Achieving financial freedom means having enough investment income so that you don’t have to work for a living. When your investment income exceeds your living expenses (including taxes), you no longer need a job to pay your bills. Of course, you don’t have to quit your job once you achieve financial freedom, but you have instead the choice of whether or not you continue to work.

You will also want a margin of safety. If your living expenses are $5,000 a month and you make $5,000 of investment income a month, for example, you have little financial wiggle room if your living expenses spike or your investment income takes a hit. It’s better in such instances to have perhaps $10,000 or more of monthly investment income before submitting your resignation letter.

To achieve your Financial Freedom Day, you need to reduce your living expenses and increase your investment income until your investment income exceeds your living expenses by your desired margin of safety.

Reducing Your Living Expenses

The best way to reduce your living expenses and keep them low is to live well below your means. There are many good suggestions in the Personal Finance Education section of this blog. The idea is to maintain your quality of life while living it in a more frugal manner.

Borrowing money for consumption is considered “bad debt” because it costs you money. Bad debt takes money out of your checking account every month when you make the payments. To get rid of bad debt more quickly, consider a Prosper consolidation loan. By refinancing your debt at a lower interest rate, you will save interest expense. These savings can be used to help buy the income-producing assets you need to increase your investment income.

Increasing Your Investment Income

You investment income must come from a portfolio of income-producing assets. If you need $5,000 of investment income per month (or $60,000 a year), for example, you should work towards building a portfolio worth $1.5 million in order to be able to draw income at a 4% safe withdrawal rate.

If your investment management costs are 1% of your portfolio’s value and inflation is 3% a year, your portfolio needs to earn at least 8% (4% + 1% +3%) a year on average in order to be able to generate the same purchasing power of income on an inflation-adjusted basis.

Diversifying with non-correlated asset classes is important. Although the stock market averages 10% a year over the very long term, its returns also swing wildly on a year-to-year basis. Prosper loans, on the other hand, are correlated with the job market rather than the stock market. Hence, making loans to your fellow Americans is a way to help diversify your portfolio of income-producing assets. But since unsecured loans to people are also risky, it’s important to keep your Prosper portfolio to a small percentage (e.g., less than 5%) of your overall investment portfolio.

The only constant is change. Investment returns change. The inflation rate changes. The economy changes. You need to monitor the financial environment and make adjustments to your investment choices and living conditions as the world changes. This is an area where you need to take full responsibility for the results you get. No one else is going to do it for you.

Borrowing money to buy income-producing assets is considered “good debt” because doing so puts money into your checking account on a regular basis (so long as your investment return is greater than the interest rate on your debt). When you find the right opportunities, consider taking out a business loan on Prosper to be able to take advantage of them. With your good credit and your excellent track record of on-time Prosper loan payments, lenders will want to loan you money and you will find Prosper to be an ongoing source of inexpensive money to fund your wealth-building programs.

Making It Happen

The first decision you need to make is to decide you want to achieve financial freedom. Then commit to making it happen, whether it takes you years or decades to achieve your dream. With your decision and commitment, you will start looking for ways to increase your income, live below your means, and invest the difference. Set up a capital account and add to it the money you save by consolidating your debts with a Prosper loan (along with the many other ways you will discover to save money).

When you are tempted to buy a non-essential luxury item you just have to have, decide what you want more — the luxury item or financial freedom. Buying the luxury item will push your Financial Freedom Day further out in time; avoiding the purchase of the luxury item and putting the money into your capital account instead will pull your Financial Freedom Day in closer to the present. There is no right or wrong answer here. Rather, it’s what you decide to do with your money and your financial future.

The conceptual framework provided in this blog post will get you started on the road to financial freedom. All you have to do is reduce your living expenses and increase your investment income in a steady fashion until your investment income exceeds your living expenses by your desired margin of safety. Prosper is here to help when you need it. Enjoy your journey and may it be a profitable one.

Roger Steciak achieved early semi-retirement in 2006 and became a Prosper lender to diversify further his portfolio of income-producing assets. His book Happy About People-to-People Lending With Prosper.com, How to Lend Money to Friends You’ve Never Met was published in 2007.

