash set aside in case of an emergency.
Life is going to pull the rug out from under you at some point. The problem is, we don’t know when. What happens if you have unexpected costs come up, and you don’t have any cash on hand?
You will need to borrow money and go back into debt.
If there is one thing worse than living in debt, it’s getting out of debt and experiencing what that freedom feels like, only to fall back into debt again. To avoid that fate, we need cash on hand.
An emergency fund is also a requirement to be a great investor. The sure-fire way to lose money on your investments is to sell at a loss when markets are down.
The problem is that when the stock market crashes, it’s typically followed by or preceded by a major shock to the economy. That means you are more likely to lose your job at the same time the market is tanking.
If you have no cash on hand, and you lose your job you put yourself in a position where you’ll have to sell your investments at a loss to make the mortgage payment.
So, how much in your emergency fund?
The next question is, “how much do I need in an emergency fund?”. Most financial experts recommend having 3–6 months’ worth of basic living expenses in your emergency fund.
While those rules of thumb are helpful, the size of your emergency fund will be dependent upon your preferences and personal circumstances, including your job security. The less secure you feel your job is, the more critical an emergency fund is.
3. Paying off debt
There are two tried and true strategies that anyone struggling with debt needs to know.
- The snowball method
- The avalanche method
The Snowball method
The “snowball method” prioritizes paying off your loans with the smallest balance. It is a four-step process.
Step 1: List your debts from smallest to largest.
Step 2: Make minimum payments on all your debts except the smallest.
Step 3: Pay as much as possible on your smallest debt.
Step 4: Repeat until each debt is paid in full.
The avalanche method
The “avalanche method” prioritizes paying off your loans with the highest interest rate. It is also a four-step process.
Step 1: List all your debts from the highest interest rate to the lowest interest rate.
Step 2: Make minimum payments on all your debts except the debt with the highest interest rate.
Step 3: Pay as much as possible on your debt with the highest interest rate.
Step 4: Repeat until each debt is paid in full.
Each method has it’s tradeoffs.
The snowball method is based on the psychology of experiencing small wins. By focusing on the loan with the smallest balance, you get to feel a “win” by paying off a loan in full rather quickly. This can give you the confidence to keep going.
The avalanche method is the most mathematically efficient way to pay off your debt. By paying off the loan with the highest interest rate first, you pay the least amount of interest and potentially get out of debt quicker.
Whichever method works for you will depend on how much motivation you believe you will need to see the debt repayment process through to the end.
4. Adopting a simple investment strategy
With most things in life, the more effort, attention, and time you dedicate to something, the better your results are likely to be. You’ve heard it a thousand times, “practice makes perfect.” If you want to be great at something, you need to dedicate yourself to mastering your craft.
The exception to this rule is investing. The more effort you put into becoming a “good investor,” the worse your results are likely to be.
If you accept that the stock market is reasonably efficient, you will also accept that picking and choosing stocks to try and outperform the general stock market is a waste of time and money.
Rather than picking stocks or paying a mutual fund manager to pick stocks for me, I “buy the whole stock market” by investing in a handful of low-cost index funds.
Diversification; more than just a buzz word
Whatever investment strategy you choose, make sure you minimize risk through proper diversification.
There are two ways to properly diversify your investments.
- Diversify by asset class. That means investing in multiple types of investments like stocks, bonds, and real estate.
- Diversify by geography. That means investing internationally as well as domestically.
Diversifying your investments is a smart and simple way to manage investment risk.
If you want to see the biggest risk to your investments, look in the mirror
We just discussed a scenario where not having enough cash on hand in case of a job loss could force someone to sell their investments at the worst possible time.
The truth is that most people don’t need to be forced; they voluntarily sell at the worst time by trying and failing to time the market.
The classic example of market timing is someone selling their investments because they fear an imminent stock market crash.
Market timing fails because an investor needs to perfectly time when to sell and when to get back into the market. Without a crystal ball, you’re likely to screw up one or both.
Managing your fear
Let’s remember why people sell their investments at the worst possible time; they are afraid.
