Achieving financial freedom can feel like a daunting task. We know it’s going to take time, sacrifice, and discipline.
And I’ve spoken with enough people to know that 90% of folks tend to fall into one of two camps.
They get overwhelmed by the entire situation and end up doing nothing, only to wish, years later, they’d gotten started.
Or they spring into action too quick without having a clear plan and goals. This is exactly what I hope to help with in today’s article.
To me, there are 3 very clear paths to achieve financial freedom. I’m sure there are others, but these are the most obvious, attainable, and time tested ones.
Each of these plans have drawbacks and benefits, and it’s worth considering which one best serves your goals and personality.
So let’s get started, and hopefully by the end of this article you have a better sense of where you fit on your journey to achieve financial freedom.
Financial Independence Through Stock Investing
Investing in stocks is perhaps the clearest and most accessible way to achieve financial freedom. And it’s probably the most overlooked simply because it’s boring.
If this was the path I was going to choose I’d simply buy a historically high appreciation index like the Nasdaq ($QQQ) and reinvest my dividend payments like clock work.
Yes, there are less volatile investment vehicles out there, but I’m a big believer in choosing appreciation over cash flow.
If you do that, assuming an individual making $100,000 annually and saving 20% of their gross income, we get something like this:
After 20 years, you currently have a portfolio value of $2,650,000.
Note: If you want to see the data, calculations, and inputs I used for this you can view it all here.
And here’s a look at the portfolio’s annual dividend payments over that time period:
In 2023 the portfolio produced over $16,000 in dividends.
Obviously, you aren’t retiring on dividends alone here.
But you would be able to sell a portion of your stock holdings every year, quarter, or month to pay yourself a salary.
In fact, doing this to pay yourself $100,000 annually is less than 4% of your portfolio’s value.
This is known as the 4% rule and, while I don’t love it, we’ll use it in this example to illustrate that this is a “safe” way to retirement.
There are some assumptions here, of course. But I believe, if anything, these assumptions downplay the positives.
For example, it’s unlikely you go 20 years without a pay increase. If you’re strict about saving 20% of your gross income, you would be adding more to your investments over time.
This scenarios assumes you simply start with $20,000 annually plus any dividend payments.
I also didn’t bother reinvesting dividends on a quarterly basis. I assumed a one-time annual purchase with savings and dividends.
The returns would be stronger with a higher frequency of reinvestment.
In short, this isn’t a fully granular, comprehensive analysis of what this path to achieving financial freedom would look like. But it is a great overview and hopefully you see it’s extremely doable.
And Imagine going another 5 or 10 years on this path. You’d be in extremely good shape!
The Problem With Investing In Stocks
The biggest issue with this approach to achieving financial freedom is discipline.
And it comes in multiple forms.
For starters, you have to be disciplined enough to save 20% of your income each year. Some people just can’t do this no matter what.
But saving and being smart with your money is going to be a requirement for whatever financial freedom route you take.
The second difficulty with investing in stocks is that people easily panic. We all know 2009 was a tough year, as was 2023.
Investors will often watch their portfolio, see it crashing, and sell at the exact wrong moment. This is insanely costly!
But when we look back at 2009 on our chart above, you wouldn’t even know it was a challenging year. The same will probably happen for 2023 when we look back 15 years from now.
The key is just setting and forgetting, letting your investments do the work until you’re ready to start harvesting.
I admit, I also have a hard time with this.
And for those that just can’t stomach the emotional rollercoaster that can happen with stock market investing, there’s real estate.
Financial Freedom Through Real Estate Investing
Investing in real estate has a lot of amazing benefits, but perhaps one of the most overlooked is how difficult it is to panic sell.
Unlike stocks, you can’t simply sell your real estate with the click of a button. This makes it much harder to act on emotions.
For this scenario I took our same $100,000 income earner with a 20% gross income savings rate.
But that’s about where the similarities end.
I had to make a lot more assumptions as to how this individual would act over time. Beyond that, there is no historical track record for how these investments would perform.
