Wednesday, January 30, 2008

How do you know when you are financially independent?

You can consider someone to be financially independent if they bring in more income from non-employment (passive) income than what they need. Of course 'need' can be a rather subjective word. Some of us need an expensive home theater system or expensive car, while others need remarkably little.

It is obvious that the more we need, the harder financial independence will be to achieve. In my case, my household expenses are $2400.00/month and $1900.00/month of debt. This means that in order to declare myself financially independent, I need to find passive income sources amounting to $4300.00/month!

I am lucky enough that I get rental income (passive income) of $775.00/month from my duplex, but this is gross passive income: before taxes and expenses. I'm going to estimate it as a net passive income of $500/month, which means that I still need to increase my passive income by approximately 900%.

I think what we are learning here is that the debt is keeping my dreams of financial independence further out of reach. If I could find a way of eliminating my debt obligation, I would only need to increase my passive income by approximately 500%.

At this point you may think that I am leading you on a predetermined path, that is because I am. I have actually started this path in September of 2007 and I really believe that debt is a big hurdle to financial independence.

In the next posts, I will discuss more about how bad debt is for your financial health, and techniques that can be used to eliminate it.

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