Criteria for financial freedom
Definition of financial freedom
My definition of financial freedom is that without going to work (but not necessarily to work), you can live a dignified, quality and meaningful life by simply relying on the investment or value-added benefits of investable assets.
- Elements of Wealth Value Added
According to the above definition, the value-added of wealth mainly depends on three factors: initial investable assets, return on investment and time. If the value-added of wealth is compared to a snowball, then the initial investable asset is the size of the initial snowball, the return on investment is the wetness of the snow, and the length of the snow track is the time.
Basic assumptions
Assuming you have a stable job, your salary can cover your family expenses and make you live a life without luxury but with dignity and quality. The following will be based on your after-tax annual salary.
IV. Criteria for Financial Freedom
(1) Core standards
- Investable assets
Investable assets should be greater than or equal to the annual salary of 100 years. If the initial investable assets are too low, the dependence on the return on investment will be great and the security will be insufficient.
- Rate of return on investment
The long-term annual compound interest rate should be greater than or equal to the annual average inflation rate plus 2 percentage points. If the rate of return on investment does not exceed the rate of inflation, the actual investable assets will shrink in the long run.
(2) Other guarantees
- A set of self-housing
The per capita living area of a family is more than or equal to 30 square meters. It has complete property rights, no mortgage and no loan. It is only used for self-housing. The value and value of the real estate are not included in the investable assets. Investment is risky, and a set of self-owned housing is an important basic guarantee.
- Stable cash flow
The annual stock cash dividend or fixed income dividend, or other stable cash source, is greater than or equal to 1.5 times annual salary.
- Social insurance
"Five insurance and one pension" - old-age insurance, medical insurance, unemployment insurance, industrial injury insurance and maternity insurance, and housing provident fund should be complete.
- Commercial Insurance
Life insurance, serious illness insurance and accident insurance are the golden triangle of family allocation insurance. The essence of insurance is security, risk management, charcoal in the snow rather than icing on the cake. To buy insurance, we must first see whether the safeguard function is in place. Guarantee is always more important than return. The most important thing about insurance is planning. Everyone needs to tailor their clothes.
- Major Expenditures
Predictable major expenditures such as children's overseas study funds and purchase of major assets should be planned ahead of time. Cash flow should be guaranteed for major expenditures without affecting asset accumulation.
Principles of Financial Planning
- The Principle of Prudence
The estimation of assets and benefits should be as conservative as possible, and the estimation of expenses, expenditures and losses should be adequate. It is preferable to predict possible losses rather than possible gains.
- Principle of Importance
It is not necessary to calculate everything in detail, so grasping the key points will control the overall situation.
- Margin of Safety
The future is full of uncertainties, and all measurements should keep a certain margin of safety to deal with unpredictable risks. For example, in the past 10.5 years, my annual compound rate of return on investment is 29.35%. Let's make a 68-year adjustment and assume that the annual compound rate of return on investment is 20% in the next few years. Based on the 100-year salary of the lower limit of investment assets I set, the first year's investment income is 20-year salary. Let's assume that the annual household expenditure increases to 2-year salary, and that the 18-year salary can be added to the next year's investment assets continue to snowball. This calculation with a big margin of safety makes me feel safe.
The above financial freedom standards are set according to my own actual situation, different people should adjust according to their own specific situation. If you are extremely confident in your ability to invest, you can greatly reduce the standard of investable assets; if you have accumulated a large amount of investable assets or received a huge legacy or gift, you can obtain financial freedom simply by Purchasing Treasury bonds or fixed income financial products. Finally, if you can control your material needs and desires to a lower level, then you will have easier access to financial freedom; if you can control the material needs to zero level, then congratulations, you are close to the state of saints or immortals, financial freedom, this very LOW problem will no longer bother you!