If you terrified when markets drop and are tempted to sell your investments, then that is a clear sign that you have too much risk in your portfolio.
The simple solution is to reduce the level of risk in your portfolio to something that you can handle during the most volatile times.
Vanguard has developed a free tool that helps you determine how much risk you should have in your portfolio. This enables you to determine the right allocation between risky assets like stocks and less risky assets like bonds.
Yes, by reducing the level of risk, you will be giving up higher expected future returns. But remember, the higher expected returns in risky assets like stocks mean absolutely nothing if you are so scared by the inevitable volatility in the stock market that you sell at the worst possible time.
If you can afford it, working with a financial advisor is an excellent way to manage behavioral risk and avoid the sell-low, buy-high trap. A great financial advisor can act as a coach and prevent you from selling at the worst possible time during recessions and market crashes.
This is where financial advisors earn their paychecks. When the economy is firing on all cylinders and everyone is making money, it can be difficult to see the value of working with an advisor.
When the economy turns south and people get scared, a financial advisor can provide tremendous value by saving you from the greatest risk to your portfolio; you.
If you want to achieve Financial Freedom, you will need to choose an investment strategy and stick to it, especially when things get hard.
5. Create a budget that locks in your goals
If there’s one thing people hate more than tracking their spending, it’s budgeting.
I am not a fan of traditional budget templates. Arbitrary rules like “dedicate 10% of your income to saving” don’t resonate with me. It makes budgeting feel like a chore, and people avoid it entirely.
I prefer a looser approach to budgeting that focuses on your financial goals.
If you’re just getting started, three goals you want to consider are;
- Building a strong emergency fund.
- Paying off debt.
- Saving for retirement.
Once you figure out how much you need to set aside each month to accomplish your goals, you simply subtract that amount from your monthly take-home pay, and whatever is left is how much you have to spend.
A quick aside on “retirement.” The idea of Financial Freedom does not mean you need to “retire.” As I said, I plan to work as long as possible on projects that excite me, are meaningful, and provide complete flexibility.
It is crucial to put yourself in a position to have the option of retiring one day.
Your health or other economic factors may force your hand, so building a plan that could allow you to retire when you reach a traditional retirement age is just smart risk management.
A simple goal based budget example
Let’s say your monthly take-home pay is $4,000.
After crunching the numbers, you determine that you need to set aside the following amount of money each month to achieve your financial goals.
- $200 towards your emergency fund.
- $600 towards your debt.
- $850 towards retirement.
That’s a total of $1,650 required to achieve your financial goals. That leaves $2,350 left to spend on your remaining living expenses.
From a financial perspective, how you spend the remaining $2,350 does not really matter.
However, if you want to live a more fulfilling life, you will want to spend more money on the things you value most in life. That is why when I track my spending; I break everything down into “the big 3”, “values,” and “stuff.”
If I can minimize the amount I spend on the big 3 and stuff, the more money will be left over after putting money aside for my financial goals and the things I value in life.
Part 2: Accelerating your path to Financial Freedom
Once you have mastered the five essentials to a basic financial plan, you will have built a rock-solid financial foundation.
Now, let’s dive into what you can do to throw some gas on the fire and drastically cut down the amount of time it takes to obtain Financial Freedom.
We will focus on two concepts.
- Increasing your savings rate.
- Earning money doing work that you love.
How to obtain a ridiculously high savings rate
There are two ways to increase your savings rate.
- Reduce your spending while maintaining your current income.
- Increase your income while maintaining your current spending.
We’ve already covered how you might reduce your spending; by tracking your expenses and taking a hard look at how much you spend on “The Big 3” living expenses.
Let’s focus on making more money, increasing your savings rate and fast tracking your path to Financial Freedom
How I increase my savings rate every year
I recently wrote about how I plan on saving 83% of my take-home-pay this year. This is extremely ambitious and, if achieved, will fast-track my timeline to Financial Freedom.
