- May 6, 2021
- Posted by: Jin Wang
- Categories: new investors, passive investing, syndications
Since the two terms, financial independence and financial freedom are used interchangeably, investors often ask me what financial independence really means, and how’s it different from financial freedom?
Being a mom, I like to use the analogy of a toddler learning to walk. Once they figure out how to pull themselves up and take a few steps on their own, they have achieved a new mobility level. They are no longer completely dependent on their parents and may not need their parents to carry them around everywhere.
However, you wouldn’t expect that same toddler to walk around the entire zoo or walk all the way to the park the following day. They’d still need a stroller to help get them there. They haven’t achieved full FREEDOM yet, although that subject will be revisited when they turn 18.
Money works similarly. So let’s dissect what it means to be financially independent vs. financially free and how investing in real estate can help get you there.
Financial Freedom vs. Financial Independence
Think about that same toddler who just learned to walk. Maybe your finances have reached “mobility,” and you have enough passive income (outside your salaried job) to cover your basic expenses. But, can you lose your job today and be ok? Do you have a fully-funded emergency fund? Will your passive income fund your current lifestyle indefinitely?
Savings is highly recommended and all, but if you are drinking from the same cup and do not refill it somehow, you will eventually run out of water. You can’t expect the money you’ve saved to fund your lifestyle for any extended period of time. However, ongoing passive income will refill that cup for you while you sleep.
To achieve financial independence or financial freedom, you’ll need to build multiple streams of passive income over time. This is why it’s called a financial journey and to have a successful one, you need to have a plan. Before we get to that, let’s define the three milestones to ultimately get to financial freedom. Which milestone are you at right now?
Milestone #1 – Financial Security
If you were fired today, but you’ve set yourself up to be financially secure, it means that you have enough external sources of income coming in to cover your basic living expenses. The bare-bone basic expenses needed to survive include food and shelter.
Most people in these situations will be relieved that at least they have a six months emergency fund, but what if finding new employment takes longer than expected and that stash of cash runs dry? This is precisely why external sources of income are critical because it will help you fill up your cup so you don’t have to have a panic attack when you realize you’re down to your last month of savings and that account is getting replenished at 0.5% interest rate at best.
Getting started is the hardest part, but you must take time to establish being financially secure first. It is the first step towards financial freedom.
Milestone #2 – Financial Independence
Being financially independent means your finances can be stretched a bit further. Not only can you cover those basic needs, but you can also afford a few conveniences or luxuries like dining out, family vacations, and some Amazon Prime.
Having financial independence allows you to retire early and maintain your current lifestyle without working ever again. Multiple streams of passive income can fund your lifestyle while you choose what you want to do day-to-day. This is when you’ve achieved your freedom of time.
Milestone #3 – Financial Freedom
True financial freedom is one step beyond financial independence. Financially free individuals’ passive income can fund the luxurious, travel-inspired, do-what-I-want lifestyle.
Financial freedom means you can make choices like flying first class, upgrading to the ocean-view suite, and bringing a friend pro-bono without worrying about where the money is coming from.
Your Path to Being Financially Free
Everyone’s financial journey begins from a different place, with different numbers and circumstances. However, the ultimate goal and the milestones along the journey are the same.
You know that living paycheck-to-paycheck is not for you. You’re aware of the possibilities for your future and your financial situation due to carefully planned budgeting and investing. This also means you’re going to need some passive income goals against which to measure and gauge your progress down the path.
Financial Security Number
Take a look at your current expenses (bills + anything you pay for), and extract the costs for the basics. How much on average do you spend on food, shelter, clothing, and other basics?
That’s your financial security number – the amount you need in passive income to become financially secure.
Financial Independence Number
Next, take a look at your current finances and lifestyle in totality; what’s it takes to fund the whole enchilada? The basics (those covered by the financial security number) plus all the enjoyable conveniences and comforts you spend money on in total equals the monthly amount you need in passive income to achieve financial Independence.
When you build enough passive income streams to cover your current lifestyle completely, that’s financial independence. You’re financially independent from needing to work.
Financial Freedom Number
Once you have calculated your financial independence number, take a step back, and consider the things you WANT to afford. Then, find out how much money the lifestyle you dream of will cost. This dream lifestyle number is your financial freedom number.
Your final steps along the financial journey path include building multiple income streams so that the passive income you earn is enough to fully fund this dream lifestyle and help you achieve true financial freedom.
How to Achieve Financial Freedom Through Investing in Real Estate
There are a million ways to generate passive income streams. You might become an author, design an app, or start a business, but all of those require significant skills and knowledge the average Jo doesn’t have.
However, more people have become millionaires through investing in real estate. Why? Because it’s relatively simple!
You buy a property and rent it out. Sounds like the game of Monopoly – pretty simple, right?
Investing in Rental Properties
Let’s pretend you’ve saved up $20,000 for an investment, for most of us, this may have to be out of state to find cheaper investment properties. So you put $15,000 down on a rental home and use $5,000 to boost curb appeal and refresh the paint. A nice couple rents the place and their consistent rent payment more than covers the mortgage payments so you’re earning cash flow each month.
However, let’s say you make $250 per month in excess cash flow after the mortgage and taxes are paid, it isn’t much and won’t create financial freedom on its own, but it’s a step in the right direction! Add a rental home like this to your portfolio every year and within 5 years, you’ll be up to $1,250 per month in rental income.
It’s not fast, and there’s no magic pill, but if you take the time to build slowly, you’ll get there.
Investing in Real Estate Syndications
An alternate way to invest in real estate and avoid the messiness of remodels and tenant woes is to invest in real estate syndications.
In these types of group investments, several investors pool their money – typically, the minimum investment is between $50,000 – $100,000. The money is pieced together to cover the down payment and the cost of renovations on a much larger-scale property.
You’d be a passive investor, while the general partners (also called sponsors/operators) are responsible for property management, renovation coordination, and occupancy rates. Sponsors do receive a cut of the returns for their work, but the majority of the profits go to investors.
As an example, a $50,000 investment into a real estate syndication with a 10% return, will produce about $400 per month in cash flow. Syndications are truly passive because your money makes money and you have no active responsibilities.
Real estate syndications are available in different markets and asset classes, which allow you to diversify and build multiple streams of income quickly.
Enjoy Your Journey to Financial Freedom
There’s no one right or wrong path to financial freedom, just as there’s no single type of real estate investment that will accelerate your journey the fastest.
Real estate can be the easy, slow and steady approach to financial freedom no matter which stage of financial security you’re at now. You’ll enjoy the journey most if you focus on the lessons, relationships, and surprises you’ll experience along the way.
Want to Learn More?
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