Much is said about the concept of Financial Independence and the benefits it brings to the lives of those who manage to obtain it.
To sum it up in a short sentence, Financial Independence is when a person’s passive income covers their current lifestyle.
Now, in what has been described above, it is important to describe a couple of concepts:
Passive Income is those amounts that are received without the need to be working or exchanging your time for money. The compensation received when working as wages or professional services is commonly known as active income.
Current lifestyle means monthly expenses, annual expenses, other expenses, and savings to invest and spend as usual. If, when you achieve Financial Independence, you decide to buy a yacht and a helicopter that you did not previously have, you will likely have to go back to work until you build a new passive income that covers the new costs of your new standard of living.
It should be noted that several of the passive incomes began and for a time were active incomes until a system was created and they became passive with the great advantage that you can have several without having to work more hours.
Some of them are :
1. Create a business: A person creates a business, hires another person or persons to manage it, and receives profits from it without being the one to do the work.
2. Receive commissions: Annuity payment renewals. Medical and life insurance.
3. Income from subscriptions: Receive monthly income from products or services.
4. Development of marketing networks: You receive a percentage of the sales of the people below your line.
5. Receive income: interest on investments (for example, in private money loans with first mortgage guarantee).
6. Rental income: monthly amount for something that is yours and that generates value for another person while using it (as long as it is systematized or managed by someone else).
Financial Security is a much lower monthly number than Financial Independence since it only takes into account 4 categories:
Housing: Refers to the rent or mortgage of where you live in addition to the condominium fee if applicable and basic public services such as water, electricity, and internet.
Transportation: Bus tickets or monthly Uber expenses, taxis or gasoline for the car, and payment of the loan in addition to the stamp and RTV depending on how the person is transported.
Food: Only the supermarket and farmer’s market.
Basic entertainment: Netflix
Typically, Financial Security represents between a third and 50% of the number of Financial Independence, which makes it highly attainable, but more importantly, the magnitude of peace of mind that it brings to those who identify it and take action to achieve it.
Why is it important for everyone to achieve Financial Security as soon as possible?
Here are a couple of reasons.
The first reason is when the main provider of the family or the only person who brings money in a family has a serious accident or a critical illness that prohibits him from working for a long time.
Another reason is what happened during the last year and a half where many people saw their income affected by dismissal, suspension of the employment contract, reduction of the working day, less or zero sales in their business, even bankruptcy of their business.
In situations like the above, there is a huge difference for the person and the family if housing, food, transportation, and basic entertainment expenses are covered indefinitely. It’s clearly not ideal and the lifestyle is restricted but it makes all the difference between having the water above your nose at eye level or the water under your nose at the level of your upper lip. Those four fingers of air difference mean everything in times of crisis.