The shortcut to financial freedom? ChatGPT's got you covered

And skip the complex financial planning

Hey AI Explorer,

Welcome to the latest edition of your weekly newsletter “Solve with AI”.

Financial freedom is a buzzword that is thrown out frequently on social media. On YouTube, Twitter, Instagram, or TikTok you are harassed by people flashing their attractive cars, houses, or exotic vacations.

It seems like everyone is out there to sell you “your” dream only if you join their “inner circle”.

Unfortunately, there is no cyber governance to mandate the spread of incorrect information robbing people of their hard-earned money.

View count is more important than trust count.

Why do I say that?

Well, I have lost thousands of dollars chasing these scams so I have first-hand experience.

I am not saying financial freedom is a bad life goal.

All I am saying is achieving financial freedom starts with fundamentals.

Before I continue, I want to share a disclaimer since we are talking about finances.

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Disclaimer:

The content provided in this post and newsletter, including any prompts, frameworks, or financial strategies, is for informational purposes only. It is not intended as financial advice, and you should not rely on it as such. Every individual’s financial situation is unique, and readers are encouraged to consult with a licensed financial advisor, tax professional, or legal expert before making any financial decisions. The author Sameer Khan, their heirs, their companies, and their assigns assume no responsibility or liability for any financial decisions or actions taken by readers based on the information provided in this post. The use of the information contained in this post is at your own risk.

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No YouTube or TikTok video can help you achieve your goals if you don't have sound fundamentals.

What are these fundamentals?

It starts with choosing your financial freedom vehicle.

Before we discuss the vehicle let’s define financial freedom or financial independence.

As per Wikipedia “Financial independence is a state where an individual or household has accumulated sufficient financial resources to cover its living expenses without having to depend on active employment or work to earn money to maintain its current lifestyle”

Financial freedom can be achieved in many ways in most countries. I am listing a few of the top financial independence instruments here.

Net Worth Income

Your net worth is your assets minus liabilities. Let’s assume you have a house worth $200,000. You have a mortgage on that house of $130,000. Besides the house, you have $10,000 in credit card debt, $15,000 in student loans, and $20,000 in car loans.

Your net worth = $200,000 - $130,000 - $10,000 - $15,000 - $20,000 = $25,000

You can convert your equity into a passive income.

Let’s assume you got a second mortgage of $20,000 (6% interest rate) and invested in an asset class generating a 10% annual gain (inflation-adjusted) you will have a passive monthly income of:

$2,000 (10% of 20k) - $1,200 (6% mortgage interest) = $800/12 = $66.6 per month

As your net worth grows, your passive income should grow. Only having a higher net worth is not enough.

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People often get misled by claims that if you have a $XX net worth then you are financially free or rich or wealthy.

They forget that you have bills to pay.

You need to leverage your net worth to generate income to become financially free.

Business Income

Let's assume you bought a business (online or brick-and-mortar). This also includes digital products like ebooks, online courses, affiliate marketing, YouTube/TikTok/Instagram videos, blogs, publishing companies, or SaaS businesses.

Just because you bought this business does not mean you are financially independent.

To qualify, your business must be capable of running on autopilot whether you show up or not.

Your autopilot business must generate profit after all the expenses to support your living expenses.

People often get sucked into a business that requires painful hours and in most cases more time commitment than your regular 8-5 employment.

Am I qualified to say that?

I bought businesses (online and brick-mortar) and went through the painful journey of owning and operating so I can speak from experience.

I was spending 80+ hours and most weekends even though we had employees.

Throwing employees to solve business operations is not the solution.

To make a business truly operate on autopilot you need to have a lot of cash (your own or funding), time, and leadership skills.

Don’t fall for ads or videos promising you financial freedom through the business route.

Businesses are the hardest way to achieve financial freedom IMHO.

I am not going to discourage you from becoming an entrepreneur.

It is quite the opposite.

If you enjoy the fun of owning and operating a business then great for you. Small businesses are the backbone of modern civilization.

All I am saying is owning a business is not equal to financial freedom.

You have to put in years of hard work, money, and resources to make it autopilot.

Royalty Income

You can earn a royalty on your tangible and nontangible intellectual assets such as books, franchises, trademarks, products, songs, movies, software code, apps, and more.

You create the royalty assets once and get paid over and over.

Imagine earning a slice of revenue every time someone streams your song or sells a product with your trademark.

Royalty income can be divided into two parts:

• Talent-based: If you have a specific talent such as singing, acting, or directing movies then based on your popularity you can earn a royalty on your work. The royalty payments can be made over time or in a lump sum.

• Asset-based: You can earn royalty by acquiring an oil field or an exclusive right to a talent-based royalty asset or building a franchise business.

If you play your cards right, you can set up an exclusive deal or spread your IP across multiple licenses for more income streams.

Royalties can be unpredictable, with earnings going from high to low depending on market trends.

You’ve also got to stay sharp when negotiating deals and protecting your intellectual property rights.

