"Air Guitar World Champion 2010: Markku Hyttinen - Yes, there is actually a air guitar world championship held every year in Finland. So, if do you make it to Destination Absolute Financial Freedom you can pretty much pick up your air guitar and do whatever you want, with whomever you want, as much as you want i.e. play your air guitar all night long!!" ~ Keelan

When you think absolute financial freedom, think total rock star lifestyle! You can pretty much remove any financial limitations and pick up your air guitar for this one!

You will have achieved absolute financial freedom when you can pretty much do whatever you want, with whomever you want, as much as you want – without ever having to worry about money or work again.

So, assuming we’d still like to keep everything we have/do from our financial freedom list, we now add all the new dream capital items we’d love to have that are not in our financial freedom list.  For example:

• 35-Yacht ($500,000) – $5, 000/month
• Ferrari Testarossa ($250,000) – $2, 500/month
• Piper Cherokee 140 or Cesna 172 Private Plane ($30,000) –$3000/month
• Own desert island ($7,000,000) – $14,000/month

Additional monthly unearned income needed for these dream luxury items comes to $21,800/month i.e. $261,600/annum. Therefore the total cost of absolute financial freedom is the $140, 400/annum needed to achieve Financial Freedom PLUS an additional $261,600/annum = $402,000/annum

Again, using an annual 8% return on investment would mean you’d need a critical mass of capital amounting to $5, 025,000 in order to secure absolute financial freedom.  So, by today’s standards it’s a very significant sum of money/capital. In order to have built up this level of personal wealth, you most likely will have become a noteworthy business owner and quite a sophisticated investor i.e. you’ll be a total money master!

So, there you have it! Financial Freedom and Absolute Financial Freedom defined in terms of an absolute sum of money required each year. So, now you know EXACTLY what it’s gonna take for you to eventually quit working for money and finally have money working for you; to escape the daily grind and retire to Margaritaville…should you want to! Check out my other articles on Personal Finance, Business and Wealth Creation tips to help you reach the financial freedom finish line…fast!

"The Harley Davidson - Part Machine, Part Metaphor: Not only is it a metaphor for emotional freedom but also a symbol of financial freedom. A frequent entry on many people's financial freedom wishlist, not to mention the accompanying roadtrip on Route 66. Certainly, riding a Harley on Route 66 is on my 101 Things to Do Before I Die list. Come get your kicks..." ~ Keelan

Financial Freedom

You will have achieved financial freedom when you have accumulated a sufficient critical mass of capital to provide enough income for you to live the lifestyle you desire (accounting for inflation) without ever having to work again for the rest of your life. The keyword here is ‘desire’. This is what differentiates financial freedom from its predecessor, financial independence, which is defined more by what you ‘require’ to live reasonably comfortably.

In essence, Financial Freedom would include having and enjoying all the luxuries in life such as:

• Second Home in the Sun ($700,000) – $3, 500/month
• 35 Foot Boat ($150,000) – $1,500/month
• Mercedes Benz ($100,000) – $1,000/month
• 1 Luxury Holiday ($12,000)– $1,000/month
• Harley Davidson ($20,000) – $400/month

The additional monthly unearned income needed for these luxuries comes to $7,400/month i.e. $88,800/annum. Therefore the total cost of financial freedom is the $51, 600/annum figure needed to achieve Financial Independence (which we worked out in a previous article) PLUS an additional $88,800/annum = $140,400/annum

Again, using the benchmark of an annual 8% return on investment would mean you’d therefore need a critical mass of capital amounting to $1, 755,000 in order to secure financial freedom. So, as you can see it’s a decent sum of money but I believe within the realms of possibility for anyone who sets about achieving it and re-thinking their approach to income generation and financial planning.  

The Legend of the Holy Grail: In this image scene from the film 'Indiana Jones and the Last Crusade' (1989) we can see Indiana (Harrison Ford) give his father (Sean Connery) a drink from the mythological sacred chalice to heal his wound. Financial Freedom may well be the holy grail of financial well-being but unlike the holy grail, Financial Freedom is potentially available to anyone who wants it bad enough.

