Most of us work because we have to, not because we want to! I am aware of the statement “choose a job that you like and you do not have to work a day in your life.” But I am sure you will agree that not many of us can actually find such a job in today's economy! If you are one of those who work to earn money, it means you have not yet achieved financial freedom. In this article, we explain the meaning of financial freedom and how you can create a path to achieve it.

We start on the premise that you do not have inherited wealth. Your cash flow is, hence, based on your family income- yours, your spouse's and your children's, if applicable. We further assume that your family income is either derived from salary or from active participation in business. In either case, you derive income by actively committing time and effort. We call this active income.

You can, of course, derive cash flows through passive sources as well. Passive income refers to income you receive without actively working to earn it! Rental income earned on residential and commercial property is one such source.

Now, financial freedom is a situation where your passive income is greater than your active income. And importantly, such income is enough to sustain your lifestyle needs. This is the state when you can decide to pursue your passion, and not work because you have to! It is essentially the time when you choose to retire, if you want to. The question is: How can you create a path to achieving financial freedom?

Passive sources

You should create passive income from several sources during your working life. One such source is your systematic investment portfolio. Many do not consider portfolio income as passive income because it requires effort and time to create and manage an investment portfolio! That is why you should set up systematic investment and withdrawal plans. You should invest in stocks and bonds that generate significant income returns; it requires less time and effort to monitor such investments and also make you less susceptible to short-term price fluctuations.

You should also invest in real estate to generate passive income. By real estate, we mean commercial and residential property that can fetch rental income. Of course, managing the property could require some effort as will finding an appropriate tenant! One reason why you should consider rental income is that it hedges your inflation risk. That is, you can increase your rental income if general price level in the economy goes up. We will not go as far as to suggest that you can consider rental income as a primary substitute for your active income. Your rental income complements your systematic investment portfolio.

There are other sources of passive income such as royalty payments from writing books and income earned from online businesses.

Your retirement is essentially the period from which you can consistently sustain your lifestyle needs with your passive income. You can create the path to achieving financial freedom by doing the following:

First, create a systematic investment portfolio. The discipline to save and systematically invest every month is more important than the amount you set aside from your current income.

Second, buy a piece of land. This will come handy in the future. You can sell the land and use the proceeds as down payment to buy a residential investment property at a later date to generate rental income.

Third, brain-storm with friends and family to start an online venture but ensure that such business is not in conflict with your day job!

Remember, creating a path to financial freedom is the first step towards pursuing your life dreams.

(The author is the founder of Navera Consulting, a firm that offers wealth-mapping and investorlearning solutions. He can be reached at >enhancek@gmail.com )

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