Wednesday, September 23, 2009

What is financial freedom?

What is financial freedom?
Before explaining what financial freedom is, there are two terms you need to know. They are active incomes and passive incomes.

What is active income?
Active incomes are incomes that you get by doing some services for other. One example of active income is money that you earn by working for other. There is nothing wrong with this type of income, but this is not the income that will make you rich. You are using time to exchange with money. Logically the more you work, the more you earn. But what if you suddenly couldn't work anymore, for example you become very sick permanently? This source of income will stop too. Normally people will only focus on this source of income, which is why very few become rich after working for their whole lives.

What is passive income?
Passive incomes are incomes that you received without doing anything at all. Yes, you can treat it as money dropping from the sky. So how can it be possible? Some examples are rental you collect by renting out your room or the whole house, interest that received in your fixed deposit and dividends that you collect from your stocks. People who focus on this source of income will slowly become richer and eventually their passive income is more than their active income. Let me tell you a story about Jack and Jill to illustrate this point.

For the term financial freedom, it means that your passive income is more than your expenses, and you will no longer need to have any active income (or need to work anymore).


Eric See said...

good post

Anonymous said...

Your idea of financial freedom is the same as mine. Keep up with the good postings. I just stumbled upon your blog and find that we are both travelling on the same journey =)

Let's keep track of each other's progress.

Have you started your journey towards financial freedom?