Local cable has been running a television commercial that simply rips my heart out. A young girl around eight goes into a jewelry store with her dad and her bright pink piggy bank. The dad helps her pick out some jewelry for mom and the commercial ends with everyone smiling and happy. Even though it’s fictional, I try not to think of how long this girl would have to save up for anything of value at a jewelry store. Do you think her mom really wants her daughter to spend months worth of savings? If I’m her mom, I’m sad. I could have simply bought it myself with the savings from a few hours of work. I would much rather have a poem or a picture from my son or daughter.

The commercial would have made Anna Jarvis, the inventor of Mother’s Day, extremely angry. Though she thought that mothers should be recognized, she later regretted the idea due to the mass commercialization of it. Jarvis ended up spending the rest of her life trying to take back the holiday from the marketers.

If I were the father in the jewelry commercial, I would have given his daughter a few of these frugal Mother’s Day ideas from Better Budgeting. Additionally, there are always these arts and craft ideas from Mommy Savers. (Editor’s Note:  In addition, Prosper Blogger, Cash Money Life had published 15 Inexpensive Mother’s Day Gift Ideas.)

Lastly, please consider writing your own card. Why would you go to a store and pay $4 to have someone else tell you how you feel about your mom? Think of this exchange from Seinfeld:

Kristin: You got the card I sent?
Jerry: I did.
Kristin: So where is it?
Jerry: What?
Kristin: The card. Is this it in the trash?
Jerry: No?
Kristin: This is my card, you threw it away.
Jerry: Well–
Kristin: I put a lot of thought into this card.
Jerry: You signed your name and you addressed the envelope, it’s not like you
painted the picture and wrote the poem.

Photo Credit: 1 

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Lazy Man has been a lender at Prosper since February 2006. He is the author of the personal finance blog, Lazy Man and Money and the health and fitness blog, Lazy Man and Health.

Seriously. In fact, they were so kind as to send me a pre-approval letter for a $50,000 loan at 3.89%, and a check designed for a car dealership (it is a sight draft to be paid to the dealer and has blanks for vehicle information including make, model, year, VIN, etc.). Check activation only requires a phone call from my end.

It’s great to know that my credit is good enough to get a decent interest rate on a new car and that I am pre-approved for a $50,000 loan. But I have a problem with the way the bank handled this. I don’t need a new car, don’t want a new car, wouldn’t spend that much on a car, and certainly don’t want loan checks sent to my house (this has fraud potential written all over it if it falls into the wrong hands!).

While I didn’t like receiving this offer, I did learn a few things.

How to stop this from happening again

My immediate action was to call my bank and request they never send these offers to my home again. I understand they are doing their job in trying to drum up new business, but I don’t want loan checks sent to my house.

Credit card companies are notorious for sending unsolicited cash advance checks which come with hefty fees attached. I also call credit card companies and request they not send cash advance checks. Both of these are a “convenience,” according to the banks and credit card companies. But all they really do is make it easier for you to spend your money, or ID thieves and opportunists to steal from you. Cancel these checks!

Don’t let anyone tell you how much you need to spend

Wow. $50,000 is way more than I need to spend on a car. My wife and I each bought new cars a couple years ago and spent about $10,000 less than our loan offer… for two cars! When I bought my car, the dealer tried talking me into a larger model car with more add-ons, bells and whistles. Remember, it’s his job to sell, and your job to buy only what you need. I stood firm and bought the car I wanted at the price I wanted.

Don’t let anyone tell you when you need to spend

We’ve had our cars for 2-3 years now and they are paid off. The first thing our bank did after we paid the last loan payment for our car was to offer us another pre-approved car loan. This is probably an automatic action in their software.

Did the customer finish a loan payment? Yes… Great! Send them another loan offer!

No thanks! I’ll buy a car at my pace and when I need it. Not just because you tell me I can afford it!