Did you know that financial freedom is available to anyone who adjusts their approach to earning income and makes it their business to accumulate a specific dollar amount of money/capital? Well, if your goal is to reach the financial freedom finish line (and it should be!), then just like any goal setting, one of the keys is having absolute clarity on what your end goal looks like. So, what does financial freedom look like? Read on to discover the visual reality of financial freedom using this 5 minute formula! Damn, she sure is mighty pretty!

Financial Freedom is thought of as the coveted holy grail of financial well-being and rightly so. Who wouldn’t want to be in a position to exercise the choice of being financially free enough to never have to work again to earn money? Sounds good to me anyway!

Now, if I asked you to quickly write down on the back of a napkin how much money you’d figure you’d need to be totally financially free, it would be fascinating to see what number you’d come up with. It’s actually a pretty tough exercise for most people to do with any level of accuracy. Not to worry, help is at hand with this 5 minute formula!
In a previous article, we used this 5 minute formula to work out the exact sum of money you’d need to reach the first 3 destinations on the road to financial freedom ( 1. Financial Protection; 2. Financial Security and; 3. Financial Independence).

In my next posts I’m going work out exactly how much money you’d need to reach the final 2 destination: Financial Freedom and then just for the hell of it, Absolute Financial Freedom.

1. Financial Freedom Roadmap: Financial Freedom
2. Financial Freedom Roadmap: Absolute Financial Freedom 
   

"Rogue Trader, Nick Leeson (who interestingly now lives in practically insolvent Ireland) managed to bring down Barings Bank in 1995 all on his own! We now know our banks aren't as financially secure as they would have us believe. Learning how to manage your own money and becoming your own best financial advisor has never been as important if you want to become financially secure." ~ Keelan

The first step on the road to financial freedom is financial protection (see my previous post for more on this). In this post I want to explain what is step two: Financial Security and how much does it cost to actually achieve this.

You will have achieved financial security when through your various investments you’ve accumulated a critical mass of capital, that, invested in a secure environment at an 8% rate of return, provides you with enough cash to meet the following living expenses forever without you having to work again should you chose. For the purpose of this illustration we’re gonna assume some numbers.

1. Mortgage repayments on your private home until it’s paid off e.g. $1,500/month
2. Family food needs e.g. $500/month
3. Utilities, gas and electricity e.g. $250/month
4. Transportation needs e.g. $250/month
5. Insurance – health, disability, house e.g. $300/month
6. Taxes – such as property taxes e.g. $200/month

This would bring your total monthly living expenses to $3,000/month or $36,000/annum. Therefore, you would need a critical mass of capital amounting to $450,000 (which invested @ 8% return per annum would generate $36,000) to achieve financial security.

What I like about this calculation is that it removes fuzzy, subjective meanings of financial security; it distils financial security into a finite number…something which I think is enormously helpful for anyone looking to achieve it.

Financial Protection: The Fort Knox Gold Bullion Depository in Kentucky, USA under construction circa 1937. President Roosevelt ordered its construction when the The Gold Reserve Act of 1934 effectively banned the private possession of gold. Anyone in possession of anything other than historic coins or jewellery had to sell it to the US Treasury.

Step #1. Financial Protection

The key thing to understand about financial freedom is this – no matter how much money you earn, it’s vital to understand that you can only ever achieve financial independence through the generation of non-earned (passive) income i.e. a return on a capital sum invested. Or to put it another way, making money work for us, rather than us working for money!

Now, what I wanted to do was figure out ‘what’s the number’? In other words, how much capital do you need to achieve: 1. financial protection; 2. financial security, and 3. financial independence?

Below I have calculated how much it costs to reach financial protection.

Financial Protection is the minimum level of financial wellbeing and first destination on the road to financial freedom – making sure you and your family are protected no matter what short or long-term financial challenge may befall you or the economy.  Here’s how you know you and your family have achieved financial protection:

1. You have enough liquid capital to cover your basic living expenses for a minimum of 3 months and ideally up to 2 years. So, if your basic living expenses came to $3,000/month, you’d need a minimum of $9,000 and ideally $72,000 in liquid capital.
2. You have a life insurance policy in place that provides income to your family/dependants to maintain their lifestyle if you were to pass away.
3. You have disability income protection insurance to protect you and your family should you become disabled in any way and prevented from working and earning income.

