@Just1dood
What is Financial Freedom? Episode 2: Residual Income
**2 September 2021, Somewhere in the Metaverse - UplandDood (@Just1Dood)** *Written on 3 August 2021* Previously on Financial Freedom... As with Episode 1, I'll start with some disclaimers (for the complete disclaimers, please read Episode 1): https://read.cash/@Just1dood/what-is-financial-freedom-episode-1-a5664834 "***Not Financial Advice. Do your own research.*** *All thoughts are my own. Did not run through any checkers. Definitions are respectively owned by the definers and attributed as such.*" **In the last episode, I'd talked about Passive Income** and what that is. It is important that you understand that before reading this. You can check out Episode 1 if you haven't already. Let's continue with Episode 2 then. Residual Income From the same Investopedia site that I'd derived the definition of Passive Income in Episode 1, Residual Income is described as such: *Residual income is not exactly a type of income but* ***a calculation determining how much discretionary money an individual or entity can spend*** *after paying their bills and meeting their financial obligations.* [*I have briefly touched on both Passive and Residual income in my article "**Are you a good steward of your bank?* *You can check that out if you like. A good read, if I may do a little shameless self-promotion. LOL."*] https://read.cash/@Just1dood/are-you-a-good-steward-of-your-bank-46f421c6 In my opinion, if one's aim is to be financially free, this Residual Income, though not an income per definition, is as important a factor as Passive Income that I'd spoken about in Episode 1.
**Just because I am generating a Passive Income does not mean that I have enough to live off of**. This may come as a surprise to you. I don't blame you because of all the hype about earning a Passive Income. Let me elaborate so that it is clearer. If my passive income is $2000 per month, that may sound a lot, and looking at that it may seem that it's enough for me to live on. But if I have the following monthly expenses: $1200 mortgage loan repayment $400 car loan payment $200 student loan payment $200 utilities (electricity, water, gas for car, phone bills, internet) I am then only left with $100 to survive on for the month. That's the residual income. Is that enough to retire on? If it's not enough, then we are far from being financially free. Let's assume that the above describes your income situation. Does that mean that **if you're unable to increase your passive income further then you'll never get to enjoy a financially free life?** **Not necessarily.** The road to reach that goal is a long one but it is a process and a journey. Here's why. See three of the four main expenses mentioned above? **Three out of the four are loans.** Loans mean that the total amount will be knocked down as you continue with your payments over time until such a time where you have paid them all off. The good news is that one day, these will be paid off. The other good news is that due to the different tenure of your loans, some will be paid off earlier than others. Let's further assume that your student loan will be paid off in another year. At the end of that year, you'll have ***$200 extra***. And **once all your other loans have been paid off, you'll have a total of $1800 discretionary income (residual income) at your disposal.** *Since we're on the topic of loans, let's side-track a little. Many of us thought that the extra we have at the bank earning a 3-5% interest is helping us build our net worth. But what we don't realize oftentimes is that we have a debt (credit card comes to mind) that's costing us at least 18% in interest. You do the math. Should you leave that* ***$200 extra*** *in the bank generating 3-5% interest or should you use that to help knock off more of the 18% interest debt?* If you're living below your means, then you are on your way to being financially free. If you're living way below your means, then the extra discretionary income can be used to strengthen your financial position. Yes, I know the above is a very simplistic way to look at things but the basic concept and understanding are all there to spark a deeper thought into how you can work your way to being financially free. Here's a sobering thought. **Even though you have achieved a comfortable residual income that is derived from your passive income, you are still far from being financially free.** We will have a look at that in the next Episode. Thank you for reading. Stay safe and see you in the next part. [***This is not financial advice. It is the writer's personal viewpoint. Please do your own research.***]
**Sources:** Header: Unsplash.com - **Jingming Pan** https://unsplash.com/@pokmer Image 1: Unsplash.com - **Kelly Sikkema** https://unsplash.com/@kellysikkema **All Rights Reserved ©2021 UplandDood |** **#ClubBrokeBCH** https://read.cash/search?q=%23ClubBrokeBCH
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29 comments
Living below your means should be the practice for everyone. Sometimes though because we had extra income like what we earn here we think of spending instead because we deserve it. YOLO, right? :D It's good but we shouldn't do it all the time for when this platform, hopefully not, will close, we are back to having nothing unless we save or invest. That's a note to myself :D :D
LOL, Yes to YOLO! Always save for a rainy day...as much as possible.
