personal financial freedom

It is important that everyone understands the basics of personal finance and also uses them effectively.

Any individual has two types of income. Insured income as well as uninsured income.

Secured income is income that will continue to flow whether you are working personally or not. For example, Rents, dividends, royalties, Interest, etc.

On the other hand, income that is not insured is that which stops flowing the moment you stop working. For example, paycheck, bonuses, etc.

In the same way, there are broadly two types of expenses: fixed and discretionary. Fixed expenses such as taxes, debts, insurance, household expenses, etc.

To achieve “personal financial freedom” we must be concerned with a Flow, which we can call a flow of freedom. This is the difference between the Total Expenses and the Insured Income, if the result is negative, then it smells like freedom. On the other hand, if the result is positive, it implies remaining imprisoned in the debt trap.

There is a simple formula by which one can determine how long it would take a person to achieve “personal financial freedom.”

N = Freedom Flow / AIOP x recovery

Where, N = Number of years necessary to reach the threshold of freedom.

Freedom Flow = Total Expenses – Assured Income

AIOP = Insured income that can be generated as a percentage of the reset. A 10% conversion is a good benchmark.

Plow back = (total income) – (total expenses) . This is the money available for conversion to an insured income.

To take an example, if for a person,

Insured rent = $25,000

Total income = $1,00,000

Total Expenses = $85,000

AIOP = 10%

So the reset is $40,000.

So, as it stands, the number of years needed to reach the threshold would be:

60,000 / 0.1x 40,000 = 15 Years.

Now, let’s say the person can reduce their total expenses by 20% and improve their AIOP by 15%, then the number of years it takes for them to reach the threshold would be:

43,000/.15 x 57,000 = 5 years.

Such is the power of this equation, that it essentially means that we must

Keep the flow of freedom as low as possible. Increase income and reduce expenses.

Maximize AIOP

Maximize back plowing.

This formula, however, does not take inflation into account. It’s better to use this as an indicative tool rather than dissect it for precision.