To break the confusion, I think I need to write a post about the concept of financial freedom. I’ll try to provide explanations based on my understanding and my definitions of financial freedom.
First of all, let’s define Wealth, Rich, and Financial Freedom:
Financial Freedom (My Definition)
Deriving income from your assets (investments or business or both) that exceed your total expenses. These income is called PASSIVE INCOME.
…having wealth or great possessions; abundantly supplied with resources, means, or funds; wealthy: a rich man; a rich nation.
…abundance of valuable material possessions or resources.
So, for now, fair to say, rich and wealth is the same thing? Ok, definitions out of the way.
Also, one important thing to note is that to me, the terms rich, wealth, and financial freedom are interchangeable. Continue reading on why this is so.
To measure wealth is to measure something that is really subjective. It is up to the individual to set the benchmark. You might set Bill Gates as your benchmark while the next person might set a millionaire living a few blocks from you as a benchmark. You might not consider yourself wealthy until you reach your target (the set benchmark).
Measure of financial freedom is also subjective. A person might only have $1000 worth of expenses per month while another might have $10,000 worth of expenses per month. It depends on the individual.
Why I said wealth, rich, financial freedom are interchangeable? Well, consider this example in Malaysia’s context:
A person earns $10,000 of passive income per month. This passive income is derived from his asset base of $2,400,000 earning 5% p.a.(inflation not taken into consideration). His expenses amount to $5,000 per month.
By my definition:
1. Yes, he is financially free. His passive income is more than his monthly expenses. (Take note I state passive income and not income you earn from your day job). Usually, to earn passive incomes, you need assets. Thus, the reason why to me, financial freedom, rich, and wealth are interchangeable.
2. A person who has an asset base of $2,400,000 can be considered as wealthy. This is especially true in Malaysia, don’t know about the US or any other place in the world.
What is not financial freedom/wealthy:
1. Spending less than what you make from your day job is not financial freedom. This is due to the fact that your day job salary is not a passive income. (For example, you are an accountant earning $2,000 per month. Your expenses amount to $1,000 per month. Yes, you’re spending less than your salary amount but no, this is not financial freedom.)
2. Being debt-free alone is not financial freedom. You may have debt and still be financially free.
3. Having an asset base of 50 billion dollars earning 5 billion dollars passive income per month but having expenses amount to 10 billion dollars per month is not financial freedom nor wealth.
Conclusion: To me, having a large asset base alone without enough passive income to cover your expenses is not financial freedom nor wealth because at the end of the day, expenses are liabilities. A liability has a claim over your assets. That’s the reason why I think that a person can only claim to be wealthy once he is financially free. In other words, financial freedom is wealth, wealth is financial freedom.
P.S. Your views on financial freedom might be different from mine. Don’t go all gaga if they are indeed different.