It would be nearly impossible for me to achieve that level of savings rate by cutting my expenses alone. Some who practice extreme frugality and minimalism can save 80% or 90% of their paycheck on a reasonable income.
For me, It wouldn’t make me happy to sacrifice that much.
What has allowed me to active an ultra-high savings rate has been picking up a side hustle to earn additional income.
Let’s dive into all the ways side hustles can supercharge your finances.
Your income is the engine of your financial life
I need you to understand that while it is a very simple statement, it is a crucial truth for anyone who wants to achieve Financial Freedom.
Your income is the most important investment you will ever have.
All other savings and investments are made possible by the income you can generate for yourself.
Economics nerds like me, refer to your ability to earn income as your “human capital.” Just like with financial capital, it is possible to put a Present Value on your future earnings you expect to earn over your career.
Here’s a simple way to think about it.
The Present Value of your human capital is the amount of money I would need to give you today for you to never work again in your life and have you be just as well off as if you continued working until your planned retirement date.
If you are under the age of 35, the Present Value of your human capital is likely worth millions of dollars.
So, what are the benefits of a side hustle?
- It diversifies your human capital.
- It increases your human capital.
- It makes saving easier from a psychological perspective.
Diversify your income
We’ve already spent time discussing why diversifying your investments is important. Diversification is simply a way to manage risk. If one investment is losing value, those losses can be offset by another investment that is increasing in value.
If you only have one source of income, you are putting all of your eggs in one basket.
For most people, if they lost their job, it would not be long before they could not pay their bills and begin experiencing financial hardship.
On the other hand, if you had a side hustle that generated enough income to cover your necessary living expenses, you could lose your job and potentially avoid any significant hardship.
If we accept that our ability to earn an income is our most important asset, it makes sense to manage risk by diversifying our income. That is one reason why I have had a side hustle my entire adult life.
Side hustle money is easier to save
As we’ve already discussed in length, making more money in itself is not enough to achieve a high savings rate. You also need to maintain your current level of spending.
One of the reasons so many people struggle to save money is because they have a tendency to spend based on their paycheck and only save and invest if there is any money left over after they bought everything they wanted.
There are ways people with one paycheck can increase their savings, like automating their savings and then spending what is left. However, it is much easier for most people from a psychological perspective to save money they earn from a side hustle or second job.
Since side hustle money is independent of your paycheck, you’ll find it easier to look at that money as “separate” from your paycheck and it will be easier to save it.
Put simply; it’s easier to use the money earned from side hustle to increase your wealth compared to getting a raise at work (which you should also try to do.)
My side hustle income perfectly compliments my paycheck from my 9–5 job.
- I have a job that provides a nice paycheck, excellent benefits, and a defined benefit pension.
- My paycheck and benefits cover my retirement income (through the pension,) any medical or dental expenses (through my benefits,) and all of my living expenses with a healthy amount left over to save and invest (through my paycheck.)
- Given everything I can cover through my paycheck and benefits, I can direct every single penny I earn from my side hustle into investments.
So, as my side hustle income increases each year, so does my savings rate.
What type of side hustle should you choose?
Broadly speaking, there are two types of side hustles.
- Second jobs.
If you have a side hustle where you trade time for money, that is a second job. Driving for Uber or Lyft would be an example of a second job type of side hustle.
2. Side businesses.
The other type of side hustle is one that has no set hours, and the money you earn is based entirely on the quality of your work and your ability to market that work.
These types of side hustles have scalable income. That simply means there is no cap on the income you could earn. There is also no guarantee you’ll earn any money.
Starting a blog, selling a digital product, or an e-commerce store are examples of side businesses.
So, which should you choose? It will depend on your preferences. I decided to adopt a rational framework for choosing a side hustle, which is to use my side hustle to balance out my portfolio of human capital.
Are you a stock or a bond?
In his book “Are you a stock or a bond,” author Moshe Milevsky challenges readers to consider if their human capital is high-risk, high-reward like investing in stocks, or provide predictable fixed-income similar to a bond.
- If you own a business or work a 100% commission sales job, your human capital would be stock. There is no limit on the potential returns, but it could also come crashing down to $0 one day.