US patent-based royalty income took a big hit when a few countries copied and produced the same products for a lot less.

Royalty income is taxable but there are ways to get tax deductions (not tax advice - consult your local CPA).

Rental Income

Rental income is generated from owning and renting properties like houses, apartments, or commercial spaces. This can also include renting out equipment or vehicles.

Rental income from real estate is the best type of income to achieve financial freedom.

Why?

Real estate gives you four main advantages:

• Appreciation: Unlike an automobile, real estate appreciates over time. Depending on location and geography it can appreciate faster or slower.

• Depreciation: Real property is built from material that deteriorates over time. The wood, siding, shingles, floor, PVC, and almost everything in your house will eventually get old. What’s great is in the US and a few other countries such as the UK, Germany Canada, and Australia you can claim the depreciation as a tax deduction on your tax return (not tax advice - consult your local CPA).

• Rental income: You can earn rental income from your commercial and non-commercial assets. This can provide a steady cash flow, particularly if the rent exceeds the property's expenses, including the mortgage, maintenance, and taxes.

• Tax deductions: In addition to the depreciation, you can also deduct your rental property mortgage interest, property taxes, insurance, repairs, and maintenance.

The only disadvantage of owning real estate property is managing tenants and repairs.

You can lower your headache by hiring a property management company but you still have to deal with funding for repairs.

Real Estate Investment Trusts (REITs)

If you don’t like the idea of dealing with tenants, maintenance, or property management headaches then REITs are second best to physically owning a real estate.

REITs are trusts that pool money from investors to buy income-generating properties like malls, office buildings, and apartments.

REITs are legally required to pay out 90% of profits as dividends. You get regular payments just for holding shares, while the trust takes care of all the heavy lifting.

Want liquidity?

Unlike traditional real estate, you can buy and sell REITs like stocks, giving you instant access to your money.

They offer easy diversification too, spreading your risk across multiple properties and locations.

REITs do come with their own set of risks.

When the real estate market takes a hit or interest rates rise, you can lose money.

Last year, most REITs including the big ones like Fundrise lost money.

Since REITs rely on borrowing, rising interest rates can cut into profits. The dividends are taxed as ordinary income. You can own the REITs in a tax advantage account such as an IRA to lower your taxes (not tax advice - consult your local CPA).

Dividend Income

Certain stocks pay dividends on a monthly or quarterly basis. Investors in these stocks can earn regular payments based on the company’s performance.

Dividend income is a smart way to get paid just for owning shares in companies that reward their investors with regular cash flow. You don’t have to actively do anything except check your portfolio once a month.

Some investors reinvest dividends, buying more stock to compound their returns and grow their wealth faster.

Others love the steady income stream, especially when tax advantages kick in.

One caveat is companies can cut dividends if their business gets impacted.

Interest Income

Interest income can be as simple as earning interest on the money in your savings account. It can also be as complex as operating your bank.

It’s money earned from doing nothing more than parking your cash in the right places like savings accounts, bonds, or even peer-to-peer lending platforms.

The beauty of interest income is in its simplicity: whether it’s compound interest growing over time or fixed-rate bonds delivering steady cash flow, you can build wealth while you sleep.

Sure, the returns may not always be spectacular, but that’s not the point.

Your money can safely grow in the long run.

But like anything, there’s a trade-off.

Low risk means lower rewards, and inflation can chip away at the value of those earnings.

Interest income can balance the rollercoaster ride of other financial freedom vehicles mentioned above.

Great! Let’s assume that you have picked one vehicle from above and you retired. Depending on your age, you want the passive income to cover your entire retirement and beyond.

How do you do that?

There is a popular method or rule called the 4% rule.

4% Rule

The 4% rule is like a playbook for making your money last through retirement.

Here’s how it works: let’s say you’ve got a $1 million portfolio which is earning you x% each year. In your first year of retirement, you take out $40,000 (which is 4%) to cover living expenses.

Then, every year after that, you adjust your withdrawal based on inflation. So, if inflation is 2%, you’d take out $40,800 in the second year.

The beauty of this rule is that it’s designed to stretch your savings for at least 30 years. What this means is you can retire early and plan for a passive paycheck for a long time.

For example, if you have a balanced portfolio of 60% stocks and 40% bonds, the idea is that the growth from your stocks will more than make up for the withdrawals, while the bonds give you stability.

The 4% withdrawal rate is conservative enough that your portfolio can bounce back.

If the stock market tanks early in retirement, like in 2008, you might need to scale back temporarily. Instead of taking out 4%, maybe you pull back to 3.5% until the market recovers.

On the flip side, if you hit a bull market early on, you can afford to increase your spending slightly.

In a growth market, your $1 million could grow to $1.5 million in a few years, making that 4% withdrawal feel even more comfortable.

There are caveats to this rule. If inflation skyrockets (like last few years) or we face prolonged market downturns, you may need to adjust.

Now let’s create a system using ChatGPT to give you a personalized financial independence plan based on your situation.