How to plan before and after achieving financial freedom?
Before achieving financial freedom, you should consider how to develop towards financial freedom. After achieving financial freedom, you should consider how to plan for life after financial freedom.
Definition of financial freedom
Passive income should cover all daily expenses, including clothing, food, housing, transportation, medical care, education, socializing, entertainment, etc.
The impact of inflation on financial freedom
The principal of financial freedom needs to grow by at least 3% each year to offset inflation.
The 4% conservative rule of financial freedom on Wall Street (three methods of calculating the principal of financial freedom)
- Financial freedom principal = annual expenditure ÷ 4%
- Financial freedom principal = annual expenditure × 25
- Financial freedom principal = monthly expenditure × 300
Example: Assuming the annual expenditure is 120,000 RMB (equivalent to a monthly expenditure of 10,000 RMB), the financial freedom principal = 120,000 ÷ 4% = 3,000,000 RMB.
Specific operation of the 4% conservative rule of financial freedom on Wall Street
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Initialization
- Divide the financial freedom principal into 25 parts, with 10 parts used for operations within 10 years, and the remaining 15 parts placed in a balanced fund or a 60% stock and 40% bond fund portfolio without being touched. If in these 10 years, the 15 parts can achieve an annualized return of around 7% (from experience, it is not difficult to achieve such a return), then the 15 parts will double to 30 parts (only need to achieve a 5.2% annualized return to restore to the initial 25 parts). Starting from the 11th year, 10 parts will be extracted from it to start a new cycle of operations.
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Year 1 (2/2/6)
- Multiply the annual expenditure by 2 to purchase money market funds (annualized return of 2%-3%) for the first and second years' expenses.
- Multiply the annual expenditure by 2 to purchase bond funds (portfolio method, annualized return of 3%-4%).
- Multiply the annual expenditure by 6 to purchase stock funds (portfolio method, annualized return of 6%-8%).
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Year 3 (4/2/4)
- Convert all previous bond funds to money market funds for the third and fourth years' expenses (after adjustment, 4/10 is money market funds, 6/10 is stock funds).
- Convert 2 parts of stock funds to bond funds (after adjustment, 4/10 is money market funds, 2/10 is bond funds, 4/10 is stock funds).
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Year 5 (4/4/2)
- Convert 2 parts of stock funds to bond funds (after adjustment, 4/10 is money market funds, 4/10 is bond funds, 2/10 is stock funds).
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Year 7 (2/2/6)
- Convert 2 parts of money market funds and 2 parts of bond funds to stock funds (after adjustment, 2/10 is money market funds, 2/10 is bond funds, 6/10 is stock funds).
Note:
- Each cycle is 10 years.
- No operation is required for the years not mentioned.
Specific demonstration:
- First operation (from the start of year 1 to the end of year 2):
- At the start of year 1:
- Money market funds: 2/10
- Bond funds: 2/10
- Stock funds: 6/10
- At the end of year 2:
- Money market funds: 0/10
- Bond funds: 2/10
- Stock funds: 6/10
- At the start of year 1:
- Second operation (from the start of year 3 to the end of year 4):
- At the start of year 3:
- Money market funds: 2/10
- Bond funds: 2/10
- Stock funds: 4/10
- At the end of year 4:
- Money market funds: 0/10
- Bond funds: 2/10
- Stock funds: 4/10
- At the start of year 3:
- Third operation (from the start of year 5 to the end of year 6):
- At the start of year 5:
- Money market funds: 2/10
- Bond funds: 2/10
- Stock funds: 2/10
- At the end of year 6:
- Money market funds: 0/10
- Bond funds: 2/10
- Stock funds: 2/10
- At the start of year 5:
- Fourth operation (from the start of year 7 to the end of year 10):
- At the start of year 7:
- Money market funds: 2/10
- Bond funds: 2/10
- Stock funds: 0/10
- At the end of year 8:
- Money market funds: 0/10
- Bond funds: 2/10
- Stock funds: 0/10
- At the start of year 9:
- Money market funds: 2/10
- Bond funds: 0/10
- Stock funds: 0/10
- At the end of year 10:
- Money market funds: 0/10
- Bond funds: 0/10
- Stock funds: 0/10
- At the start of year 7:
Steps to achieve financial freedom
- Evaluate financial status
- Develop long-term plans
- Correct consumption mindset
- Control spending desires
- Learn delayed gratification
- Achieve financial freedom
Factors affecting the speed of achieving financial freedom
The speed of achieving financial freedom depends on the amount available for investment after deducting expenses. The less spent on consumption, the more available for investment, and the faster financial freedom can be achieved.