What is financial freedom anyway? Do I have to be a millionaire for that? How long will it take me to achieve this goal? Can I even manage that, even if I wasn’t born super rich or am not as ambitious an entrepreneur as Elon Musk or Mark Zuckerberg?
The answer is: it depends entirely on your own lifestyle. My personal definition of financial freedom is this: you are financially free when you have enough passive income to cover your current expenses. Then you no longer have to work to survive and can leave the classic hamster wheel and devote your time to other things. The emphasis here is on “must” and “can”. If you enjoy your own work so much that you can hardly imagine anything nicer, you will probably not quit even after winning the lottery. But shaking off the yoke of “having to” is my personal goal in this matter.
It’s not always about becoming a millionaire. For many, it’s about finally getting around to restoring the sailing boat in peace and quiet. Or to be able to go on vacation three times a year instead of always being on the balcony.
Passive income and independence
What do we need for that? Probably the most important aspect is passive income. This usually means the return on investments. Of course, you will always need some time to manage these investments, even if you have enough of them and they are all going well. Even if you have a manager for the assets, you need some time to oversee that manager. None of this is 100% passive. But that’s not the point either. Rather, it is about reducing the “uncomfortable” time to earn a living to such an extent that you have enough time to do what you actually want to do. Financial freedom has always been a goal for me because I no longer wanted to be forced to work forever. For the most part, I enjoyed my work, but I often found the framework conditions to be restrictive. Above all, the expectation of superiors, clients or customers that what you offer or do, tomorrow and the day after tomorrow will also have to offer or do. True independence comes when you no longer have to do anything but are allowed to do it. When you have the freedom to determine your own destiny. For me, financial freedom has always been a component because it takes dependencies away.
To achieve this independence, three components are necessary:
Know your lifestyle.
The first thing to do on the path to financial freedom is to summarize. Back when I started the path of financial freedom, I grabbed the bank statements from last year and opened an Excel spreadsheet. Columns included “Food”, “Clothing”, “Apartment”, “Hobbies”, “Vacation” and “Luxury” and the individual items on the statements in the rows. The allocation not only showed how much money I spend each month on what, but also how much I spend each month at all. This is probably the most important indicator of your own lifestyle: how much money do I need a month to make ends meet? The order of magnitude is quite sufficient. If I know that I use around 2,500 euros per month, then I also know that with savings of 10,000 euros, I can last for around four months when the going gets tough. Even if my girlfriend leaves me, the boss quits me and the car breaks down, I have four months in which I can easily pay the rent and buy something to eat. If I eat out of cans during this time, don’t go on vacation and do without frills, I may even last a little longer. That is enough to calmly apply for ALG, bring the application documents up to date, take care of the repair of the car and mend the broken relationship or, if there is no other way, to process it. OK, the latter can sometimes take longer. But I hope you understand what I mean.
If I know my lifestyle and can quantify it with a sum of money per month, then I know exactly how much passive income I need in order not to “have to” anymore. And these numbers can also be flexible. By categorizing my expenses, I can see whether there is scope in certain areas. I can e.g. B. Be financially free sooner if I am willing to cut luxury expenses or forego vacations. So by reducing one’s lifestyle. I can also be financially free sooner if I manage to increase passive income, i.e. increase the return on my investments. The only important thing is that I compare and keep an eye on my monthly lifestyle and my monthly passive income.
Be ready to set a new, long-term goal.
The road to financial freedom doesn’t have to be super hard and rocky. But most of the time it is longer than you might think. There may be cases where people got rich overnight. E.g. by winning the lottery. However, according to statistics, most of these people are back at a similar financial level as before a relatively short period of time, usually a few years later. And there are also the spectacular stories of celebrities like Ingrid Steeger or Roberto Blanco, who were multiple millionaires in their best times and years later suddenly a message came up in the picture that personal bankruptcy had to be filed. Boris Becker, the former tennis star and Wimbledon winner, was declared insolvent in 2017. Even Michael Jackson struggled to maintain his Neverland ranch for years. There is more to getting money. You have to be able to hold it.
I don’t want to demotivate you with these stories. There are more than enough millionaires who stay millionaires. Long term. The goal of “financial freedom” should only be given some time. One should be aware that it can easily take 10-20 years to achieve this goal. The necessary knowledge to “hold” and appropriately “let flow” of money needs to be built up and learned. There will be mistakes that want to be made and cost money. There will be setbacks that cost motivation and require you to get up again. It took me almost exactly 25 years from earning money to get to a level that I can say: now I’ve “made it”. And currently I still invest a few hours a week to maintain and further expand my investments and want to continue investing time to reduce these hours a week to a few hours a month.
