The 10% rule:Start from the very beginning and achieve financial freedom within 10 years
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Every year, your net payment and expenses rise to 2 percent.
Maybe you like cooking and preparing delicious food in the kitchen is one of your favorite things. So, you found a sideline business and spent your spare time making recipe videos.
In the first year of your cooking sideline business, your target is to replace 10 percent of your after-tax income, which $4,800.
In the second year of your sideline business, your target is to replace 20 percent of your after-tax income with a sideline business income, which comes to $9,792.
Every year, you increase your sideline income to replace the 10 percent extra after-tax income from your daily job.
After year 9, your income from the sideline and your annual expenses are up to $50,616.
When you can pay for living expenses on a job you love, you have achieved financial freedom.
To make it clear, in order to make sure you're making the same comparison, the income you earn from your side business should also be taxed, since it replaces the net income you earn from your daily job.
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Living frugally will greatly reduce your time to achieve financial freedom
If nine years sounds like too long, there is another way from which you don't have to wait for nine years.
Keep in mind, the key to financial freedom is that you can pay all your living expenses with income from a job you love.
In the above example, it took us nine years to become financially free, and we assumed that in the first year, your living expenses were 90 percent of your after-tax income.
The lower your living expenses as a percentage of your net income is, the less of your current income you will need to replace from a sideline business.
If your living expenses are 80 percent of your after-tax income, you can achieve financial freedom in eight years.
If your living expenses are 70 percent of your after-tax income, you can achieve financial freedom in seven years.
Assuming you can replace 10 percent of your after-tax income with a sideline business, the lower your living expenses are, the faster you can achieve financial freedom.
The faster you adjust your income, the faster you will achieve financial freedom
The “10 percent rule” assumes that you replace 10 percent of your daily work income each year with your interested sideline business or project. I chose 10 percent for two reasons.
1. This number is relatively realistic (pursuing what you love can take a long time to pay off).
2. 10 percent is an integer, and people like integers.
My point of view is, 10 percent is not a magic number, it is something roughly. If you can replace more than 10 percent of your daily income each year with something you enjoy, you'll be able to achieve financial freedom more quickly.
The only magic number is the difference between your annual expenses and your net income from the job you love, and once that number is $0, you are financially free.
What is “living cost”?
I have been using the word living cost, so what does living cost include? It is as simple as taking money out of your pocket or bank account.
This means all your traditional living expenses such as housing, food, transportation, entertainment, travel, etc.
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