FINANCIAL FREEDOM IS OVERRATED

Achieving financial freedom seems to be the new religion in the west. On a weekly basis, new blogs, books and ideas emerge to quickly gain financial freedom. Check the keywords in Google or Amazon. So much stuff out there.

I like the idea of being financially independent. Although I think this topic is going in the wrong direction. Let me explain why.

What is financial independence for me?

I define financial freedom as the time in which my “passive” sources of income can provide my annual expenses.

As you can see, there are some variables in this equation. You can play around with these variables and see how long it will take to reach that goal with this great calculator here, see https://networthify.com/calculator/earlyretirement?income=50000&initialBalance=0&expenses=20000&annualPct=5&withdrawalRate=4.

For example, if your current annual income after tax is 50.000 $ and you save 60% (!!) of it, and we assume that you gain 5% after tax on your investments (5% of the value in dollar of your “passive” income sources) you can retire in 12,4 years. If you neglect the annual withdrawal of 4% it is earlier (around 10,5 years) as your portfolio value must be 400.000 $ to get your annual expenses of 20.000 $ every year.

You will first notice that there are many assumptions in these calculations. Do you know your future monthly expenses in 10 years? I don´t know them.

But let´s start with the important topics.

Why do you want financial freedom?

Early retirement is a common desire of the work force these days. They dream of sleeping enough in the morning. They want to pursue their own hobbies and passions without stress. And most of all, they finally want to quit their shitty job! They hate 9-5. They hate working for somebody else. They hate to be dependent on this job. They have this idea of financial freedom as the ultimate goal of finally being free and happy.

After several studies there are considerable disadvantages for early retirement. An analysis by Cornell University shows a strong correlation between early retirement and premature death. Other studies show a connection between prolonged work and increased lifespan.

From this perspective, we can conclude: early retirement is a punishment!

There are many millionaires who do not know what to do when they get rich. They buy expensive things, go to wild parties and relax in exotic resorts around the world. It's totally fun for about two months. And then? They are bored to death! People need a task in life that challenges them. Without a goal in life they get fat and depressed.

Why don´t you just change your job or the way you are earning money if this is the major problem? Why wasting your time 12,4 years in a job you hate to finally do what you really like? This is pathetic! Look at my other article on pursuing an easy job as a solution.

Let´s look at the other variables of the formula shown above. The assumption is a regular profit on your investments of 5% after tax. Here are the long-term, inflation-adjusted returns of major asset classes of 1900 to 2017 in USD before costs and taxes:

• Stocks: 5,2 % p.a. (around 3,5 % after tax and costs)
• Long-term (government bonds): 2,0% p.a.
• Saving account / money market / short-term bonds: 0,8 % p.a.
• Gold: 0,6 % p.a.

Source: Credit Suisse, financial report 2018; Credit Suisse Global Investment Returns Yearbook 2017; Gold: FinFacts, Bloomberg

As you can see, you have to outperform the market to achieve steady gains of 5 % per year. That´s not impossible, but it´s definitely not a passive investment strategy anymore. It requires good knowledge of investment, good money management, luck and a constant development of your skills. You need to invest your time to acquire these skills and manage your portfolio.

The same applies for real estate. In my view, real-estate is not “passive” income. You have to choose the right investment objects, look after your tenants, take care and manage repairs and visit property holder meetings. Yes, sure, you can outsource these tasks. This will lower your return on investment.

What I mean by that: to be able to generate significant “passive” income, you have to be rich or be extremely talented and invest a lot of time. Most of us do not meet these requirements.

What about building your own business and increasing your income?

Here are some simple statistics: 90% of all start-ups fail within five years. Probably another 90% of the remaining 10% will lead to an income for the founder, which in the long term is no higher than that of a manager in the same industry, but more labor intensive, stressful and risky. There is no “freedom” involved.

I do not want to change anyone´s dream of starting a business. If it is your profound dream, do it. I just want to say that for the most of us it is the wrong route to achieve financial freedom. Most of us are not like Marc Zuckerberg.

Then there is the savings rate. Those who want to achieve "financial freedom" on the path of high savings rates must accept that this means a significant decline in their standard of living in the present.

There are advantages to limiting your current consumption. But a frugal lifestyle will drive you crazy. Do you like people who forbid you to go to the bathroom at their home because they want to save water?

Why are there so many book and blogs about financial freedom out there, when probably only 5% of us will ever reach that goal?

Pretty easy, they make money with it.

Nobody has anything to say against wealth creation. However don´t get fooled by marketing of other people. It would be desirable, that advisory books and financial bloggers would describe a more realistic picture of the topic.

I would recommend that you to focus on the here and now. Think more deeply about your why. If you hate your job, change it. Work in the direction of finding a job that will make you happy. Do not overestimate the money.

If you want to build more wealth, invest, build a business, blog or do whatever you want to. Go for it.

But please never buy a book titled “How to become a millionaire in five years starting as homeless, high-school dropout.”

I wish everyone every success on the realisation of new and old goals!

Yours sincerely,