I need to remind myself, I have to save a lil bit tighter.
All the best. We all need to.
Thank you, big brother!
A friend once told me, If you have extra 5k in your pocket, invest the 2k in crypto, 1k in stock market, then 1k in your savings account. I guess that's a better way not to be tempted to spend our extra money 😅 So far, I don't have any loans coz i don't like laying debts 🤣
You are to be commended. Not having any loans puts you so much ahead of so many of us already.
Living below your means. That is way too hard if you are a young adult yet.😅 There are a lot of temptations but we must come to our senses if we dont want to grow old broke.
It is a touch personal battle each of us will need to go through. But our exposure here teaches us that BCH doesn't come by easy! :)
One should not have a life of not understanding his financial ability. This is what happens to most of us. The moment we receive a little pay, we will begin to spend as if we have received more than enough. We most are ready to make some necessary calculations about our financial life in other to become financially free in future. Just as you said, it is a matter of time.
Many here on this platform are young. That is a big advantage because compounding is a powerful multiplier especially if one starts young.
one should really learn how to handle their finances really well. and never ever forget to save if you really want to achieve that financial freedom.
Absolutely. Savings and having financial wisdom is essential.
Your bills made me so sad to look at even though I too have so many bills to maintain and pay 🤣🤣🤣 and even with family... you are doing a great job dear, bless you
Lol. None of us can escape from bills. We do our best to manage. God bless. 😊
Loans are the hardest to pay to be honest, because they chip off quickly from your expenses depending on how much you pay for it. It can be a huge burden sometimes to our wallets. Glad that I earn more than what is spent, and proud to be debt-free!
Wow. That's very encouraging to hear that your debt free. You're way ahead of so many of us.
Living simply and minimizing daily expenses for food helps a lot. Last 2 months we planted lots of new crops in the yard, and computed the market value of the ones we harvested. We saved around $20, which is huge and adds up!
Commendable. It does add up. And you're also eating healthier since you know exactly how your crops were grown. Toward a #BetterSeptember!
Long time ago, I live way below my means. I saved enough but investing never crossed my mind. Now that it's hard to live below our means because necesities for children are way different than adults. Now I had this FOMO feeling, why I did not invest when I was able. Dang! Children, be reminded, okay? Save and invest however small. It accumulates over time.
Would be ideal if we'd all started investing when we're younger. Time and the magic of compounding work in our favor then. Bit it's never too late to start.
Clever explanation brother, I also read this kind of scheme and I don't focus much on it but the moment I saw yours maybe I should look back again, and I remember that this is also inside the book of Rich Dad and Poor Dad... Hmmm, you leave me to some puzzle to solve. hehe
His book is a perspective changing book! A must read. One of my top 10 books for sure. Do share once you've solved the puzzle. 😂 Toward a #BetterSeptember!
You have touched on an important point here. Living below our means is necessary to achieve our financial freedom. This is so crucial. As also as to know how to handle debts. Many people never achieve long-awaited financial freedom since they get caught in endless loans.
That is true. Work the whole life to pay loans. Being a slave to the banks. There isn't much difference between the banks and casinos, in my opinion. They have the upper hand or as they say, the house always wins. Best to stay away from this kinda of house.
A good comparison between the banks and the casino since the house always wins. And you're right. The further we are from that kind of house, the better. But with the casino, if you don't take it seriously, at least you can have fun. LOL
That is so true. It's all serious with a bank! LOL.
Most of my life I have lived on what I call the 80/20 rule. That is, you live on 80% of your means, and save and invest the 20% you don't need. That 20% builds on your passive income through dividends and other things you have invested in, and of course that can also be used to recalculate your income. These days my figures are actually around 60/40 because at the same time through the years as my income has increased both through work and investments, I really have not changed my cost of living. We are at the point now that we really don't even use our paychecks anymore. They all go straight into the bank or our investment accounts, and I give myself a set salary each month.
You have planned very well, my friend. Wished I was as disciplined as you are. But never too late to start, I guess. Living a very simple life now and building another online. This is the way to go moving forward.