- If you are a tenured professor, your human capital would be like a bond. The same amount of money hits your bank account each month, with a small chance of getting fired but with a cap on your earnings potential.
If your job is high-risk, high-reward, your human capital acts like a stock. If you have relatively high job security and predictable pay raises, your human capital acts like a bond.
To balance out and diversify your human capital, choose a side hustle that has the opposite characteristics of your day job.
- If your day job looks like a stock, go with a second job that acts like a bond to provide a predictable and stable source of income.
- If your day job looks like a bond, go with a side business that acts like a stock to provide you with the upside potential for unlimited growth.
Since my day job looks like a bond, I decided to start a side business to provide some stocks into my portfolio of human capital.
Scalable income means scalable wealth
When I started my side business, I was in the privileged position where my 9–5 job could cover all of my living expenses and allow me to save. That meant I could save and invest 100% of the profits from my side business.
I take every penny my side business generates and put it directly into an investment account.
This provides me with both scalable income and scalable wealth.
- As I grow my side business, that means I will have more money to invest.
- Each year I invest more than I did the year before.
- At the same time, the investment gains from previous years begin to compound.
This kind of virtuous cycle acts as a wealth snowball. Each year, the income, savings, and investment gains grow larger than the year before.
If my business continues to scale at the rate it has in the past few years; I have put myself on pace to become financially independent within the next few years.
Financial Independence is the ultimate form of financial freedom. It is the point where even if I lost my job and my business failed at the same time, I could still pay for all of my living expenses with the income generated from my investments.
If you can paint a better picture of financial security, I would love to see it.
Part 3: Building a business you love
Recall my definition of Financial Freedom.
Being able to spend my days doing work I love when I want, how I want, and where I want.
Adopting the five personal finance principles, we discussed earlier and creating a side business with scalable income has the potential to put you on a short track to Financial Freedom.
However, there is one key ingredient you can’t overlook.
If you start a side business or a side hustle, it should be doing something you love.
What is the point of escaping a 9–5 job you hate or “tolerate” just to find yourself working for yourself but doing something you hate or “tolerate?”
Having financial wealth and scalable income is not enough; to be truly free, you must love the projects you work on.
You have to really want it
I created a side hustle doing something I was passionate about, talking about personal finance and how we can use money to live our best life.
I started writing about money in 2018. In my first month of writing, I made about $15, which I was thrilled with.
I quickly learned that earning a buck doing something you love is an addictive feeling.
From a purely cost-benefit perspective, it was not an efficient use of my time at first. I probably spent more than 40 hours to generate that $15. That would put my hourly wage at less than 40 cents per hour.
This highlights an important lesson when you start a side business that has scalable income; in the beginning, you will work a lot of hours and make next to no money. Not only will you make very little money starting out, but there is also no guarantee that you will ever make any money. Remember, the majority of businesses fail; that applies to you too.
Before I found success as a personal finance writer, I started and failed with an at-home fitness company. I poured in hundreds, if not thousands of hours over a 2-year stretch and never made a profit.
When I told my wife I was going to start writing about personal finance, I think she was pretty nervous because if I spilled my guts into another business that failed, I could have suffered from burnout.
This is a very real risk, especially if you are going to start a side business AND work a full-time job AND have some kind of social and family life. Burnout and mental health among entrepreneurs is way under-discussed. For every Elon Musk, there are thousands of would-be entrepreneurs who are suffering from anxiety, burnout, and depression.
I don’t say this to discourage you from starting a business, but you should realize the risks involved; a business presents not only financial risk but risks to your health too.
So, when I started writing about personal finance, I initially viewed it as a “passion project.” While I hoped to make money, it was not the primary motivating factor. I just simply had so much that I wanted to say about managing money, and I needed an outlet for it.
Turning the corner
Since it made me happy to write about personal finance, I was able to continue doing so while making next to no money for about six or seven months.
I got lucky when an article (which in retrospect was mediocre) went viral. In October of 2018, I made over $500 from my writing, and I began to build an audience.
