The Financial Freedom Formula

If you’re reading this blog, reaching financial freedom is probably high on your list of goals. One of the keys to reach financial freedom is to leverage what I refer to as the “money muscle.” No I don’t mean borrowing money to buy stocks (invest on margin), rather, I’m talking about having money working hard for us. How do we keep more of our money and have our money work hard for us instead of having to work hard for money?

Clarity = Power.
The first step to keep more of our money and have our money work hard for us is to have more financial clarity. The more clarity we have on how to reach financial freedom, the more power we have. To have clarity on financial freedom, we must first determine our key objective when it comes to money.

What’s your objective when it comes to money?
Is your objective to have enough to live the rest of your life worry free?
Is your objective to have enough so you can travel around the world?
Is your objective to have enough to enjoy all the leisure activities you want?
Is your objective to have enough to leave a legacy to your kids and the future generations?
Is your objective to have enough to help others?

For Mrs. T and I, our key objective is to have enough to have more options and freedom in life. Instead of having work dictating how we go about with our daily lives, we will have the freedom to decide how we go about with our daily lives. Having this level of freedom to decide what we can do will allow us to truly and fully enjoy our lives. We no longer need to “book” vacation times. Want to go on a last minute spontaneous adventure? Sounds good, let’s go!

Another objective I have is to help others. One of the items in my bucket list is to write a $1,000,000 cheque and donate to a local charity one day. I believe being financially free will allow me to reach that dream one day.

As you can see, there’s nothing wrong of having multiple objectives. šŸ™‚ Identifying your key objective is extremely important in gaining clarity.

Earn enough passive income to pay for the lifestyle that you desire.

When passive income is greater than what you need, you’re financially free. It’s pretty simple right?

Here are two primary sources of passive income
1. Investment income (i.e. money working hard for you)
2. Passive business income (i.e. business working hard for you)

Investment Income

Investment income is money that come from investments like stocks, P2P lending, or real estates. Investment income takes time to build.

Dividend growth investors and passive index ETF investors are putting money aside each month to increase their investment income. By setting up a plan and executing it, Mrs. T and I have been able to increase our dividend income from less than $700 per year in 2011 to over $10,000 last year.It has been a tremendous amount of growth in 4 years time frame. We are working hard to continue such growth.

Passive business income

Creating a business is easy, to have the business profitable can be challenging. No wonder so many businesses go out of business after a year. What’s even more challenging is make the business passive so you don’t need to be involved. When this happens, the income from these businesses are truly passive. What are some examples of passive business incomes? Selling books or ebooks, selling storage spaces, having a parkade business (i.e. parking lot), selling online courses, creating a mobile app, and etc. There are many different passive business opportunities available to all of us. The key is to get started on one.

As you can tell by now, this blog is primarily focused on investment income, more specifically, income from owning dividend paying stocks. Although this is our focus for generating passive income, it doesn’t mean that we’re not establishing passive business income streams. Mrs. T and I have published a couple of cookbooks and have been working hard to generate more book sales. It’s been about 3 years since we published our first cookbook. To be perfectly honest, this road has been more challenging than we expected. After showing our books at a few major international book fair, we seem to have picked up some steam on our cookbook business! Hopefully we will start generating more passive income from our cookbook business moving forward.

It’s great to have passive income but the key is to receive passive income from multiple sources. The more passive income sources you have, the more diversify your income is.

Let’s summary the keys to reach financial freedom with what I so-called Tawcan’s magical financial freedom formula.

Are you ready?

Wait for it…

Wait for it…

Here it is!

Financial Freedom = Working Income + Saving + Investment Income + Passive Business Income + Simplification

It’s a really straight  forward formula if you think about it.

Working Income

Reaching financial freedom doesn’t mean you have to stop working. Many early retirees still continue working but in a different function. For example, Joe at RetireBy40 works on his blog and generates part time income. Mr. Money Mustache has a carpentry/house building business. The so-called internet trolls will probably argue that these two individuals are not “retired” as they’re still “working.” But we’re talking about financial freedom here, not retirement. šŸ™‚

When we reach financial freedom, we plan to work part time to continue generating income. Part time work like my photography business and perhaps some financial consulting work. Who knows, maybe this blog may generate some cash flow in the future. One can dream right?

