In order to achieve financial independence, passive income is the key.
Passive income refers to recurring cash flow derived from income producing assets.
Whereas active income is income derived from salary, or net operating earnings if you are self-employed.
There are 5 stage of financial security, these are listed in order of least to most secure: Stage 1: Financial Strife This stage is characterised by living from pay cheque to pay cheque, having difficulty paying off credit card or personal loans, and having minimal or no personal savings.
Here passive income is negligible, and active income is equal to, or less than, your total expenses.
This is the stage you do not want to be in, avoid it at all costs, or get out of it as soon as you can.
Stage 2: Financial safety This is the stage where your personal savings are enough to last you six to 12 months in the event of unemployment from any cause.
This is the minimal safety net that everyone should have available in their bank account.
Once you have reached this, any surplus cash may be used to achieve the next stage.
Stage 3: Financial independence You have achieved financial independence when your annual passive income is adequate to cover your regular expenses per annum.
Your investment is starting to pay off, and more cash flow from your active income will be available to purchase additional income producing assets, compounding your cash flow.
You are well on your way to the next stage.
Stage 4: Financial liberty Here your passive income is equal to, or greater than, your active income.
If you have reached this stage pat yourself on the back, because having to continue in your current employment is a matter of choice, not a must.
You are well on your way towards becoming a self-made millionaire.
Stage 5: The Fast-track You are able to afford all your dreams with your passive income, irrespective of whether you are working in a job or not.
Obviously these stages work in a continuum, and how much passive income a person needs in order to achieve each financial stage varies depending on individual circumstances.