What is financial independence and how to achieve it
In today’s article we will answer the question What is financial independence and how can we achieve it. In addition, we will analyze the methods of obtaining the status of a financially independent person and check their effectiveness and debunk some popular myths about this.
We will also answer the question whether it is possible to live without work and without money, and how people used to get along without money.
This article was inspired by the very popularity of our post on how to earn money without leaving your home.
In addition, we receive a lot of inquiries about how to multiply your assets or how to get financial resources without working in a traditional way.
Lots of people get advertisements and are encouraged to make all kinds of “certain” investments to make them a fortune effortlessly.
We will take into account various popular methods and indicate those that are a certain scam and which actually make sense
Basic concepts related to work, money, market
Let us therefore consider whether there is a mythical financial independence – how to define it and where to look for it.
Somewhat perversely, we will precede the definition of independence by defining the opposite concept, i.e. financial dependence.
Are we dependent on finances these days and what does that really mean?
We consider these questions to be fundamental because many people equate the notion of dependence or financial independence with the necessity or voluntary work.
Let us ask ourselves a question:
Why do we need a job or our own business?
The most popular answer to the question asked in the survey was the following:
We need work in order to have enough to live on.
When we delve into the hidden meaning of this answer, we can ask a second question:
Is money essential to life?
Of course, it should be immediately explained that the concept of “having a livelihood” covers the possibility of purchasing various goods and services that provide us with the satisfaction of our basic needs (food, sleep, clothing, safety) or increase our comfort.
In the group of all goods that we can purchase for money, we distinguish the so-called basic goods such as food, drink, housing and additional goods – increasing the comfort of life or giving us satisfaction.
For the moment, let us recognize that we are considering “survival” as having basic goods.
The general classification of what is a basic good and what is not is very debatable and depends, for example, on the level of development of a given society, including the technological level, organization of power, society, etc. our current standard of living.
It is now worth moving on to the question of the meaning of work, which is closely related to the possibility of acquiring goods.
When we ask working people – why do you go to work or (young) learners – why you are getting ready to work – we have several options for answers.
Some respond directly that they work to have money – without going into further details and without thinking – what they need the money for.
Of course, the question about the meaning of work is much more complex because work gives us not only money for current (basic) or future needs, but also has a significant relationship with higher needs, for example the need for self-fulfillment or ambition.
A very classic example of the hierarchy of needs on which we rely is the so-called Maslov’s pyramid of needs. We mention it but today it is not the subject of our considerations.
So when considering the answer to the question of what financial dependence is – perhaps it will be easier to detail it a bit and ask:
Isn’t financial dependence the same coincidence as dependence on money?
Because if we could live without money – the topic of financial independence would not exist and it would be unfounded to consider it …
In turn, negating tautological concepts or financial independence – is not the same coincidence as independence from money, so there is no need to have it?
Let us also clarify that we understand Dependency on money as the necessity to ensure its inflow throughout our lives. Similarly to addiction to gambling, games, alcohol, nicotine or drugs – dependence requires constant access to a given good.
A completely separate issue is the question of the amount of money we need to live, both in terms of meeting our current needs and future plans, such as retirement or the need to provide our children with property.
The question of what amount expressed in currency is the minimum to live on is very individual and depends on the place where we live.
In Thailand, you can allegedly survive on $ 2 a day – a level not achieved in Western countries.
It would seem that generally in the twenty-first century we are dependent on money and this is not due to our greed or personal preferences.
Nowadays, we need them to buy food, clothes, pay bills or rent an apartment or pay off a loan.
And it’s basically true. In a moment we will try to prove why we are so dependent on money these days.
To explain this phenomenon, let’s try to go very quickly through the history of the development of money-based civilizations, and bring us closer to the era before money was invented, when there was a market for the exchange of goods but no currency.
Has money always been essential to life?
In prehistory, most people, like animals, lived in small clusters today and were generally doomed to self-sufficiency. We ate what we had collected or hunted, we lived in shelters or caves that ensured safety and protection against the harsh climate.
Even much later – in the pre-industrial era when most people were farming – societies and families were less dependent on money and more dependent on their own farm work.
This was due to a different social structure and the fact that most farms were self-sufficient in the context of providing themselves with basic goods such as housing, food or clothing.
We continued to raise animals, cultivate the soil, harvest plants and make simple tools ourselves.
The animals served as a transport, source of meat and leather for the manufacture of clothing and footwear.
Increasingly larger centers (settlements, cities) appeared in civilizations, in which people began to specialize in the context of their work.
