To have a portfolio that throws off $40,000/year - which is the definition of financial freedom - assuming a 7% rate of return (which is very achievable) - the size of your portfolio needs to be $575,000, a little over half-a-million. To save, invest and raise that kind of money on an income of $40,000/year can be a challenge, but one that can be overcome if you have that other friend of the average investor - time.
If you save 15% of your gross income, that is $6000/year at a monthly rate of $500/month, that returns 7%, it will take about 30 years to get to $600,000. Of course, when you have 30 years to invest, you can be more aggressive in your allocation, and aim to achieve 10% returns by simply investing in the S&P 500 index (with dividends reinvested). This will give you a portfolio of $1.1 million, which at 7% will throw off $77,000 as income for you in your financial freedom years. This is just as well as the extra income will compensate for the effects of inflation over the next 30 years.
If you don't have the time indicated to develop a portfolio of that size, you have two options - either raise your income (without raising consumption), or raise your rate of return. While it may seem that the latter is more attractive, in reality, you will often be raising your risk profile by chasing better returns. On the other hand, by investing in yourself to raise your income, you will be making a difference in your life for good.
Raising your income can be achieved either at your current job, or by starting a niche, targeted business of your own. Starting a business is not an easy task, but there is plenty of help available. You will have to first develop a skill that is valuable, and then provide the sought-after service. This can be time-consuming at first, but over the long run, will pay dividends in the form of extra income as well as equity in the business. Always ensure that your services are of the highest quality, and sooner, rather than later, you will be making money by the boat-load.
Thus, these three variables are your pearls of financial freedom:
- Savings (hence Income)
- Rate of Return
And your end-goal is a portfolio which can throw off your needed living income on a safe rate of return.
Tweak with them, try to improve them, and you will have your financial freedom faster than you thought possible. Ignore them, and you will find yourself wandering in the world of hot tips and lottery hopefuls.