How to Plan Before and After Financial Freedom?
Before achieving financial freedom, one should consider how to progress towards it, and after achieving financial freedom, one should think about how to plan for life post-financial freedom.
Definition of Financial Freedom
Passive income can cover all daily living expenses, including clothing, food, housing, transportation, medical care, education, socializing, entertainment, and more.
The Impact of Inflation on Financial Freedom
The principal for financial freedom needs to have at least a 3% positive growth each year to offset inflation.
Wall Street's 4% Conservative Rule for Financial Freedom (Three Calculation Methods for Financial Freedom Principal)
- 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 Operations of Wall Street's 4% Conservative Rule for Financial Freedom
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Initialization
- Divide the financial freedom principal into 25 parts, using 10 parts for operations within 10 years, while the remaining 15 parts are placed in a balanced stock-bond fund or a 60% stock and 40% bond fund combination without touching it. If during the 10 years, these 15 parts can achieve an annualized return of around 7% (based on experience, achieving such a return is not difficult), then the 15 parts will double to 30 parts (only needing to achieve a 5.2% annualized return to return to the initial 25 parts), and starting from the 11th year, 10 parts can be withdrawn for a new round of operations.
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Year 1 (2/2/6)
- Annual expenditure × 2, purchase money market funds (annualized return 2%-3%) for expenses from Year 1 to Year 2;
- Annual expenditure × 2, purchase bond funds (composite method, annualized return 3%-4%);
- Annual expenditure × 6, purchase stock funds (composite method, annualized return 6%-8%);
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Year 3 (4/2/4)
- Convert all previous bond funds into money market funds for expenses from Year 3 to Year 4 (after adjustment, 4/10 in money market funds, 6/10 in stock funds);
- Convert 2 parts from stock funds into bond funds (after adjustment, 4/10 in money market funds, 2/10 in bond funds, 4/10 in stock funds);
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Year 5 (4/4/2)
- Convert 2 parts from stock funds into bond funds (after adjustment, 4/10 in money market funds, 4/10 in bond funds, 2/10 in stock funds);
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Year 7 (2/2/6)
- Convert 2 parts from money market funds and 2 parts from bond funds into stock funds (after adjustment, 2/10 in money market funds, 2/10 in bond funds, 6/10 in stock funds);
Notes:
- A cycle lasts for 10 years;
- No operations are needed for the years not mentioned;
Specific Demonstration:
- First Operation (Start of Year 1 - 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 (Start of Year 3 - 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 (Start of Year 5 - 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 (Start of Year 7 - 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:
Mantra for Achieving Financial Freedom
- Review financial status
- Develop long-term planning
- Correct consumption concepts
- Control consumption desires
- Learn to delay gratification
- Achieve financial freedom
Factors Affecting the Speed of Achieving Financial Freedom
The speed of progressing towards financial freedom depends on the amount available for investment after subtracting expenditures from income; the less spent on consumption, the more available for investment, thus speeding up the achievement of financial freedom.