The specialization was that it is easier to do one thing in a large amount (e.g. be a farmer, hunter, shoemaker) than to do everything in turn.
Specialization increases work efficiency, but more on that in a moment.
With the advent of specialization and professions, the problem of exchanging goods between people appeared.
Of course, if the farmer needed new shoes or a machine, he should turn to the craftsman who prepared these shoes for him in return for giving him agricultural goods, for example wheat or milk, or raw materials in the form of skins.
The former so-called barter exchange does good for good or service for service, or alternately service for some product.
However, the storage of the farmer’s goods and the need to provide warehousing were troublesome. Moreover, the storage of goods with a short shelf life caused large losses and was very ineffective and exposed to volatility and uncertainty.
What money was invented for
Money was invented to facilitate the exchange of goods on the market.
So if a farmer had a lot of wheat in a given year, he could convert it into its equivalent, i.e. an equivalent expressed in currency (once gold) and buy something for the money earned when he needs it.
Likewise, a shoemaker who sold a lot of shoes before the cold – had accumulated capital that he could use to buy food later – when everyone in his neighborhood already had shoes.
So money is the carrier of our work with the possibility of using it at a later time. They also provided the possibility of future security – for example, in the event of a crop failure and in the new year the farmer was unable to produce enough food.
Currently, societies are much more focused on consumption and it is difficult to imagine that city dwellers grow food for their own needs, sew their clothes and keep pigs in the basement.
In the era of modern technologies and advanced production – a single person or even a whole team – having a very large amount of time – will not produce a computer or a telephone from scratch.
Specialization has produced so much technological progress that catching up with competitors in practice may be impossible. This is important because there are supporters of traditional ways of life – movements that reject technological progress and live only with the products they produce.
The economic efficiency of production in such sediments that live isolated from technological progress is very low compared to modern methods resulting from many years of research such as process optimization.
Currently, we are dealing with a technologically advanced market economy whose money circulation is very large and serves the needs of various professional and social groups.
In developed economies, agricultural production is adopted by specialized companies and the remaining residents work in other industries – for example in the aforementioned technology industry.
Technological progress is the result of specialization, but it is worth noting that in order to specialize, we must, as individuals, devote many years of our lives to science.
A monthly course is not enough to become a surgeon or programmer.
The specialization kind of “throws” us into a certain path and very few people change their career path diametrically in middle age.
Therefore, since we have to specialize, because without specialization, we will lose to the competition through ineffectiveness – we cannot easily return to the lifestyle of our ancestors.
The undeniable fact is that we are dependent on a continuous flow of money which is directly related to the need to work in the field in which we specialize.
Without money, we will not be able to compete in society and we will have two options. We can become hermits or join a group such as Amish.
So if you do not have a rebel nature, you want to stay in society and most importantly you want to be independent from others – whether you like it or not – you are forced to earn an income. This income will primarily be used to meet your basic needs and may further be used for other purposes.
We have come to the end of Part One, which covers the basic concepts of financial independence.
In the further part of the study we will discuss ways to get income.
Ways to get money for a living
Work or own business – active income
The most popular form of obtaining financial resources (personal income) is the so-called active income, i.e. a form of obtaining financial resources that requires us to commit our time and, importantly, the income is directly proportional to the effort / commitment / time spent on work for which we receive remuneration.
Examples of active income are:
- remuneration for work performed for another entity or person (contract work)
- independently providing services (orders and works)
- sale of self-made goods (production)
- sale brokerage (trade)
The above-mentioned forms of earning income through active activities are very common and relatively easy to achieve.
Apart from the difficulties of finding a job in some professions or starting a company – practically anyone can take up a contract and if the position is not particularly demanding – the preparation period can be very short.
Earning money through contract work (in various forms of employment) is the most popular and has many advantages, which include:
- stability and predictability of earned income
- ease of starting work – in a position that does not require experience or many years of study
- possibility of promotion to higher positions
- low risk of losing one’s livelihood
- no capital required
- development through training and gaining experience
Passive income – what it is and what advantages it has
We have already discussed ways to get money through work or your own business. This type of fundraising is the most popular and obvious, however, along with the development of capital markets, there are also ways to earn income from assets already owned, and this income is the so-called passive income, which we will discuss now.
Man is lazy by nature, but rather likes to make his life easier and if he does not have to do something, he does not do it.
Some believe that the entire progress of civilization is the result of a feature of human nature which, in a way, pushes us towards progress.
