The Truth About Financial Freedom Part III

I want to share an important milestone with you in terms of Financial Freedom. I’ve discussed this before and it’s worth bringing up again, but it’s the fact that there is no absolute Financial Freedom. There are increasing or decreasing amounts of it.

But along the way, as one continues to increase Financial Freedom, there is an important milestone that allows one to become exterior from average everyday life and that milestone is called Financial Independence.

In fact, there is a Law of Wealth that defines it:

“Financial Independence is when Passive Income exceeds Generosity, Expenses, Taxes & Savings.”

I first learned about Financial Independence when I was 18 years old, but it wasn’t defined this way. Financial Independence was defined to me as the amount of money I needed to have invested in my “nest egg” to be able to retire. Now, if you didn’t know my story yet, I was a traditional financial advisor for many years and my mom was my first client. And we did the conventional “nest egg” theory with her where she worked and contributed to social security, got a pension, paid off the house, and had some money in retirement accounts so that at age 59.5 when you can legally start to enjoy your “nest egg” she could begin her golden years. Well, at age 60 she was diagnosed with stage 4 cancer and passed away within 6 months. I was devastated as a son and also as a financial advisor, seeing The Plan unravel right before my eyes with my own mother.

Over the years, I began to learn that the wealthy didn’t believe in retirement. I spent over a decade studying the Top 1% of wealth and learned that they invested in businesses and real estate and stored their money in places like precious metals and life insurance and gained a different type of Financial Independence. They had Passive Income that exceeded their Generosity, Expenses, Taxes and Savings.

Now, income cannot be absolutely passive. Like Financial Freedom, there are increasing and decreasing levels of passive when it comes to income.

The most passive forms of income are produced by investments that generate income from an asset and don’t require very much time or effort to be traded for them.

So, the goal would be to get income from these investments that require minimal time or effort to be traded for them and to the degree that this passive income exceeds your generosity, expenses, taxes and savings.

To accomplish this, you’d need to do the math to see what this number was for you.

I’m going to teach you right now how to come up with it.

1. How much do you spend per month now to maintain your standard of living?

2. If you had no consumer debt at all, how much per month would you need to maintain your current standard of living? Let’s stay it is $10,000 per month.

3. Realize that this $10,000 per month number makes up 25% of your total income. You will want to save 40%, be generous with 10%, and estimate 25% for taxes. 40+10+25 = 75%. If you have 75% allocated for generosity, taxes, and saving, then there is 25% left for living.

4. Take the number from step 2 and divide it by .25 (we are doing the backwards math like we learned in arithmetic to determine what the full amount needed would be based on the fact that we know what 25% of the full amount is. You divide the $10,000 by 25% to back it out and get the full figure).

5. You can see that the number required would be $40,000 in this case. A person would need $40,000 in total passive income per month in order to:

a. Give 10% or $4,000/mo.

b. Spend 25% or $10,000/mo.

c. Pay taxes on 25% or $10,000/mo.

d. Save 40% or $16,000/mo.

All of this totals up to $40,000/mo. in Passive Income.

Now you may look at this and think “wow that’s way too big a number” or “wow, that’s not going to be enough”. That’s why it is important to really understand in step 1 and 2 of this how much your current cost of living is and what it would need to be if you had no consumer debt. If you earn and spend less now, then your number would be smaller. If you earn and spend more now, then your number would be larger.

It is important to analyze this number at least once per year because as inflation increases (it will) and as taxes increase (they will) you will need to adjust your expense category and your taxes category.

So, we know our number, now what?

The next step here is to determine how much we need to have invested in order to generate this number. Let’s stick with my $40,000/mo. figure just to be consistent. Remember, we are investing for “yield” (passive income) here not for appreciation (increase in price of an asset that we will sell off later). When I invest for yield, I like to target myself for 12%.

We need $40,000/mo. and there are 12 months in a year. So, we will multiply $40,000 x 12 and come up with $480,000/yr. in Passive Income that’s needed.