Saving

Living below your means and having a frugal lifestyle are key contributors to allow one to reach financial freedom and stay financially free.

Investment Income & Passive income

See above. šŸ™‚

Simplification

Are there things in life you can simplify to save money? Perhaps you can sell things that you no longer use, reduce your media consumption, reduce your cellphone data plan, consolidate all your debt, reduce your wardrobe, or create & stick to a mail plan. There are many ways to simplify your life to save money. You can then use the money saved to invest.

On a related note, while I love ramen and I think it’s absolutely delicious, eating ramen every day as a way to save money is probably not a good way to simplify your life. You’ll probably  end up with some health problems in the long run due to the high sodium level in ramen….

ramen
(Eating ramen is probably not a good way to achieve financial freedom)

We all must pay attention to these five components in the financial freedom formula both individually and in combination. These components are interdependent as they must work together in synergy. When you have them working in synergy, you’ve truly leveraged your money muscle.

Want to take some action after reading this post? Here are 3 things to do in 30 minutes that will set you up for a better financial future.

1. Learn about possible long term investments that you’re comfortable with that will generate passive investment income.
2. Learn how to invest in one of these investments.
3. Work on creating passive business income streams.

Now get to work!

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45 thoughts on “The Financial Freedom Formula”

  1. oh man, that ramen sure has got me missing Japan again…

    Yup, when it comes down to its, it’s all pretty straightforward… Financial freedom isn’t easy, but it’s not rocket science either.

    Reply
  2. Great formula. I’m doing most of these and have considered the others. I think your personality and capabilities also plays a role in which of these you should focus on. Eg working income + investing income are highly complementary. I find that because we have 2 salaries with good employment history, working income + investing in property through (moderate) leverage work well.
    Thanks for sharing.

    Reply
    • Yes, your personality and capabilities have a huge role in which you should focus. For some it’s easier to focus on working income, for some it’s something else.

      Reply
  3. Like so many things the knowledge isn’t the problem. You must implement your plan and alter your behavior if you want to make a change. Ideally we’ll get to where our passive income fully supports our lifestyle. Although I imagine I’ll be calling it quits prior to that point since I still plan to work in some form and hopefully by then the blog/writing income or any other potential side hustles can fill in the gap.

    Reply
    • Hi JC,

      There’s no reason why you can’t call it quits prior to reaching FI. There are ways to supplement income as you mentioned.

      Reply
  4. Nice financial freedom formula. The knowledge is out there, why re there so few people that reach FI? JC has the answer above: you need to change your behavior. There might be one extra hurdle: the disbelief of people that it is possible. Or they might not know that it exists.

    Looking at our implementation of the formula above, we are doing fine except for the passive business income. I do think this can give the journey a real boost.

    Good luck with your cookbook business!

    Reply
    • Thanks ambertreeleaves. Agree that behavior is the number one thing that’s preventing people from reaching FI. Good point on disbelief, especially if you don’t know anyone close to you that have achieved FI. You can read on the internet but you may consider these stories as internet myths.

      Reply
  5. You and Mrs. T have it right. To have enough to have more options and freedom in life. That’s true independence. The sooner you hit this level, the better odds you have of being a creator and making even more money. I want it for you. I cannot wait to see the $1M check you write. Have a great weekend buddy and thanks for writing this post.

    Reply
  6. I like how you separate investment income from passive business income. The former requires nothing but the money to buy the dividend-producing asset. The latter can be quite demanding, but if you enjoy it, it doesn’t feel much like work (cookbooks, photography, and blogging are all good examples).

    I love your $1 million dollar charity check on the bucket list. Few people can aspire to such a lofty and worthy goal.

    Cheers!
    -PoF

    Reply
    • Hi PoF,

      Passive business income definitely require more work, it’s also perhaps more difficult to make it truly passive.

