OreChou

I think it the excitement only a free man can feel, a free man at the start of a long journey whose conclusion is uncertain. I hope the Pacific is as blue as it has been in my dreams.

Life is a journey. If you determine your goals early and make useful plans, you will have more time and energy to enjoy your life. However, many people are currently on a path they do not like because of money issues. In my father's generation, most people worked as teachers or doctors in a county town, dedicating most of their lives to their jobs. Their thoughts were more focused on job stability, income level, and welfare. They cared about performance-based pay and retirement benefits, among other things. The education I received from a young age was to get good grades, go to college, and become a white-collar worker. I naturally followed this path, but the longer I worked, the more monotonous my life became. Specifically, the higher the salary, the higher the debt; the older I got, the more pressure I felt. Over time, I would compromise for the sake of money and do things I didn't like. The period of rapid development in every industry's benefits has passed, and even with a steady job, the chances of achieving financial freedom have decreased. Therefore, the key first step is to determine when to retire, how to get rid of things you don't want to do, and make a financial freedom plan.

Financial Freedom and Wealth Freedom#

Before making a plan, it is important to understand that financial freedom and wealth freedom are two related but slightly different concepts. Financial freedom means that your non-labor income is sufficient to cover your daily living expenses without relying on work income. Wealth freedom means that you have enough wealth to achieve your dreams, goals, and desires, and live a luxurious life beyond basic needs. The standards and levels of these two types of freedom are different.

Let's first define the types of income, which mainly include three types:

1. Work income: Income obtained from labor, such as salary from work.
2. Securities income: Income from paper assets, such as stocks, bonds, and mutual funds.
3. Passive income: Income from non-paper assets, such as rental income from real estate, income from patents or intellectual property products, etc.

Among the above types of income, the faster you learn to obtain passive income and securities income, the faster you can retire young and wealthy.

Financial Freedom Formula#

To achieve financial freedom, we can use a simplified formula.

Retirement Capital = ((Annual Total Expenses - Annual Total Passive Income) * (1 - (1 + (Annual Rate of Return - Inflation Rate))^(-Years of Retirement))) / (Annual Rate of Return - Inflation Rate)

In the formula, Annual Total Expenses and Annual Total Passive Income are easy to understand. The Annual Rate of Return and Inflation Rate are also well known. The part (1 - (1 + (Annual Rate of Return - Inflation Rate))^(-Years of Retirement)) in the formula represents the proportion of capital gradually decreasing from the start to the end of retirement. We assume that the capital is used up exactly in the last year of retirement, so we subtract the remaining capital proportion from 1 to obtain the proportion of consumed capital.

Annual Rate of Return#

The Annual Rate of Return is a measure of investment returns, representing the expected investment return rate over one year if the investment return remains at the same rate. The Annual Rate of Return standardizes the investment returns of different time periods, making it easier for investors to compare the returns of different investment products. It is an estimation method for investment returns. This is the accelerator in our plan.

Inflation Rate#

The Inflation Rate is an indicator that measures the rate at which the purchasing power of money decreases and reflects the rise in the price level over a certain period of time. Inflation affects investment returns and living costs, so it needs to be considered when calculating real returns and making financial plans. The inflation rate fluctuates with policies, economic conditions, and market situations. This is the unstable factor in our plan. The following is the historical inflation rate data for China:

An Example#

Using the formula above, let's imagine the capital needed for someone's retirement. If a person's annual total expenses are 200,000 yuan and their annual total passive income is 100,000 yuan, and the inflation rate is unknown, we set it at 5%. The annual rate of return on their assets is set between 6% and 10%. The required capital is as follows:

If the annual total expenses are 300,000 yuan and the total passive income is 100,000 yuan, the required capital is:

Each person can estimate how much capital they need for retirement based on their own situation using this simplified formula.
Money is never enough, but it can never be spent. Make a plan, withdraw from earning money as early as possible, and do what you want to do.

This is a plan that needs to be taken seriously, and there are some points to consider:

1. For annual total expenses, learn to budget and decide where you want to spend your money.
2. Pay attention to expanding passive income and allocate some energy to it. Be cautious about the stability of labor income and its susceptibility to macroeconomic conditions.
3. Once retirement begins, do not pursue a too high annual rate of return. Stability in the plan is important. However, do not stop efforts to find high-yield methods during the accumulation stage.

After making a retirement plan, the next priority is the accumulation of retirement capital. During this process, you will encounter other financial concepts and issues, such as debt, cash flow, net assets, how to increase asset value, and whether to purchase insurance. If there is time, we can discuss these topics later.

Finally, keep learning and growing. Active learning is the exploration of the unknown world, and this process of exploration is wonderful and joyful.