Now that you know how to grow your Investment Account and how
not to grow your expenses, the million-dollar question is how much money do you
need to reach the coveted status of "Financial Freedom"?
Passive Income - Expenses > 0 = Financial Freedom
This is where the simple maths lessons that you had during
primary school days will be useful.
Original formula:
Passive income - Expenses > 0
The first question you need to answer is how much "more
than zero" that you are comfortable with? 10 cent is also more than zero
but are you comfortable if that is the only amount left in your bank account
every year?
Most sane people will not. So for example sake, let's fix it at
$10,000.
Your formula will now be:
Passive income - Expenses = $10,000
The next question is how much expenses you need annually to
support a lifestyle that can make you happy. Not deliriously happy. Just happy.
You will be surprised that a lot of people actually don't know
but you my dear readers should know since you have done your Cash Flow Planning!
So for example sake, let's fix it at $100,000.
Your formula will now be:
Passive income - $100,000 = $10,000
Therefore:
Passive income = $10,000 + $100,000 = $110,000 per annum
You will need
$110,000 every year to sustain a lifestyle that can make you happy.
The next question is how much capital do you need in your Investment
Account to generate $110,000 passive income annually?
This is where I will introduce to you a new performance
measurement called Return On Investment (ROI).
In business, the purpose of the "return on investment"
is to measure, per period, rates of return on money invested in an economic entity
in order to decide whether or not to undertake an investment.
In our case, it is for us to decide how much capital we need to
sustain our lifestyle.
As a manager of your own private Investment Account, you should
know how much percentage return your investment generates every year. You aim
must always be to make the return as high as possible. Why?
Let's go back to our formula:
Passive income = $10,000 + $100,000 = $110,000 per annum
Investment x ROI% = Passive Income
Investment x ROI% = $110,000
Investment = $110,000 / ROI%
If your ROI is 10% p.a. then the capital needed to generate
$110k is $1.1m.
If ROI is 5% p.a. then you will require $2.2m.
6% p.a. - $1.375m; 15% p.a. - $734k; 20% p.a. - $550k
The higher the ROI, the lower the capital you required to be
financially free.
So figure out the magic
number that suits you.
Once you got it, focus on achieving it. The journey is not going
to be easy but it is not impossible either. Millions have done it. So can you!