30 August 2011

My Road Map to Achieve Financial Freedom: 10% + 20 years + 720K = 6k passive Income

Financial freedom means you are no longer work for money. But you still can work for fun, joy, personal interest, pursuing your dream or contributing to social. First and foremost, we must have enough passive income to support our daily life in achieve financial freedom. Personally, I believe that if I have 6k passive income, then it is the time for me to quit my routine job and focus on the life I want for the rest of my life (Except I am quite enjoying my job which gives me some sort of satisfaction from time to time). But the problem is how to generate this 6k passive income.
After having this goal (that is, to generate 6k passive income per month), I have identify two essential tools for me to achieve it. The first is the ability to generate at least 10% return annually; and the second is to accumulate enough capital.

First of all, let's assume I have the ability already, so the question is how much the capital
needed. In fact, 6k per month is equivalent to 72k (6x12) annually. With 10% return annually, a
capital of 720k is needed to achieve this goal. However, how long I need to accumulate 720k capital? This is a very crucial question.

Nevertheless, I have identified two ways to achieve this:

1. Stock Market
The first way is to take risk and do lots of homework in stock market. Investing a potential undervalued company requires lots of brave and patience. This is because the company may have very little liquidity and nobody believes it is a good deal since most people prefer to judge a book based on its cover (market value and trading volume) instead of its inner content (intrinsic value).

2. Saving
The second way is to optimize my usage of money to increase the amount of saving. If I can save net 1k per month, I will have 12k per year. After 10 years, I will have 120k only. And then, after 60 years, I will reach the goal....

Obviously, saving is not a good way to achieve this goal. However, if I got the first tool, the whole story will be different. Let's look at the explanation below:

Year Zero:
Beginning of Year one: 12K
Beginning of Year two:
(total previous accumulation*(1+return rate)) + New Saving
= 12K*(1 + 0.1) + 12K = 25.2K
Beginning of Year three:
(total previous accumulation*(1+return rate)) + New Saving
(25.2K)*(1 + 0.1) + 12k = 39.72K
This answer can be found via the equation below:
FW = A((r+1)^n - 1)/(r)

And then, we re-arrange the equation in such a way that we can find the unknown, n:
n = log(FW*r/A + 1) / log(r+1)
Answer: 20 years

Let's check the answer again.
FW = 12*(1.1^20 - 1) / 0.1 = 687.3K or approximate to 700K
After having this solid plan, I can focus more on my daily job, enjoy my daily, and at the same
time achieving my financial target. (Note: we can increase the return rate to shorten the period of time to suit ones needs and vice versa.)

That's all for today. More fascinating articles and sharing will be updated from time to time in Xaivier Blog. So, you are welcome to subscribe our feed, look at our sitemap or simply visit our Homepage.

Written by: Xaivier Chia


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