One of my favorite movies of all time is Amistad. If you have not seen it, it is well worth watching. The movie is an important historical piece that delves deep into slavery. The movie delves into the topics of property rights, human rights, and morality. The most emotional part of the movie is when Djimon Hounsou’s character, Cinque, stands up and chants for his personal freedom by yelling “Give us free” over and over.
When I decided to leave the corporate world and venture off on my own, I felt like I was essentially saying that I wanted my freedom. Now, obviously, that’s not the same thing as human slavery, but I too wanted freedom of choice, freedom of time, and ultimately, financial freedom. I now pick and choose the investment banking projects that I work on and who I work for. I now pick the real estate investments that I invest in. And I choose when I want to do something. After running my own companies full-time for the last 8+ years, I can now say that I have also achieved financial freedom.
Freedom is important to me. While I have always seen the value of big corporations, I have always thought that there was an even bigger benefit to being a business owner or entrepreneur. The thing I did not realize when I was working for companies, however, is that the security I thought I was receiving from the company was really just a false security blanket at best. That’s not to say that many people should not work for others. You can make a lot of money, you can have security, and you can gain prestige all while having a larger organization behind you that supports you financially with projects that you want to explore within the company. But I do know that there are many people within organizations that desire freedom.
There are various ways that you can obtain freedom. The two that were always the biggest ones to me are (1) financial freedom and (2) freedom of time.
Financial freedom by my definition is having enough investment assets producing a positive return that the income from the investment covers your personal lifestyle. With real estate, it takes time, but it is doable. I, gratefully, have never lost money on a real estate deal, but I have had a couple deals with very thin returns. When I go into a deal, I expect to receive an internal rate of return greater than 15%. That means that when I invest $100,000 into a deal, I would expect to receive approximately $145,000 back from cash flow and upside if we were to hold the asset for 3 years. ($100,000 x 15% x 3 years) = $45,000. Add that return amount to your original investment amount and that is where the $145,000 is derived from.
For financial freedom to truly work, though, your passive income needs to cover your cost of living on an annual basis. For example, if your household expenses equal $50,000 per year, do you know how much you will need to invest over time to cover your expenses?
Let’s say that on average, you can comfortably achieve a 6% annual yield from passive investments (we see a range of opportunities that yield more than 6%, but I like to be conservative). If you divide $50,000 by 6%, then you need to have an investment portfolio that is $833,333. If you can average 8%, then your investment portfolio would need to be $625,000.
This obviously does not happen overnight, but if you maintain discipline and are proactive finding opportunities, you can invest for your future over the long-term. It is possible and investing becomes second nature once you commit to the practice to save and invest any extra money you receive from pay increases, bonuses, gifts, inheritances, gains from other investments, etc. If you can do this for the first time with $10,000, then you can do it again with $10,000, and then you can figure out how to set aside even more money. Once you become intentional about your financial goals, you can turn investing into a habit that sets you up for financial freedom.
Freedom of time by my definition is having enough investment assets producing a positive return and/or having enough flexibility in your work schedule that you have the ability to choose what you want to do with your time. If you have enough passive income to cover your lifestyle, then you can choose what to do with your time. You may still decide to work to continue growing your portfolio or you may decide that you can retire early. You may decide that you will work, but only until you grow the portfolio to double the size of your annual expenses. You may decide to manage your investments and engage in your passions the rest of the time. The bottom line is that you can give yourself permission to do whatever you want with your time because your investments cover your expenses. It is a good place to be.
When I reached that level, I did not stop working. I kept investing and I choose to continue working, however, I made a lifestyle change. The bottom line is that this is your life, so choose what makes the most sense for you. My investments span multiple countries now, but the majority of my investments are still in the United States.
Like Cinque from Amistad, we should all be yelling to ourselves to “Give us free”. You should certainly find ways to supplement your active income and find ways to grow your passive cash flow and net worth so that you can ultimately have financial freedom and freedom of time.
I wish you well on the path to freedom.
Until next time, happy investing!
-Robert