Unless you’ve been living under a rock for the past year or two, you will have noticed an increase in prices of almost everything, whether that be food, fuel for your car, or even the little things like going to get your haircut, going to the cinema and so on. It seems like nothing has been untouched by inflation. It ensures that as prices go up, the monetary value of your savings and assets goes down. The number on your account might stay the same, but that number can buy you fewer things as time goes on. For obvious reasons, that is terrifying. In this article, we are going to be talking about financial freedom, also known as financial independence. This is usually defined as:
‘the status of having enough income to pay your living expenses for the rest of your life, without having to be employed or dependent on others’
The goal of financial independence is to be able to choose whether you want to work or not, it allows you to no longer be forced to do something you might not want to do. It’s the ultimate freedom. You can wake up and do nothing, or you can go to your job as normal because it’s something you enjoy. You can go on holiday for a few days, or a week, or 6 months, it doesn’t matter. The choice is yours, the world is your own.
This might sound a little too good to be true, but I promise you it’s not. You don’t have to be a trust fund baby to achieve this. Absolutely, this position of financial freedom is not something that the average person achieves. But that being said, the average person doesn’t think this is possible so most don’t even try. Of course, you’ll never achieve something you don’t attempt. If you do what the average person does, you will achieve average results. The average person is not even close to financially free, in fact, they live paycheck to paycheck. They are one missed payment away from being completely broke, or even homeless. 58% of Americans live like this, in the world’s richest country!
If you follow these 7 steps, you’ll get there. But remember, this isn’t a get-rich-quick scheme. You have to be in it for the long haul. Millionaires aren’t made overnight, and it always takes longer than you expect to achieve something truly life-changing. It takes years of consistency. It makes a mental shift and a change in your habits and behaviours.
One thing to remember before we get started. What you don’t do is just as important as what you do. So make sure to check out my guide on Financial Blunders to Avoid
1. Figure Out What Financial Freedom Means to You
Financial freedom means different things to different people. Before you can hope to achieve it, you need to know where you are starting and where you want to be. To some people, that freedom might just be not having to worry about bills. To others, it means being able to completely live off their investments and never work again. Your requirements will change based on the life you want to have. Like on a GPS, you can’t get anywhere without both a starting point and a destination.
Where You Are
Make a note of the value of your bank accounts, the cash you have laying around, your pensions (if you have one), any expensive items you may own like a house or a car, and add them all up. These are known as your assets
Then, make a note of how much debt you have (if you have any), and money you owe like your student loans, mortgage repayments and so on. Those are known as your liabilities.
Subtract your liabilities from your assets. This will give you your net worth. Your net worth might be negative if you have considerable debt, but don’t be discouraged. The lower the number, the more important it is that you follow these strategies.
Where You’re Going
According to the Book ‘Financial Freedom’ by Grant Sabatier, you should aim to save more than 25 times your annual expenses. By doing this, the interest generated by your portfolio should amount to one year’s worth of expenses, per year, which you can then simply withdraw and live on.
Here’s a simplified example: If you spend the equivalent of $30,000 a year, you should aim for a net worth of at least $750,000. Assuming your portfolio grows by roughly 4% per year through either interest, dividends (returns on your stock investments), or the by the value of your assets increasing, the next year you will have $780,000. You then simply withdraw $30,000 and live off the for the next year. Obviously, the more you save, the more you can withdraw per year. This is a simple example but the premise is sound.
2. Plan, Track, Optimise & Repeat
Now you know where you are and where you want to be. Congratulations, you are already a step closer to financial freedom! This next step is about establishing the behaviours that are going to get you closer to your goal. By establishing these habits, the process becomes near enough automatic. Work smarter, not harder.
The golden rule of this section is tracking your spending. If you don’t know what you spend your money on each month, you can’t possibly improve! Some people find this intimidating and assume it’s time-consuming but it takes me on average 10 minutes a month using a robust spreadsheet.
I just go on my banking app at the end of each month, look at an expense and the date, and then put that number in the right category and date on the spreadsheet. All the totals are done automatically like magic.
From these 10 minutes a month, I can easily see the following:
- How much I have spent on a specific category (like shopping, tax, restaurants, books, rent etc) for both the month and the year
- How much I have earned and spent in total each month, and for the year
- How my spending and earnings for one month compared to any other month
- Where I am spending too much on certain areas, or maybe not enough in others
- How much I spend on things I can’t control (tax) vs things I can control (everything else)
- How much I have profited or lost each month and for the year so far
All of that is for around 2 hours of work per year! The information you learn about yourself from doing this is invaluable, and if you take anything from this article it should be this. If you would like a template of my financial tracking spreadsheet, please email me at email@example.com and I will send you the google sheet for free
Now you have the means to track your finances and make adjustments based on how you perform each month. That in itself is massive! From here, you can analyse your needs vs your wants. Save more money by cutting down on unnecessary luxuries or subscriptions you might not even use. The more money you save, the more you can invest and the faster your portfolio will grow.