The amount of disability insurance you should have is directly related to the amount of money you’ve saved. If you have say 3 months liquid capital saved, then you should really consider having disability protection to cover the outstanding 21 months so that ideally you have a combination of savings and/or disability income in place to cover 24 months basic living expenses.  As a rule of thumb, insure yourself for 60% of what your income is. Typically the monthly cost of disability insurance can be about $30(if your 30yrs old) and up to $100 (if your 50yrs old) per $1,000 protection

Discover what it takes in dollar amounts to reach the first 3 destinations on the road to financial freedom!

Everybody, no matter what their current financial circumstances, can achieve the rarefied reality of financial freedom. This article details what it takes to reach the first 3 destinations on the road to financial freedom. So, listen up, as what you are about to read would probably cost you a few hundred dollars if you went to a financial advisor to help work this out. Hopefully, this article will have saved you a trip and a few hundred dollars!

Myths & Misunderstandings about Financial Freedom

You’ll often hear people mention terms like financial security or financial independence in the course of everyday conversation. Within my own social and business circles, practically everyone I know desires some level of financial independence or freedom. However, I’ve found that financial well-being remains hidden and out of reach as a result of fuzzy concepts and even sketchier numbers people have in their head about what these terms mean. Therefore, the first thing I want to do here is dispel any myths or misunderstandings and reveal the true meaning of financial independence and financial freedom.

How Much Does Financial Freedom Really Cost?

The key thing to understand about financial freedom is this – no matter how much money you earn, it’s vital to understand that you can only ever achieve financial independence through the generation of non-earned (passive) income i.e. a return on a capital sum invested. Or to put it another way, making money work for us, rather than us working for money!

Now, what I wanted to do was figure out ‘what’s the number’? In other words, how much capital do you need to achieve: 1. financial protection; 2. financial security, and 3. financial independence? So, over the course of a weekend I decided to have a go at describing and calculating the hypothetical cost of each of these 3 levels of financial well-being. Here goes!

- Read Step 1: Financial Freedom Plan: Hidden Destination #1. Financial Protection

- Read Step 2: Financial Freedom Plan: Hidden Destination #2. Financial Security

- Read Step 3: Financial Freedom Plan: Hidden Destination #3. Financial Independence

In my next posts, I will define exactly what Financial Protection, Financial Security and Financial Independence is in terms of a sum of capital required to generate adequate non-earned income.

“Charging Bull: Otherwise known as the ‘Wall Street Bull’ is one of New York’s iconic images. Supposedly the bull is leaning back on its haunches and with its head lowered as if ready to charge…or is it ready to keel over!? Either way, it’s fair to say the theme is the sheer brute force, and unpredictability of the stock market.” ~ Keelan

Markets have been showing wild swings over the last month or so. The Dow Jones plunged 600 points one day then surged 400 points the next! Gold rises above $1,900/ounce and then slides back to $1, 840. Nail biting stuff! But, what should you do about it?

Markets volatility is a constant bedfellow of wealth building. Should you invest during a volatile market? If so, how can you grow and/or protect your money? Read on to discover this amazing 3-Step Formula!

Note: This information was accurate at the time of writing!! Markets will have moved on since so check the values yourself. That said, the overall tactics outlined below are typically valid during any volatile market.

The following are 3 solid ideas to consider implementing to protect and grow your wealth. Remember, there are no guarantees in life or investing so the onus is on you to be fully comfortable with your specific growth and wealth protection strategies. Bounce them off your financial advisor (if he/she is any good) and make sure you are considering your financial goals, time horizons, your age profile etc. also in your decision-making process.

#1. Stockpiling: Using Down to Go Up

“Stockpiling” is a term used by Phil Town in his New York Time #1 Bestseller, “Payback Time”. Stockpiling is a somewhat counter-intuitive, upside-down stock investing strategy –  you buy stock in businesses you love, and then hope the price will go down even further so you can buy some more. Sounds strange at first but the key here is simply to make sure the value of the stock is substantially greater than the price you are paying for it. The more the price goes down, the better it is for you as the average cost of your investment per share goes down.