As I mentioned, we’ll use a target yield of 12% per year and we will do the backwards math here too and divide our annual total by 12%.

$480,000 divided by .12 comes out to $4,000,000.

We will need $4,000,000 invested at a 12% annual yield to generate $480,000/yr. or $40,000/mo. in Passive Income.

If I’m using my Sacred Account combined with Seller Finance Real Estate (which I am) then I know that I also need to acquire about 82 homes to achieve this.

The next question is to find out how much we need to save in order to build up to $4,000,000. This also means we will need a set timeline. Let’s say a person is trying to achieve this in 15 years, which might seem like a while, but compared to the timeline of most people (which is never) 15 years is relatively short.

Using a saving & investing calculator, I can see that if a person saves and invests $8,400/mo. at 12% over the course of 15 years, they’ll achieve $4,000,000.

$8,400/mo. saved and invested for 15 years is a total of $1,512,000.

We can use this figure to determine how much this person would need to earn based on their savings rate. Now, the average American is saves less than 5% of their income. The Top 1% save 40% of their income. If a person is saving only 5% of their income, they’ll need to earn a whole lot of money to accumulate $1.5 million. But if they save 40% of their income like the wealthy do, we can simply divide the $1,512,000 by .40 and see how much money they need to earn over the next 15 years, which is $3,780,000 total, or $252,000/yr. for the next 15 years on average.

This gives the action plan.

Over the next 15 years:

1. Earn $252,000/yr. on average

2. Save & invest 40% of it, which is $8,400/mo.

3. Invest $4,000,000 collectively in passive income producing assets that yield 12% per year

Do you see how simple this really is?

The beautiful part about this strategy is that it builds over time. Traditional retirement or “nest egg” investing actually depletes over time and the #1 fear is running out of money before passing away. With this strategy, the $40,000/mo. in passive income accounts for 40% of it being saved and invested so that your net worth and passive income continue to build each and every year.

What are the barriers here?

a. Being able to earn enough income to save 40%

b. Having the financial discipline to pay yourself first at a rate of 40% instead of blowing the money on other things

c. Knowing where to save and invest to not lose money and earn the investment yields needed

All of this comes down to financial training. A person can be trained to generate more income. A person can be trained to pay themselves first with 40% of what they earn. A person can be trained on where to invest. Therefore, the starting point for all of this would be financial training.

In closing, my mission in life is to help good people build more wealth who make the world a better place.

So, if you’re a good person who wants to help make the world a better place and this article helped you, I want to encourage you to join our free Facebook community, Wealth DynamX Nation.

I want to encourage you to start putting this into practice. And feel free to write to me and let me know how it went. Or if you’re a client of mine and you’d like help leveling up, send an email to my team with “Level Up” in the subject line to [email protected].

If you’re a follower and have not read my book The Blueprint to Financial Freedom yet, that is the place to start. This book covers the specifics for each level in the various chapters and you can grab the book for free as my gift.

Click here to get a copy!

The Blueprint to Financial Freedom by Jerry Fetta

To Purpose, Wealth & Freedom,

Jerry Fetta

Jerry Fetta is the CEO and Founder of Wealth DynamX. He is a nationally recognized financial expert featured in Forbes, Yahoo Finance, Fox, Chicago Weekly News, New York Finance, interviewed on 100+ podcasts with world renowned experts, earning endorsements and affiliations throughout his career with names like Kevin O’Leary, Grant Cardone, Dave Ramsey, and Pamela Yellen.

Jerry’s mission in life is to help create millions of financially educated and solvent families achieving greater financial freedom and sharing the truth about money with those around them.

Learn more at www.WealthDynamX.com

(DISCLAIMER: The information in this content should not be considered tax, financial, investment, or any kind of professional advice. Only a professional diagnosis of your specific situation can determine which strategies are appropriate for your needs. Wealth DynamX can and does not provide advice unless/until engaged by you.)