After I had that first bit of success, I'll admit that I became greedy, and now that I realized I could make money from writing, profits took back over as a primary motivation.
This made 2019 particularly stressful as I continued to make more money from writing, but the profits swung widely from month to month. Taking my emotions on a roller coaster ride.
This brings me to another tip about running a part-time business.
Business success and profits are not linear. Having a few months in a row of rising profits does not guarantee your success will continue in a straight line.
I think my brain was warped by watching too much Shark Tank and hear entrepreneurs talk about having 20% plus increases in profits every month. It turns out that is not the case for most businesses.
The best way I have been able to stay even-keeled is to put out work I am proud of, keep expectations low, be delighted when I exceed My goals.
Rinse and repeat.
As you put in more reps, you’ll get better at your craft, and if you’re lucky you’ll reach a place where you can continue earning more money for the same amount of effort.
From side hustle to side business
I think you can call anything that provides you scalable income a business. If I were to simply continue writing and earn more and more for my writing, I believe that qualifies as a business.
However, in late 2019 I decided that what I really wanted was predictable monthly income; to do that, I needed a product.
So, I went to work, turning the topics I write about into three different digital products.
- Online courses.
- Paid subscriptions.
This was a smart way to diversify my business because, by this time, I had written well over 100 articles. All of that groundwork and the research required to write them had already been done.
From there, it was a matter of putting in the hours to build upon what I have already done and repackage that content in various forms.
I don’t mean to make it sound easy because it took an immense amount of work. I spent hundreds of hours in 2020, learning how to create and market courses and eBooks.
But much like my writing, the more reps I put in, the more efficient I became at these tasks. Unlike a blog post, an ebook can continue earning consistent income long after it’s initial publication.
How to reach Financial Freedom in less than 10 years
The amount of time it takes to achieve financial freedom comes down to one factor; the amount of money you can make doing work you love relative to your living expenses.
Many part-time entrepreneurs put too much pressure on themselves to make a full-time income from their business right away. This can contribute to the burnout and mental health issues we discussed earlier.
If you have found a side hustle/business that you are really excited about, why not set a realistic goal of when you could go full-time with it?
That’s why I came up with the 10% rule.
If every year you can replace an additional 10% of your current income doing work you love, you can achieve financial freedom in no more than 10 years.
How to figure out exactly when you’ll be financially free following the 10% rule
The easiest way to understand how the 10% rule works is with an example.
Let’s assume the following.
- You have a corporate job that pays you $70,000 per year.
- After taxes and deductions, your annual take-home pay is $48,000.
- Your annual expenses are equal to 90% of your take-home pay or $43,200.
- Each year, your take-home pay and your expenses rise by 2%.
- Maybe you love cooking. Being in the kitchen and preparing fantastic dishes for you and others to enjoy is one of your favorite things to do. So, you pick up a side hustle writing and making videos about cooking recipes.
- Your goal in the first year of launching your cooking side-hustle is to replace 10% of your take-home pay or $4,800.
- In your second year, your goal is to replace 20% of your take-home pay (which has increased by 2%) for a total of $9,792 with your side-hustle.
- Each year you scale the income of your side-hustle to replace an additional 10% of the take-home pay your day job provides you.
- After year nine, the income you receive from your side-hustle and your annual expenses are equal at $50,616.
This is summarized in the following table.
When you can cover all of your living expenses doing work you love, you have achieved financial freedom.
To be clear, to make sure you are comparing apples to apples, the income you earn from your side hustle-should be calculated net of taxes because it is replacing your net-income from your day job.
Living frugally will dramatically reduce your timeline to financial freedom
If nine years sounds like a really long time, then I have good news; you don’t have to wait nine years.
Remember, the point of financial freedom is when you can cover all of your living expenses with income from work you love. You do not need to replace all of the income from your day job or even 90% of it.
In the example above, where it took nine years to achieve financial freedom, we assumed that your living expenses were 90% of your take-home pay in year one.
