Incomes can be subdivided into Active Income and Passive Income. Getting paid by somebody you work, running your own business, or being self employed are all Active Income. One is required to put hours into the activity in order to maintain the same stream of income. The moment you cease to work or stop working, this income also stops.
Passive Income on the other hand is income resulting from cash flow received on a regular basis, requiring minimal to no effort by the recipient to maintain it. In order for an activity to be considered passive, it has to be an activity in which the owner of it does not materially participate in. Income you earn without having to work a job is commonly referred to as Passive Income. Passive Income examples are Rental Income, Dividends, Bank Deposits, LTCG on Equities, etc.
Financial Independence means you have enough personal wealth to live, without having to work for basic necessities. Thus Financial Independence means the ability to manage money in such a way that you have sufficient funds to live your chosen lifestyle without assistance from others. Financial independence does not mean you need to retire. It only means you can freely pursue what you want in life irrespective of the income it creates.
Robert Kiyosaki said, “The key to financial freedom and great wealth is person’s ability or skill to convert earned income into passive income and/or portfolio income.” So one should focus on the passive income and spend time acquiring those assets that provide passive or long term residual income.
Age, existing wealth, current salary or income doesn’t matter – if someone can generate enough income to meet their needs from sources other than their primary occupation, they have achieved financial independence. However, the effects of inflation must be considered and calculated, else there will be a time when they lose their financial independence because of inflation.
If you’re using money like most, buying things on credit, making monthly payments, trying to put away a few bucks each month, etc. Then you’re doomed to end up broke. You have to put in the most effort upfront. Then after a while, you can relax into a wonderful lifestyle, giving you time for your loved ones, hobbies and even dreams which you have long since let go.
To effectively eliminate your debts, you have to use the military principle of “massing of forces.” This means you concentrate all available resources on one debt at a time. A quick rule of thumb would be to pay off your debts in order of their outstanding balances, working from the smallest balance debt to the largest.
It takes more than a few weeks to build real financial independence. You must develop and maintain a long-term view. If you live only for today’s gratification you will never really begin building a financially secure future.
A person’s assets and liabilities are an important factor in determining if they have achieved financial independence. Financially independent people have assets that generate income [cash flow] that is equal to their expenses. The only way to really achieve true financial independence is to own everything in your life and owe nothing. That’s real wealth.
So have a financial plan and budget, so you know what money is coming in and going out, have a clear view of your current incomes and expenses, and can identify and choose appropriate strategies to move towards your financial goals. A financial plan addresses every aspect of your finances.
Ralph Waldo Emerson once said, “What lies behind us and what lies before us are small matters compared to what lies within us.” What you have to determine is whether financial independence lies within you.
It takes hard work to achieve financial independence, which is probably one of the primary reasons why 95 percent of people don’t do it. Being able to work if you want to, or not work if you don’t want to, that is true freedom and you deserve to be enjoying it.