Therefore, the question often arises whether earning money can be achieved in a different way than through your own work.
Of course, money or material goods can be stolen. It is morally wrong, but the theft or plunder of farms was very common in ancient times. there are also other, somewhat very sophisticated and carefully hidden behind the facade of morality forms of stealing or parasitizing a certain group of people on another.
Sometimes it is even organized and legal theft.
So are there any other ways of getting money than stealing or doing your own work in such a way as to be able to have a regular flow of money and the necessity of daily work?
At this point, we come to the conclusion that financial independence does not mean giving up our own needs, but means such a state of our own organization that allows for the inflow of money passively.
The so-called passive income is therefore a way to raise money using the assets you already have, known as assets.
What are Passive Income Assets?
In the next section, we will introduce several types of assets that allow you to earn passive income.
An example of an asset that allows you to achieve passive income is, for example, a developed property (house, apartment, office) intended for rent.
If we have a property that does not serve as our everyday place of residence – we can rent it to a person who does not have an apartment or has it in a place where I do not want to live.
For example, someone moves to another city for work and needs a place to live.
It often happens that we inherited real estate, e.g. from our parents, by inheritance or donation. We can also buy a property for investment purposes, i.e. buy it not to live in it, but to rent it and receive monthly remuneration for it.
Renting a property is therefore a way to earn a regular income from the mere fact of owning this property.
The real estate group includes not only existing buildings, offices or flats, but also undeveloped land – land – for example agricultural land.
While in the case of renting a property, we must first build such a property or adapt it to rent, in the case of land lease, the matter is much simpler.
If there is a farmer in our area who has a farm and would like to develop, he will need land that he does not necessarily want to buy from us, but to rent for a period of, for example, 10 years just to sow some kind of plants there and then reap the benefits of harvesting them.
This is the so-called real estate lease which may also apply to commercial use, for example someone leases a property for 50 years and builds a building on it for their own money.
In both cases, the involvement of the investor, i.e. the person who has the legal title to the land, is much smaller and requires less financial expenditure.
Leasing is therefore a great way to gain passive income from your land in case you do not have other financial resources necessary to start a larger investment.
For example, we have land but we do not have the financial capacity to independently build a property, e.g. a house for rent or an office building.
As in the case of built-up real estate, it often happens that the agricultural land is inherited or donated by parents or extended family.
It is important that such agricultural land has an appropriate class of land suitable for cultivation and, on the other hand, that it is in a location where large farms operate.
Profits from capital companies – dividend
Another example of passive income with the use of assets is collecting a dividend, i.e. a part of the company’s profit or other form of business in which we are shareholders.
As in the case of real estate, we can become a shareholder of a company by purchasing it, for example, its shares on the stock exchange if the company is listed on the stock exchange, or by direct investment and acquisition of the company’s assets, for example, a limited liability company.
It should be noted, however, that the passive income from the owned company excludes the situation in which we are active employees of the company and we receive a salary for this. Of course, such a situation is possible – i.e. our company can be both a source of passive income (through dividend) and active income (due to remuneration for work performed for the company)
It should be emphasized at this point that we can only talk about passive income when our relationship with the company is passive, and therefore inactivity in the operating activities of the entity which is the company
In this case, we only use the fact that we have a certain share of ownership in the company.
So we take advantage of the fact that a company employing other people generates a profit for us. This profit, calculated after the company’s full accounting year and paid to investors, i.e. shareholders, is called a dividend.
The dividend may apply to both large companies listed on stock exchanges and smaller capital companies that exist outside the regulated market.
We have listed three basic methods of earning passive income.
The obvious fact that distinguishes passive investing from income from work is that in order to earn passively – we must have certain assets, either inherited or for those we have earned before.
We did not include activities such as, for example, speculation or trading in financial instruments or raw materials on commodity exchanges in the group of passive income.
This is due to the fact that speculation is in fact an active form of earning money and not passive investment.
Overall, our view of investing for profit in the form of speculation is that we see this form of investment as a way of avoiding the inflation tax and protecting your assets from inflationary impairment.
We are currently dealing with crazy central bank policy. Negative interest rates block any meaningful profit on bank deposits or bonds.
The truth is that the bond market has been destroyed with empty money. Central banks that have massively bought up corporate debt have completely distorted this market.
In the era of negative interest rates, any meaningful profit on bank deposits or bonds that are redeemed by massive with money printed by central banks – practically does not exist.
If readers are interested, we will continue this thread in more detail.
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