Just like everyone else, I thought financial freedom begins when all my expenses are covered by passive sources of investment income. Yes, of course you have reached a milestone and your level of freedom has has drastically improved. However, in the course of my journey towards reaching this milestone, my views have gradually changed.

The Foundation

Real financial freedom does not start when your investment income covers all your expenses. That is when you reach a point where you have placed a foundation beneath you. Financial freedom starts when your investment income meets your desired living standards in your future.

The foundation is based on your monthly expenses. Here are two examples. Meet Tom and Jerry.

Tom

Monthly Expenses: $3,000

Investments: $50,000

Annual return: 7%

Annual return/$: $3,500 ($291.66 per month)

Tom is still heavily reliant on earned income. Investment income is only at 9.7% of their living expenses. In order to reach his foundation, he will need $514,286 in invested capital.

Jerry

Monthly Expenses: $3,000

Investments: $514,286

Annual return: 7%

Annual return/$: $36,000 ($3,000 per month)

At this point, Jerry has reached or shall we say laid his foundation. All investments cover all living costs.

Viewing this milestone as a foundation made more sense to me. Internalizing the fact that this was just the beginning to molding your financial freedom created a clearer psychological benefit going forward.

Just as a house requires a concrete foundation to stand firm during earthquakes, your finances require the same to remain resilient during unexpected crisis.

Here are some examples of one’s foundation relative to expense assuming a 7% annual return on investments.

Conclusion

Reaching your foundation bring great benefits when it comes to how fast you build your wealth. I hope this post helps you look at your expenses from a different perspective.

Reaching your foundation is a major milestone but don’t let off the gas! Foundations need a house to be built on. It’s up to you how nice or simple you wish to build on top of it. Being financially free starts above your foundation. When you create something that truly sets you financially free beyond the foreseeable future is true financial independence.

How much does your foundation cost and how far are you from reaching it? Please share below! Thank you for reading.