The one and only secret to stockpiling is to make sure the value of the business is substantially greater than the price you are paying for it.  The key word here is value. You need to understand how to value a stock (using EPS, P/E Ratio, Minimum Acceptable Rate of Return etc.,) and give yourself a decent Margin of Safety.

The spirit of  “stockpiling” is to only buy stocks in a business you’d be excited to own all of (if you could J). Then you hope the price goes down so you can “stash” as much as you can afford at as low a price as possible. Beautiful!

#2. Cash is Trash, Get Some Metal

Nowadays people prefer gold in their hands to cash in the bank and who could blame ’em! Hedging against inflation with gold is a time-tested strategy used by investors. That said, you don’t need to buy bars of gold and bury them in your back yard (just yet!). However, everyone should have some gold and silver in their investment portfolio. Even as little as 10%. Why? Because the real value of cash is in rapid decline – inflation and a global banking crisis means you really can’t afford to leave large dollops of cash residing in savings accounts.

Also, currencies like the Euro and Dollar are on shaky ground. We’re in the midst of a global currency war if you ask me. Even the Swiss Franc, traditionally a global safe haven for traders, isn’t a great hedge right now, as recently the Swiss National Bank in an effort to protect their just set a ceiling on the value of the currency (first time since 1978).

So, gold and silver become apparent safe havens for anxious investors. Although knocking around the $1, 600-$1,800/ounce ceiling of late, Gold is predicted by some quarters to rise higher even as far as $2,500/ounce before the end of the year! If you don’t feel comfortable buying gold bullion in the form of bars or gold coins, then you can simply buy the SPDR Gold Trust ETF (Tracker Symbol: GLD), the world’s biggest Exchange Traded Fund tracking the price of gold.

Silver, which had been on an upward trend since May 2011 and hovering around $41-$43/ounce, has corrected recently to around $30/ounce. Gold (and silver) are in the midst of a massive sell off as investors try to cover losses in other asset classes. The price of Silver is often tied to the price of gold but Silver is the most volatile of all the precious metals. So be careful. When market sentiment eventually shifts regarding gold (and it will!) values can slide in the other direction faster than an ice cube down your back.  For those of you with an iPhone I recommend you download the Gold Price app otherwise check out their website (www.goldprice.org) for latest price and news on Silver and Gold.

#3. Savers are Losers:  Repurpose Your Savings

I think hoarding your cash in a savings account for 2 or 3 years is a stupid idea…and why savers become losers. Saving cash is a stupid long-term strategy but a smart short-term tactic. Let me explain…

I’m a huge fan of saving as a key habit and tactic in building your wealth. Even if you’re a multi-millionaire already but you’re not saving at least 10% of your gross (or net) income; you are going to get your financial ass kicked if you haven’t developed the discipline and financial understanding behind saving.

Saving is the #1 financial habit to develop. Start with 10% of your gross, push this to net 10% if you can. The important thing about saving cash is to not let it sit in low-yielding bank savings account for more than 6-9 months. You can’t hide in cash.  You need to repurpose those savings into investments quickly. Why? Well, if you compare your net saving yields against average inflation rates you usually never make a dime! Check out Dr. John Demartini’s FAST (Forced Accelerated Savings Techniques) – he proposes you increase your savings automatically by 10% each quarter! I’m a big fan of Demartini’s mindset and approach to money management and wealth building. What I like about this method is that it forces you to focus on your net cash flow (Net Income after Taxes and Living Expenses). So, you’ve either got to find ways of reducing your effective tax rate or increase your gross income…or both!!

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Greed is Good!? Ahm, don't think so! Fictional Character, Gordon Gekko, from the 1987 Movie Wall Street, Stepped Too Far Outside His Comfort Zone and into the dark world of Risk Arbitrage and ended up Broke and in Prison!!! Not such a Sophisticated Investor after all ~ Keelan

Federal Securities Law in the United States defines a ‘Sophisticated Investor’ as someone who has either a net worth of $2.5 million or has earned more than $250,000 annually for the past two years to qualify. An ‘Accredited Investor’ is defined as someone who has a net worth of $1 million dollars and an annual income of $200k for the last two years. However, don’t let those numbers scare you, read on to discover an alternative definition of a truly “sophisticated” investor and how you can become one.

