Transcription
Studies show that for millennials, the number one life goal is financial independence. And across all generations, baby boomers, Gen X, Millennials, and Gen Z, the biggest retirement fear is the same, running out of money. But here's the crazy part. 99% of people confuse being rich with being financially free. But they are not the same. You don't need to be rich to be free. And plenty of rich people are not free at all. So if your goal is just get rich, it doesn't guarantee financial freedom.
If it's your first time here, hey, I'm Edan. I became financially free in my 30s. In this video, I'm going to break down what each of these concepts really means, why they're not the same, and three key takeaways that might completely shift how you think about money. By the end of this video, you'll understand how to set the right financial goals for yourself so you are not wasting time chasing the wrong thing. If you haven't already, make sure to like and subscribe so you don't miss any of my money tips. Okay, let's get started.
To explain the difference clearly, I want to put it in a simple way and show you the wealth, income, financial freedom van diagram. Think of it like this. Wealth is what you own. Income is what you earn. And financial freedom is what your assets earn for you. They're connected. Yes. When you put them together, you get seven different zones people fall into. Now, let me walk you through each one with the examples.
Let's start with zone number one. Wealthy only. People who have high assets but no income and no financial freedom. These are folks who look rich on paper. They might have an inheritance or a property, but they don't have a stable income. To pay their bills, they have to sell off their assets. Their lifestyle depends entirely on drawing down their savings. Take Emily for example. She's 32 and inherited a $2.5 million US house in California plus $300,000 in savings. She doesn't work and she doesn't have any investment income. Every year her property tax is around $28,000 and her living expenses add up to $60,000. To cover it, she sells around $90,000 of her assets annually. So on paper, Emily is rich, but in reality, her wealth is shrinking every year. People in this category seem rich but are not secure because their money only goes down.
Next up is income only. High income but no wealth and no freedom. These are people who earn a good paycheck but have little savings. Their lifestyle keeps up with their income and they don't have meaningful investments. The moment the job stops, everything collapses. Let's look at James. He's 38 years old and makes $145,000 a year as a mechanical engineer. Sounds comfortable, right? But between a $5,000 a month mortgage, car payment, daycare, dining out, and subscriptions, he spends almost everything. His retirement accounts are barely funded, and he has no passive income. If he's laid off, he has maybe two months of runway. So, here's the truth. People in this zone are making money, but they don't really own their life. Once their income stops, their life is immediately affected. They're trading time for money with no security and no freedom.
Now, let's check out zone number three, financial freedom only. You are not rich, but your life is covered. These are people whose passive income covers their basic living. Their assets are modest and they don't need an active job. Their lifestyle is comfortable, even if simple. Imagine Sarah. She's 50 years old and lives in Tennessee in the US. She owns a small duplex that's paid off, bringing in about $1,700 a month in rent. Her monthly expenses are around $1,500, so she doesn't need a job. Her net worth is $500,000, not super wealthy by big city standards, but she's free. Here's the key. Financial freedom isn't about having endless money. It's about economic independence and time freedom. When your passive income from investments, rent, royalties, or any other source can cover the lifestyle you want, you no longer depend on the paycheck or worry about survival. You can choose how to live instead of being forced to work just to make ends meet.
Now that we've covered the three pure zones, let's move on to the overlap zones. First, let's look at the wealthy and income overlap. These are people with a big net worth and a big paycheck, but the money mostly comes from their job, not from passive income. They invest their money, but they still have to work to maintain their lifestyle. Their expenses are high, so they are not financially free. Mark shows us what this looks like. He's 45, a tech executive earning $350,000 a year, and his net worth is $4 million US. He owns a $2 million house and has $1.5 million invested, earning about 4% safely. That's about $60,000 a year in passive income. Sounds great, right? But here's the catch. His lifestyle, like private school, mortgage, vacations, luxury car, costs $280,000 a year. His passive income hardly moves the needle. If he stops working, his family's lifestyle would fall apart and he would burn through his wealth fast. Mark is rich, but his life is expensive. His investments alone cannot fund his lifestyle. Most of his wealth isn't liquid or producing cash flow, like home equity, retirement accounts he cannot touch freely, and that's his stock options, cash locked inside of a business, or college funds for his kids. All of it is tied up. He looks wealthy, but he's still chained to his job.
Moving on to the wealthy plus financial freedom zone. This is being rich and free, but without any job income. These are people with a high net worth whose passive income easily covers their lifestyle. They don't need to work at all and live off investments, dividends, or rental income. Let's look at Linda. She's 60 years old and retired with a $5 million US investment portfolio. It generates about 3 to 4% a year, which is around $150 to $200,000 in passive income. Her lifestyle costs only $90,000 a year, so she doesn't need a job. She spends her time traveling, enjoying hobbies, and volunteering. This is the classic wealthy retiree. They have both money and freedom.
On to zone number six, income and financial freedom. Here, your job is optional because you are already free. Passive income covers your basic needs. You might still work, but only because you want to. Your paycheck becomes extra for fun, purpose, or just a little more cash. Stress dropped big time. Take Alex. He's 33, works remote, and makes $120,000 a year. He also owns a small rental condo that brings in $1,800 a month. His living expenses are about $1,600. Even if he quit tomorrow, he could still cover everything with passive income. He keeps working because he enjoys it and wants to level up. The point is he's free but chooses to keep earning.
And finally, let's move into the middle, the sweet spot where wealth, income, and true freedom meet. This is true abundance. People here have a high net worth, a strong income, and passive income that covers your lifestyle. Work is optional and often driven by passion. This is maximum security, freedom, and opportunity. Meet David. He's 42 and a business owner earning $400,000 a year. On top of that, he has a $3 million US investment portfolio generating $100,000 a year plus $2 million in rental properties bringing in $60,000 passive income. His lifestyle costs about $120,000 a year. Even if he stopped working tomorrow, he's set for life. His job just adds more wealth, not stress. Here you have it all. Wealth, income, and freedom. The true financial trifecta.
Now that we've gone through all seven zones, you can start to see a bigger picture. But it really boils down to four types of financial freedom. At the core, financial freedom isn't about how much money you have. Money is just a tool. How you use it, and how it works for you is what truly determines your level of freedom. With all the zones and types in mind, it's time to focus on the key takeaways.
First, focus on being free first, then rich. A lot of people think, "I'll get rich first, then I'll be free." The truth is there are plenty of rich people who are not free at all. A smarter way is to get free first. Make sure your passive income can cover your life, and then anything else you earn is just a bonus. In the US, most people consider wealthy to mean a net worth of $2.3 to $2.5 million US. That's a huge target. But to be financially free, you don't need millions. You just need enough passive income to cover your lifestyle. Look at Sarah's case in zone 3. Her duplex generates just enough cash to cover her living expenses, and that's all she needs to be free.
Second, financial freedom is not about wealth. It's about cash flow. This is the most essential point. Even if someone is technically wealthy, if their assets don't generate enough monthly passive income to cover their lifestyle, they are not truly financially free.
Third, if you are a high-income professional, the trap to avoid is letting your lifestyle rise with your salary. A doctor earning $250,000 might buy a bigger house, a luxury car, and take expensive vacations. Most of that money gets spent, leaving little for passive income. The result, a high salary, but no freedom. They are still tied to their job.
Okay, if you made it this far, I hope something in this video really resonated with you. I would love to hear from you. Tell me in the comments which zone you are in right now and which zone you are aiming for. And if you enjoyed this video, you might like this one, too. I'll see you there.