My big assumptions rely on this person making about 1 investment property purchase every couple years with 25% down. I also assume that each property creates net cash flow of $200 per month, rents increase annually by 4.0% and property value increases each year by 4.5%.
Here what the portfolio value looks like after 20 years and a total of 11 properties:
Note (again): If you want to see the data, calculations, and inputs I used for this you can view it all here. This one is the second tab in the spreadsheet.
And, given our above assumptions, here is what the annual income from that portfolio looks like over time:
Obviously, these are far less volatile looking charts than our stock market example. But recall that historical stock market data is easily accessible.
But that’s also part of the beauty of real estate investing. We often don’t know fluctuations of our property values on a month-to-month basis let alone daily!
What’s notable here is that the real estate portfolio is worth north of $4,000,000 which is well above our stock market portfolio.
That said, we’re also carrying mortgage debt here, and I didn’t do all the math to figure out exactly how much debt there would be still.
Our real estate income is also much higher than our $QQQ dividend income. Many people will look at these two things and feel real estate is the obvious winner.
The Tradeoffs Between Investing in Stock vs Real Estate
But recall that dumping money into $QQQ is insanely (and truly) passive. Real estate is not.
So these gains come with serious tradeoffs.
Beyond that, it’s not as easy to access our real estate gains as it is $QQQ.
If we wanted to start taking a $100,000 salary from our hypothetical real estate portfolio we could get about 40% of the way there purely through our net cash flow.
But then what?
You could refinance the first property, or even sell it. And you could do this every 1-2 years.
The first property we purchased in this hypothetical scenario was $160,000. Today, given our 4.5% annual property appreciation, the property is worth about $370,000 and we’d have $62,000 left on the loan.
Refinancing this property with a 75% loan-to-value would mean putting about $215,000 in our pocket, tax free, today!
That’s enough to pay yourself for two straight years.
Add to that another ~$40,000 per year in rental income and you wouldn’t have to do another refinance for 3 years.
Not bad!
So while it’s a bit more work to access your nest egg, you wouldn’t need to do it that frequently.
Speaking of more work, there’s one other path to achieving financial freedom that can’t be beat.
Achieve Financial Freedom By Starting a business
Unlike investing in stocks or real estate, there is no obvious path we can calculate when looking to start a business.
That said, it’s also one of the surest ways to gain control of your life and achieve financial freedom.
I’m not going to get into the weeds here because there are countless permutations on what kind of business you could start and how to get going.
But if I had to choose, I’d likely go into the “sweaty startup” space with as little capital outlay as possible.
And it’s easier than you think.
Shawn Gorhman had a great tweet thread about buying a micro business that’s worth a read:
How to buy a (micro) business/job off Craigslist:
— Shawn Gorham (@shawngorham) September 23, 2024
Its Monday morning, you hate your job, you hate your boss, you just want to own a business, own your time/schedule but you have no money…
I am here to help: listen up
Craigslist
I also posted about my buddy who makes $2,200 per month running trivia nights for a few local bars. I’m convinced he could expand this into a pretty strong business!
My buddy pays his entire mortgage by hosting bar trivia nights twice per week.
— Travis Biziorek (@TravisBiziorek) September 24, 2024
Here's what he does and I think it could be expanded into a multi-million dollar business… 👇🏼
Shawn notes that he believes the owner of the demolition business was making $200,000 – $300,000 per year for 20+ years.
Imagine doing this and turbo charging your stock market or real estate investing on the side. Remember, our assumptions utilized a 20% savings rate on gross income.
That would be double to triple the amount we were investing!
And there are a TON of business you could start that take some effort but not much money. Landscaping, roofing, cleaning, etc. are all non-sexy businesses that can be extremely lucrative.
Have A Plan To Achieve Financial Freedom
Somehow, over the years, I managed to fumble my way to financial freedom.
But I could have done it a whole lot sooner had I started with a simple plan.
That’s really half the battle… pick a financial freedom path that works for you and that you know you can stick to.
Then just execute year after year.
It can be a grind, especially in the early years. But it gets easier and more rewarding as you start seeing (and feeling) the progress.