Almost every financial advisor or institution considers this ‘Sophisticated Investor’ the big fish they are baiting their hook to catch. Many so-called sophisticated investors are charmed by the bright lights and shiny objects dangled in front of them by investment brokers and institutions.  Oftentimes, the Sophisticated Investor is merely dropping sizeable chunks of cash into Hedge Funds and getting ripped-off in the fees (usually 2% of assets under management and 20% of returns) for the so-called privilege.

Here, we’re going to park the standard definition of the sophisticated investor as purveyed by high-rollers on Wall Street. By my definition you have become a sophisticated investor when the majority of your required income is being generated in the Investor Quadrant described earlier in this book.

Learning the ropes of building and owning a business will kind of pre-qualify you to become a sophisticated investor. It’s not absolutely necessary to have been a business owner before you graduate to becoming a professional investor but it certainly does help. Flexing your business acumen muscle in the cut and trust world of business will have taught you some valuable lessons about:

1. Yourself - how you think, your capabilities, strengths, and weaknesses.

2.  Risk - the levels of risk-taking you are comfortab e with.

3.  Financial Statements - income & cash flow statements, balance sheets etc.

4. Managing Resources – people, systems, technology etc.

5.  Capital - raising it, borrowing it, utilizing it.

6.  Sales and Marketing  - strategies, tactics, plans etc.

7. Negotiating - learning the art of win-win.

Investing: Divesting from Average, Becoming Sophisticated

Nobody likes to consider themselves as average…even in the financial world of investing and wealth creation. However, making the transformation from being an average investor to a sophisticated investor requires the development of a whole new mindset, and set of financial and business skills, not to mention attitude to risk. It requires you to sidestep Mr. Average and step-up another level. The following table helps makes some clear distinctions between how average and sophisticated investors think, operate and invest. I would encourage you to really study this table and think before you act on your next investment.

Note: Credit/Inspiration for this table must be given to Rich Dad’s ‘Guide to Investing’ book

Creating real wealth requires you to quit average-Joe investing style and mindset and transform yourself gradually into a sophisticated investor. That said, it’s important to know yourself and your risk-tolerance level and only make investments you are in the main comfortable with (whilst stretching your comfort zone where it’s counter-productive to your wealth creation)

For many brand-new entrepreneurs who dream of creating wealth but have never started a business before or invested, stepping outside their normal comfort zone can be difficult. However, creating wealth will require an investment on your part. It’s the idea that you have to invest money in order to make money.

Investing carries a certain level of risk and you need to decide upon your risk tolerance depending on your personality type and your stage in life. You can choose to invest in low-risk assets that yield less but at least you can sleep easy at night!

You absolutely must acquire the knowledge about investing in these asset classes in order to build wealth. Work within your own boundaries. Only acquire assets you can afford to pay for or learn how to use Other People’s Money.

There are many personal reasons why starting or owing a business may not be right for you. However, from a wealth creation perspective there really is no argument. Owning a business is just about the best thing you can do for your wealth creation journey. The following are just 10 wealth creation reasons why owning your own business is a good idea.

Reason # 1: Build an Asset that Provides You with Extra Cashflow

Reason # 2: Develop Business Skills and Acumen

Reason # 4: Build an Asset that Increases in Capital Value (part or all of which can be sold)

Reason # 5: Develop Financial Intelligence

Reason # 6: Buy other assets that are cash-flow positive with pre-tax dollars

Reason # 7: Pay a lower effective rate of tax.

Reason # 8:  Build a retirement fund using pre-tax company money

Reason # 9: Commercial debt is cheaper than personal debt.

Reason # 10: Delay the payment of tax.

However, starting and running a business is not a walk in the park. So before you begin it’s worth considering the 5 important personal questions. Find what those are here.