A Fool and his money are soon parted

It’s your job to be vigilant with your spending. If you let banks and other lenders dictate your spending habits, you will never get ahead in life. Buy what you need, when you need it. But ignore the suggestions of people selling a product. Their only interest is making your money, their money.

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Patrick is the author of Cash Money Life, a blog about personal finance, career management, and self-improvement. He served in the United States Air Force, has traveled to over 35 countries, and is a fantasy baseball champion. He is an active lender at Prosper.

As we’ve been working to reduce our expenses, I am noticing that many things that we are saving money on are also helping the planet. We are producing less waste and being more purposeful with our spending. Whether you are looking to cut expenses or reduce your impact, here are twenty-five things you can do right now that will help you do both.

Utilities

Install a low flow showerhead - a typical shower can run 5 gallons a minute. If you install a low flow showerhead, you can cut that to 1.5 gallons a minute.

Turn off the water when brushing your teeth or washing dishes - If you aren’t actively using the water flow, turn it off in between uses and save some water.

Install CFL bulbs - CFL bulbs use about 75 percent less energy than standard incandescent bulbs and last up to 10 times longer.

Vary your cooking methods a little - Certain kitchen appliances use less energy than others (for a great list of costs for food prep, visit the City of College Station). Instead of using the oven, which costs over 85 cents/hr, can you use a crock pot which costs about a penny per hour?

Unplug unused electronics and appliances - That TV that is turned off may still be drawing power in standby mode. So is that microwave with the clock. Unplug those devices when not in use to save some electricity.

Plant trees - Depending on where it is planted, a single tree can block the wind in the winter, saving on heating costs. It can also provide shade in summer, saving on cooling costs. Trees are great for absorbing carbon dioxide.

Turn your thermostat down in the winter - There’s no golden rule that says a home must be at 70 all the time. In the winter, set your thermostat a little lower during the day and wear a sweatshirt around the house. In the summer, turn the thermostat up a little and wear lighter clothing around the house.

Caulk around doorways and use weather stripping to seal drafts. - A single draft in a room can make you feel a lot colder. Seal up the drafts and feel warmer in your home so you can keep the heat lower overall.

Use cold water for washing laundry - Did you know that 90% of the energy used for washing clothes is for heating the water? Give cold water a try when washing your clothes and also use cold-water detergents. As long as your clothes aren’t too soiled, they can come clean in cold water.

Hang dry your clothes - Dry your clothes on a clothes line outside or find a rack for drying your clothes inside. Save the electricity or gas that would be used by your dryer. Note: Sometimes clothes can get pretty stiff with air drying. What you can do is let them air dry most of the way, then pop into the dryer for a little bit to help them soften up.

Turn off your lights - When you aren’t using a light in a room, turn it off. That holds true even if you might be returning a few minutes later. The power surge of turning on that light only equals a few seconds of having that light on.

Around the House

Use natural cleaners - Avoid the harsh chemicals and save some money at the same time. Being Frugal has some easy cleaner recipes.

Give reusable coffee filters a try - Instead of loading your coffee maker every morning with a new filter, try a reusable one. They aren’t very expensive, but can reduce waste and save you money over the long run.

Use rechargeable batteries - It’s sometimes hard to fork over the money for rechargeable batteries. But they quickly pay for their cost in money saved if you are using electronics that drain batteries quickly (like cameras).

Forgo the plastic baggies in lunches - Instead of using plastic bags, use reusable containers if possible. The same goes for storing all types of food at home. If you need to use a plastic bag, try to reuse it if it held dry goods.

Get a reel mower - Go back in time with a reel mower that is updated for this century. They can do the job, you get some exercise and you don’t need fuel to run it.

Use both sides of paper when printing - If you are printing something for reading later, see if it would work to print on both sides of the paper. Some programs offer the option of printing even or odd pages, so you can try to match the pages up correctly. If the ink is too dark, try printing in draft.

Buy used furniture or find some for free - Instead of buying new, you may be able to find a perfect end table (or another piece of furniture) for low cost or maybe even for free on freecycle.org. A piece of furniture doesn’t end up in a landfill and you have the furniture you need. It’s a win-win!