      Reply
  7. Spot on, Tawcan! Objective is really important in this financial journey. If you have a set of objective, find the means to achieve for you to enjoy financial freedom later on. Sacrifices definitely pay off.

    Reply
  8. Good formula to make it to FI Tawcan and you’re easily getting there.

    To us, financial independence is definitely about doing about whatever we want, whenever we want. That definitely doesn’t mean not doing anything, what’s the fun in that? When we’re in position where we can do that, we will be hugely happier for it. Plus we will probably earn more doing what we want to do, rather than what we have to do.

    I think in 10 years, we would like to have a substantial amount of passive income (dividends mainly) but also have some sort of financial service business perhaps as well.

    We wish you all the best with your goals Tawcan, but I think you’re getting there just great!

    Tristan

    Reply
    • Hi Tristan,

      Too many people think early retirement means do nothing at all, that’s totally not true. 10 years is a great time line to reach FI.

      Reply
  9. Tawcan,

    Great article for readers out there. Work hard, save your money, invest into assets that produce income and definitely have a side hustle. The combination of all of this will lead to financial freedom, NO DOUBT. Thanks for posting Tawcan, have a great first weekend of April!

    -Lanny

    Reply
  10. Simplification is really a key to financial freedom. Based on experience, I think when you have a simpler life and living, it tends to give me more savings for me to use for investment or in business. And, it gives me less-stress life.

    Reply
    • I agree and its an area that is often overlooked. As you get older you realize you don’t really need all this stuff to be happy which in turn saves you quite a bit of money in the process. Also, successful investing doesnt really need to be complicated. Pick a few low cost funds and set your deposits on automatic. My accounts are now quite large after 20 years and I havent really put much effort into it – other than the going to work part of coarse.

      Reply
      • So true. Too many of us forget about simplification. Instead we reach for more stuff. Eventually we have so much we don’t know what else we want/need.

        Reply
  11. Great breakdown of the path to financial freedom. I agree that gaining clarity is a great first step. Otherwise it’s easy to lose track of your way and make decisions that don’t support your bigger goals.

    Reply
  12. Passive income is definitely a surefire way to financial freedom. I’m working on creating online informational products as a way to generate passive income.

    Reply
  13. This is a very interesting take on FF. I’m actually working on my own FI formula and I opted for creating more online income in order to retire early :-). If all goes well, this should happen after this year road trip. For the first time of my life, I will be able to work full time on my websites.
    thx for the inspiration!

    Mike

    Reply
  14. Tawcan,

    I totally agree with the formula and process you have up there. Goals are definitely important, and even if you only have a vague idea its better than having nothing. That vague idea can lead to steps to build towards FI and how to achieve things you need.

    By the way, I believe that first picture is one of the towns in the Cinque Terre section of Italy… I’m probably going to be there this summer. Also, I would debate you that ramen can be healthy depending what you stack on top of it.

    Enjoy,
    Gremlin

    Reply
    • Hi Gremlin,

      Yes that picture is from Manarola, one of the towns in Cinque Terre. It’s a wonderful area in Italy. I’d love to go back there in the future. Interesting point about ramen, I guess it depends on if it’s instant ramen or the authentic ones.

      Reply
  15. I’ve taken some steps to building my passive income…bought my first rental property and hope to buy more in the future. I need to find something in retirement that I’d be passionate about that could also earn some income like you with photography, MMM with carpentry, etc. Man that ramen pic got me hungry…not sure you’d save much money eating that Ramen everyday either! =) That’s not the cheap Nissin ramen packs from the supermarket.

    Reply
  16. Thanks for including “health” as an important part of financial freedom! We all cut grocery budgets to save $$, but need to remember overall health too. Eating as healthfully as you can afford will save $$ later in doctor and dentist visits. Nutrition & multivitamins are especially important if kids are involved.

    Reply
  17. A good read. I have just started to think about generating multiple income streams that could pave my path to FI. It’s a long way away and patience is something that’s required during the initial stages.

    Reply

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