The lower your living expenses are as a percentage of your take-home pay, the less of your current income you’ll need to replace from your side hustle.
- If your living expenses are 80% of your take-home pay, you can achieve financial freedom in 8 years.
- If your living expenses are 70% of your take-home pay, you can achieve financial freedom in 7 years.
Assuming you can replace an additional 10% of your take-home pay every year through your side hustle, the lower your living expenses are the faster you will achieve financial freedom.
This is summarized in the following chart.
The faster you can scale your income, the faster you’ll achieve financial freedom
The 10% rule assumes that you are replacing an additional 10% of the income from your day job with your side-hustle or passion project each year. I picked 10% for two reasons.
- It sets realistic expectations (it can take a long time to make real money pursuing your passions.)
- 10% is a round number, and people like round numbers.
My point is that there is nothing magical, about 10%. If you can replace more than 10% of the income you make from your day job each year; you will achieve financial freedom much faster.
The only magic number is the difference between your annual expenses and net-income generated from doing work you love; once that number is $0, you have achieved financial freedom.
What counts as “living expenses”
I keep using the term living expenses, but what exactly do I mean by that?
This is simple: we will consider living expenses to include literally any transaction where money leaves your pocket or your bank account.
- That means all of your traditional living expenses like housing, food, transportation, entertainment, travel, etc.
- Seasonal spending on things like birthdays and holidays.
- It also includes any short-term savings, for example, money put into an emergency fund, house repair fund, or a travel fund.
- Finally, it will include a basic amount for how much you need to save and invest for long-term retirement planning.
Yes, you need to include an allotment for retirement savings. If you’re doing work you love, you might think, “I never need to retire.” But here’s the thing, it may not be up to you.
By the time you reach a traditional retirement age, your health or the state of the economy may not allow you to continue working.
So, you need to save a basic amount for retirement from your side-hustle before you can be considered financially free.
There are two ways you can do this.
- The very unscientific way of simply budgeting to save 10% of your income for retirement.
- Taking the time to actually figure out how much you need to save for retirement based on your situation. It takes a lot more effort but is worth it. I have some tips on how to do that in this article.
So, once you can cover all of your living expenses and savings requirements from income generated doing something you love, you are financially free.
Financial freedom is not a lifetime guarantee
Since Financial freedom is dependent on the income you can generate from doing something you love; it is a fluid situation. Achieving financial freedom does not guarantee you a lifetime of freedom.
If you can no longer generate enough income to cover your spending from work you love, you could lose your financial freedom.
This could be a temporary situation if you have a few bad earning months, or it could be a permanent situation in which case you would need to pick up either part-time or full-time work at a 9–5 job that you may not “love” but need to keep paying the bills.
That is why many people would not choose to actually “claim” their financial freedom as soon as their side-hustle income surpasses their living expenses.
I would count myself among that group of people. My side-hustle generates enough income to cover most of my living expenses. Still, I am very happy to continue working a great 9–5 job that I like to help me accumulate more assets and give myself a bigger cushion.
Right now, I take every penny I earn from my side-hustle, and I invest it. As my portfolio builds, it begins to produce its own income, which could help supplement my side-hustle income in lean months if I choose to grab financial freedom and make my side-hustle my main-hustle.
It’s not going to be easy, and there is no guarantee of success, but you need to know that it is absolutely possible for you to achieve financial freedom one day.
Start with the first step of replacing 10% of your income from doing work that you love and build on that success.
In this article, we touched upon every major financial issue that I have been thinking about for the past few years, from basic personal finance concepts to the pressures and rewards of running a part-time business while holding down a full-time job.
As long as this article has been, we barely scratched the surface on most of these topics. If you have found this valuable and want to go even deeper on each of the topics we reviewed, I invite you to join my weekly newsletter here.
Here is the final thought I will leave you with; I wish for you to become a student of money as I have but do not obsess over money as I have for much of my life.
If you can take the lessons learned here, continue seeking out more knowledge, and have relentless optimism, you can have a successful and healthy relationship with money.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.