Reduce junk mail - Save some paper and possibly prevent id theft by visiting the Federal Trade commission site that details how you can reduce unsolicited mail.

Switch to online bill payments - Many banks are offering online bill pay and some have it for free! Save a stamp and save on paper usage.

Mend anything that you can - If an article of clothing needs mending, don’t throw it out. Try to do it yourself by learning some basic sewing techniques.

Out and About

Carpool whenever possible - Not everyone can do this, but if it’s a possibility then jump on the chance to save some money and reduce carbon emission.

Ease up on the gas pedal - Drive moderately (not aggressively) and lower your speed to save some big bucks and help the environment at the same time. For some great results on tests, see Edmunds.com.

Skip the bottled water and refill your own - Save on plastic waste by filling a reusable water with your tap water. Don’t like the taste of your tap water? Try a filter.

Instead of spending the day inside, go outside - Get everyone out of the house and head outside for a fun day outdoors. Make sure you turn off everything when you leave the house. Go for a walk/bike ride or maybe plant a few flowers. Enjoy some time outdoors.

Photo Credit: 1

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Tricia is the blogger behind Blogging Away Debt. In her blog, she documents her family’s journey to pay off over $37,000 in credit card debt. Part of her debt reduction plan included a loan from Prosper.com. It originated in June of 2006 and was paid in full in October of 2007.

Everyone has a weakness. My weakness is Ruffles potato chips. Seriously. I can eat a family size bag in 2 sittings. But I don’t allow myself to do that. Not only is that unhealthy for my waistline, it is unhealthy for my wallet.

So I avoid Ruffles. I only eat them two or three times a year, and usually only at parties. Otherwise, I know I would buy them at the grocery store every week and probably weigh 20 pounds more than I do now.

I admit I have an addiction to those crispy, salty potato chips. But thankfully, I haven’t developed any serious spending addictions. That’s right, spending can be an addiction. And it can be a tough addiction to break because you can live without potato chips, but you can’t live without spending money.

Here is how you can break your spending addiction:

Know why you spend. Are you bored? Do you spend money for excitement? Do you equate things with wealth or security? Spending money is like any other addiction. It can calm you and make you feel more peaceful. But shopping is not a hobby. It is important to understand your spending habits and why you have them. Otherwise, you will continue on your path without being able to change your habits.

Acknowledge your habits and make an effort to change them. Now that you know why you spend money, you will only be able to change those habits if you are willing to do so.

Know your weakness and avoid them. I know I can’t buy a family size bag of Ruffles every time I go to the grocery store. I would eat the entire bag in a day or two and that just isn’t healthy. So I don’t buy them. It is important to recognize your spending weaknesses as well. Do you go to the mall after work to fight boredom - and come home with a new outfit you will never wear? Do you visit Best Buy once a week to check out the new HD TVs and walk out with a couple CDs or DVDs? How about that daily trip to the gas station? I know people who stop by the gas station on the way to work every morning and leave with a tall coffee and large muffin.

Change your habits. Go shopping with a plan. The mall is a great place to find things you plan on buying, but it’s a horrible place to spend recreational time. The same thing goes for Best Buy. Gas stations are for buying gas. Try stopping only for gas - and paying at the pump. My bet is that you will see instant results in your cash flow.

Hold yourself accountable, but reward yourself as well. Once you identify your areas for financial improvement, hold yourself accountable. Your efforts for change will fall flat unless there is something keeping you in line. You can hold yourself accountable by giving yourself small rewards along the way. The point of curbing your addictions isn’t to turn yourself into a monk, but to allow you to control your spending instead of having your spending controlling you.

It is OK to spend money, and it is OK eat potato chips. But do so with a plan. Know your limits and stick to them. Your wallet, and your waistline, will thank you.

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Patrick is the author of Cash Money Life, a blog about personal finance, career management, and self-improvement. He served in the United States Air Force, has traveled to over 35 countries, and is a fantasy baseball champion. He is an active lender at Prosper.