The way is the goal.
One or the other of you may already know this. You set a goal and work towards it with enthusiasm. The goal is finally fulfilled and this “done” event creates a feeling of elation. Unfortunately, it is similar to shopping here: the feeling of elation is relatively short-lived. It was already gone in the next few days. And if I have enjoyed the same short-term exhilaration several times in a row, then it lasts even less and less long. A habituation effect occurs.
In the case of long-term goals in particular, the way to such a goal is much, much longer than the feeling of elation after reaching the goal. Looking forward to reaching the goal can help, but is often not enough to stay motivated in the long term. The best way I’ve found so far to stay motivated over the long term is this: learn to love and enjoy the path to the goal. Reaching the goal is important and also enjoying the feeling of having reached the goal. But it is even more important to enjoy the path to the goal itself. Then it often doesn’t matter how long it really takes. With a goal that realistically can only be reached in 10 years, it can also take 20 or 30 years if the journey is so much fun that you are happy to stick with it.
It helps immensely to be aware of the small successes that you experience along the way. To be consciously happy about the individual little things takes a little practice at the beginning. The “big successes” and the completed milestones generate so much more happiness hormones than the little things. But with a little practice it works quite well and helps a lot to keep yourself going. The best example here is investing in stocks. At the beginning of my “career” I and a good friend tried to make money with stocks for quite a while. We were always on the lookout for the super deal that would make us rich overnight. We also had some really nice successes, climbs of several 10% in a few days. But measured against the big goal, namely to become millionaires, that has not visibly brought us any further. So all in all, even the best successes were rather frustrating and we kept hunting, always hoping to get the super deal tomorrow. I now have a well-functioning system of investing in stocks. It yields an average long-term return of around 8-10% per year, which I am extremely satisfied with in this day and age. When trading, I always try to be happy about the small successes. If I particularly like a certain stock and it actually rises after buying, then I like to consciously look at the chart, briefly calculate the profit I would make if I sold now, and am happy about it. The fact that I’m not allowed to sell at all because that would violate the rules of my system doesn’t matter. I am happy about the small profit because I know that a lot of small profits bring me forward.
A second aspect is obstacles and failures. There will be some of them on every longer journey and it is important not to let them kill your motivation in the long run. Often these failures are frightening and if you have experienced a certain type of obstacle several times, it can be incredibly blocking if another obstacle of the same type is already looming on the horizon. System trading is a good example here too. My system has a loss rate of around 60-70%. I. E. I sell 2/3 of all trades I make at a loss. The system works because the few winners yield so much income that they overcompensate for the losses. Still, it’s like cutting yourself a little with every sale of a losing position. It is uncomfortable. When the next loss becomes apparent and the stop takes effect, you don’t even want to look at the depot mentally. Here it helps to “turn” the obstacle in your own imagination so that it no longer causes fear. In the case of my system, I did this by trading play money until I was relatively sure that the system was working. And even with that, it was relatively difficult to execute the trades for the first six months. Even with the winning trades, I regularly asked myself whether it wouldn’t make sense to let the trade continue. Maybe it will continue to rise. But the statistics and the time have convinced me otherwise. Today I just stubbornly execute every trade. I check that my system has not made any mistakes, but I no longer question the rules because I can trust them. This “mental turning” of the obstacle also requires some practice, but at some point it can be done without any problems. A good book on this particular example of trading is this: Come Into My Trading Room by Alexander Elder. A whopping third of the book is devoted to psychology, and that’s not the only system trading book in which that is the case.
Overall, it helps to consciously enjoy small successes as often as possible and to imagine that you have already achieved the great goal of financial freedom. True to the motto: “Fake it until you make it”. That may sound a bit stupid, but I know from my own experience that it works. With small rewards, such as a walk in nature when you have reached a certain savings goal, you can actively “program” yourself to enjoy the path. And then the big goal doesn’t feel that far away anymore.
The path to financial freedom consists in increasing the yield from passive income so much that it exceeds the price of one’s own lifestyle. Usually this is a long-term path. In order to pursue it, one should consciously get involved in the goal that one wants to achieve. And finally, it is enormously helpful to enjoy the way to this goal as best as possible. Not just to make sure that you will eventually achieve your goal. But especially so that you can claim to have lived by the time you reach this goal – and not just “mallow” a significant part of your life so that you can only enjoy the fruits of your work afterwards. A smooth transition from working hard to enjoying more and more is my best bet.