Is Financial Freedom Legit or a Scam?
Financial freedom has gained a lot of popularity recently, most notably with millennials and the F.I.R.E. Movement. Like most things, FI has become a victim of its own success and a lot of “gurus” and snake oil salesmen have come onto the scene trying to sell the dream of financial independence. Even if it is achievable, is it practical to retire early in your 30s and sit on the beach the rest of your life?
In this article, we aim to provide a comprehensive analysis of the concept of financial freedom and its practicality. We will examine its definition, the different paths to achieving it, if these paths are legit and its pros and cons.
What Does Financial Freedom Mean?
Financial freedom will mean something different to everyone depending on your specific situation. If you’re living in New York City, then what you consider financial freedom will be vastly different than if you are retiring early on a beach in Bali, Indonesia.
So while everyone’s requirements for financial independence may differ, FI is generally defined as when you have sufficient income and assets to cover their expenses without having to work.
With FI you should be able to live comfortable life without being tied to a job or a source of regular income. This happens when your passive income exceeds your expenses, and you can live solely on your savings and investments.
Financial freedom is an attractive goal for many people for several reasons:
Reduced stress: Financial freedom means having the security and stability of knowing that you have enough money to cover your expenses and provide for your future needs. This can reduce stress and anxiety about money and allow you to live a more relaxed and fulfilling life.
Increased flexibility: Financial freedom allows you to have more control over your time and decisions. You can pursue your passions, travel, start a business, or work on a project without having to worry about financial constraints.
Better quality of life: Financial freedom enables you to live a better quality of life. You can afford the things that matter most to you, whether it’s a comfortable home, quality education, or health care.
Ability to help others: Financial freedom also gives you the ability to help others in your life. You can give back to your community, support loved ones, or make a positive impact on the world.
A sense of control: Finally, financial freedom gives you a sense of control over your life. You are in charge of your financial decisions and can make choices that align with your values and goals.
Is Financial Freedom a Scam?
There are scammers in every field and Financial Freedom is no different. Basically, if someone tells you something that sounds too good to be true, then it probably is.
Financial freedom is something that takes work and will not happen overnight. It requires taking a deep look into your income and expenses and making tough choices in order to achieve your goals.
Don’t believe someone who says they have a magic pill that will automatically give you financial independence, because like anything else worth doing, it requires hard work and sacrifice.
The Problems with Financial Independence
One of the biggest problems with financial independence is that it is a goal, that once achieved, might leave you without any real motivation or direction. This can manifest itself in many different ways but here are something’s to consider:
Lack of structure: Financial freedom can be both a blessing and a curse. Without a regular 9-to-5 job, it can be difficult to maintain a structured schedule and establish a routine. This can lead to feelings of boredom, restlessness, or a lack of purpose.
Reduced security: Financial freedom means having control over your financial decisions, but it also means you are solely responsible for your financial well-being. Without the security of a steady paycheck, you may be exposed to more financial risk and instability.
Difficulty maintaining motivation: Achieving financial freedom can be a long-term goal that requires discipline and hard work. Without the structure of a job or regular paycheck, it can be difficult to maintain motivation and focus on financial goals.
Responsibility for investment decisions: If you rely on investments to provide financial freedom, you are also responsible for making sound investment decisions. This can be challenging, especially if you are not familiar with investing or the financial markets.
Potential for isolation: Financial freedom often means having more control over your time and decisions, but it can also lead to feelings of isolation. Without a regular job or structure, it can be more difficult to socialize and connect with others.
Is Financial Freedom Possible?
Financial freedom is definitely possible and there are a few different paths to follow. Individuals can choose the one that suits their goals, personality and lifestyle. Some possible financial freedom paths are:
Path 1: Early Retirement
Financial Independence Retire Early or FIRE is a popular path to financial freedom. It involves saving and investing a substantial portion of one’s income to achieve financial independence and retire at a relatively young age, usually in the 30s, 40s or 50s. This path is ideal for individuals who are not passionate about their careers and are looking to escape the 9 to 5 grind.
To use the 4% Rule, first figure out exactly how much you spend and how much you make. Now take a close look at your expenses and start to eliminate all the unnecessary expenses like expensive dinners out, car payment, etc.
Once you have your monthly number, multiply it by 12 to get your yearly spending and then multiply this by 25x.
4% Rule Example:
$3,000 monthly expenses
X 12 Months/Year = $36,000
X 25x = $900,000 – This is what you will need to save in order to retire early while spending $3,000/month.
*Note – taking 25x of expenses is the same as the 4% Rule (but in reverse) – $900,000 x .04 = $36,000*
Now that you have gotten rid of all your unnecessary expenses and still have a comfortable life, consider that this is what your life will be like if you retire early without any extra income coming in. If you think you’ll be happy with this scaled back lifestyle, then go for it, but if not then consider working a few more years or getting a part-time job or side hustle in early retirement.
Path 2: Entrepreneurship
Entrepreneurship is another path to financial freedom. It involves starting and growing a business that generates passive income. This path is ideal for individuals who are creative, entrepreneurial and willing to take risks. The goal is to create a business that generates enough income to cover one’s expenses, allowing them to work on their terms.
Businesses to consider are local businesses (landscaping, roofing, etc.), franchises or starting an online business.
I started and sold an online business which gave me a certain level of financial freedom and so this is what I naturally recommend other people do. Online businesses are unique because there startup costs and risks are extremely low when compared to a brick and mortar business.
Path 3: Real Estate Investment
Real estate investment is another path to financial freedom. It involves buying and managing rental properties that generate passive income. This path is ideal for individuals who are willing to put in the time and effort to learn about real estate and who have a strong network of contractors and property managers. The goal is to build a portfolio of rental properties that generates enough income to cover one’s expenses.
If you’re not sure where to get started when investing in real estate then you can consider house hacking.
House hacking is a real estate investment strategy that involves purchasing a property and living in one part of it while renting out the other parts to generate income. The goal of house hacking is to use the rental income to offset the costs of ownership, including mortgage payments, property taxes, insurance and maintenance expenses.
The easiest way to do this is to purchase a single family home and then rent out the other rooms. This might be an uncomfortable way to live but remember that it is only temporary. This will also greatly reduce your rent (mortgage) and in some cases can even eliminate it all together so that you can live for free!
A more advanced strategy is to purchase a multi-unit property, such as a duplex or triplex, and live in one unit while renting out the other units. The rental income from the other units can be used to help pay for the mortgage, taxes, and other expenses, reducing the overall cost of ownership and potentially allowing the owner to save money each month.
Pros and Cons of Becoming Financial Freedom
Financial freedom has its pros and cons and it is essential to consider both before pursuing it as a goal.
Financial Independence Pros:
More time for personal growth and development
Freedom to pursue personal interests and hobbies
Reduced stress and better health
Ability to travel and see the world
Increased quality of life
On the other hand, some of the cons include:
Financial Independence Cons:
Reduced income and financial security
Lack of structure and discipline
Increased risk of boredom and loneliness
Dependence on passive income sources
Difficulty in making a significant impact in the world
So is it Legit?
Financial freedom is a concept that has gained popularity in recent years and can simply be defined as having enough passive income and assets to cover expenses without having to work. It’s important to understand that it is possible but it is not easy to achieve. So while many unscrupulous people will try to sell a magic pill promising financial independence, the truth is, is that it takes hard work and sacrifice.
There are several paths to achieving financial freedom, including early retirement, entrepreneurship and real estate investment and each path will depend on your current financial situation and skill set.
It’s also important to consider that financial freedom has its pros and cons and that you will need to fill your new found freedom with positive activities in order to live a full and happy life.