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This is when you have enough income from sources other than your regular job to pay for your current lifestyle.
I suppose a simple definition is it’s that stage of your life where you don’t need to worry about money anymore.
The trouble is, it’s all a matter of degrees. What is ‘financial freedom’ for one person will not be perceived as being the same for another.
Some people will think that they are only financially free when they can live a lavish lifestyle without having to ‘work’. Of course the meaning of ‘work’ can also be vague.
If you have found your passion and are doing what you want to do and are earning money from it, for you it is suddenly not classed as work, but you still need to do it to generate the money to live off. So this is not really financial freedom.
True financial freedom means that you don’t have to ‘earn’ the money yourself.
Let’s say that you need £1000 per month to pay all your bills and leave a bit left over for entertainment purposes. If you then rented out a room in your house for £1000 per month, would you be financially free? (Let’s not consider tax and maintenance issues here).
I think that the issue here is that your tenant won’t be there forever and for true financial freedom, you need pretty solid guarantees that the money coming in, is for as long as you need it. Also, situations change. If you needed to move house, you’d need to get another tenant to maintain you rental income.
Some sources of income are fairly predictable and can be used to calculate your total ‘passive’ income. These may be dividends from shares, or interest from money in a bank account. To get to the stage of true financial freedom is to get your passive income to be a greater amount than your expenses.
The trouble is, if you spent some of the money in the bank account or sold the shares, this income would change. So passive income based on an investment such as renting a part of your house, or shares is dependent on you treating that money as permanently invested and not available for use. Ideally, true passive income should not include permanently investing your money, it should be something that is set up and runs at little or no cost and generates money.
Other sources of passive income are very erratic and certainly not predictable. Sales from a book, money from the Google AdSense program where people pay you when ads are clicked on your website, or prizes from Premium Bonds are all unpredictable passive income examples.
So ‘financial freedom’ means different things to different people. Sometimes it’s very easy to get to be financially free, but usually it is quite hard and may take a long time. Most of us get to become financially free by accident when we get older and inherit money.
Either way, you need to concentrate on those things that make you money without you having to earn it and preferably without tying up any of your capital.