A little over two years ago, I was brainstorming titles for a newsletter I felt compelled to start.
I knew I wanted to write generally about real estate, investing, economics, and other adjacent topics, but I struggled to find the right angle or “lens” from which to approach them. I wanted my writing to not only be for me, but be interesting and valuable to others.
I threw a few possible titles at the wall, each representing a slightly different angle. I surveyed a few people (including and most importantly my wife) and Passive Perspectives seemed to resonate the most.
But even with a title secured, it took another 18 months to overcome the fear of clicking the publish button and actually ship the first edition.
From that first edition to now, my goal has always been to share the insights, information, and perspectives I feel are relevant to passive investors in the current time. And not as some guru expert, but as a fellow traveller in the passive investing journey.
And one of the things I’ve learned through personal experience is the importance of having the right mindset and clearly defining your goals. I’ve written more about these topics than I expected to, but it’s because all investing decisions start with your goals and your approach to achieve them. It’s truly foundational.
A discussion of goals almost always includes something about “finding your why.” And while that’s important, if you’re anything like me, it’s not something you can immediately define with precision. Sure, you can quickly name some things like “family” or “freedom to travel,” but you know those are superficial – your true why is much deeper, even if you can’t yet articulate it.
If you find yourself in this position – bombarded on all sides with the idea that you shouldn’t move forward until you know your deepest why – don’t fret. It’s ok to set a more superficial goal while you work to uncover that deep why.
And one of the best places to start is by defining your freedom numbers.
What is freedom?
Freedom means something different to everyone. But for today, I’m defining it as having complete control over your time. You say yes to the things you want to do, and no to the things you don’t. No external force dictates how you spend your time.
When you think about this, maybe you envision quitting your job and sitting on the beach. Or maybe you envision continuing to work a job you love, but with the peace of mind knowing you can leave anytime you want. For me, it’s about knowing that the needs of my family will still be met regardless of whether I want (or am able) to actively work.
While this isn’t directly about money, we have to face the reality that we live in a material world and it takes an ever-increasing amount of money to live. So the ability to say yes and no as you please is predicated on having the money to do so.
3 Freedom Numbers
There are three levels to having this kind of time freedom:
Level 1: Cover your living expenses. Analyze your expenses and determine how much you need to live a comfortable but no-frills life. Let’s say that amount is $7,000 per month – if you can invest in passive investments that generate $7K of monthly income, you’re financially free. You might not be living the jet-setting high life, but you finally have lots of optionality (freedom) in how you spend your time.
Level 2: Cover your salary. At this level, your income from passive investments matches your work salary or other active income. If you continue living below your means, your wealth starts to compound exponentially.
Level 3: Cover your dream life. This is the pinnacle of passive investing. The income from your passive investment funds anything and everything you want to do.
How to hit your freedom numbers
Achieving your freedom numbers is a function of:
The amount of capital invested
The rate of return of those investments
To determine how much capital you need invested, divide your freedom number (annualized) by the rate of return. Here’s an example for Level 1:
If you need $7K per month to cover your expenses, that’s $84K per year
If you can invest in passive investments that produce an average of 8% cash-on-cash return, you need just over $1M invested ($84,000 / .08 = $1,050,000)
Keep in mind: there’s an inverse relationship between the rate of return and how much capital you need invested. The higher the rate of return, the less the capital you need. And vice versa.
The biggest challenge
Determining your freedom numbers and their capital requirements is the easy part. Finding the investments that will achieve those freedom numbers is the much harder part.
But you have to “begin with the end in mind.” Even though finding good investments is always the tough part, if you have clarity on your passive income goals, it becomes much easier to craft the investment criteria necessary hit those goals. And then you can relentlessly search out only the investments that meet those criteria.
By setting your passive income target and filtering out any investment opportunity that doesn’t help you get there, you’ll be lightyears ahead of most investors, and significantly increase your odds of achieving true time and financial freedom.