Avoid this common trap:
‘Powerful people judge everything by what it costs, not just in money but in time, dignity, and peace of mind’Robert Greene – 48 Laws of Power.
I’ll admit, saving money is very satisfying. But you can easily take it too far. There is a big difference between being frugal and being cheap. A frugal person is willing to spend more in the moment if they know down the line they can spend less. They understand moderation and know where to spend and where to cut back. They know a higher quality item will last longer, so they don’t need to spend time or money replacing it.
A cheap person on the other hand just wants something at the cheapest possible price, they don’t think about the quality of the item or service. This person inevitably spends more time, money and energy in the long run dealing with the consequences of their prior decisions. These people spend hours and hours trying to save just a few measly dollars, scouring for deals, discounts or holes in the system. They completely miss the point that their time has value too. If you spend 4 hours of your life to save $10, you are valuing your time at $2.50 an hour. Don’t do that.
Secondly, It is all well and good to save where you can, but don’t objectively suffer in order to save money. If you’re skipping meals or missing out on once-in-a-lifetime experiences that you know bring value to you in order to save extra money, you’re doing it wrong. I have fallen into this trap more than once and it has never been worth it.
3. Get Out of Debt!
You know where you are, where you are going and how you are going to get there. Good work so far. Obviously, skip this step if you don’t have any debt, but if you do have debt, paying it off aggressively should be your number 1 priority.
Debt is so dangerous because it’s easy to fall into and hard to see. It’s the biggest setback on your journey to financial freedom because the longer you leave it, the bigger it gets. Just like how interest works with you when you’re building your investments, debt is doing the exact same thing against you. Some people argue that there is good debt and there is bad debt, but I’m not so sure.
Take this with a grain of salt, of course, I am not a financial adviser. But I have the opinion that if you can’t afford something outright, then you can’t afford it.
4. Build Your Emergency Fund
Excellent work, you’re debt free and your system is working. Now, your next priority should be building an emergency fund.
An emergency fund is essentially a fund or a bank account that you can use if something bad happens. It’s for if you have an unexpectedly large expense or you lose your job, something along those lines. The general guideline is 3-6 months of living expenses, but I personally prefer to have 6 months of expenses at the ready.
Are emergencies likely to happen? Maybe, but maybe not. The reason for saving all this money goes beyond just being prepared for a rainy day. It has multiple benefits that trickle down into other areas of your life.
- You have peace of mind, knowing that you have enough money to cover almost any circumstances that might happen.
- You are no longer forced to do a job you don’t enjoy out of a need for money. You can quit and find something else without the risk of not being able to pay your expenses
- You can take more risks in life because you know you have a financial cushion you can rely on
5. Diversify Your Income Streams
At this point, you’re already doing considerably better than the average person. But from here we need to change our strategy slightly. Most people have one source of income, their job. But what happens if you lose that job? What if you get made redundant or replaced by a machine?
Wealthy people don’t have one source of income, they have multiple. If you take away one of these streams, they’ll still be bringing in money every month. I am firmly of the opinion that you will never become wealthy by having a normal job.
In fact, I am so confident in this that let’s create an example:
Let’s say you earn $40,000 a year, but you spend $30,000 a year. You’re saving 25% of your income which is already substantially higher than the normal person. If we go with the 25x rule as mentioned in section 1b of this post, it would take 75 years to hit that number. Chances are you’ll die well before you hit that number.
It’s a simple example but the premise holds true, you need to diversify where your money comes from, and the best way to do this is to create a scalable business. There are limits to how much of a pay rise you can get at your job, but there is no limit to how much a business you own can make as long as it creates value for people. Most people don’t want to run a business, and that’s fine. Remember – you can own a business and not work for it. That’s what employers pay people to do. You will have to do the initial leg work yourself, but as it grows you can delegate these tasks to others.
What is a scalable business? Well, that’s a whole other topic. But essentially, it’s a product or service that can serve more and more people without the requirements of running the business changing dramatically. This blog is one example: 3 people could read this post and I would make nothing, or a million people could read this post and I could make thousands off the ad revenue by buying the books I recommend through links. Either way, I have only had to write this post once despite providing value to so many more people.
6. Time Is Your Biggest Asset – Learn to Use It by Investing
As mentioned before, you will never become wealthy at your normal job. Similarly, you’ll never get wealthy by saving your money in the bank. The interest rate the bank gives you isn’t even close to the rate of inflation, so any money you save beyond your emergency fund is simply a waste.
Any money saved beyond your emergency fund should be spent on acquiring assets, things that generate or increase in value over time.
“Stocks” consists of the shares of which ownership of a corporation or company is divided. When you invest in a stock, you are exchanging money for partial ownership of that company. These stocks may pay you annually (this is called a dividend) to own them, and the value of that stock may rise over time. After years and years, the value of that stock could be considerably more than the money you put in due to something called compound interest.
What should you invest in?
Ultimately it’s up to you and your tolerance for risk. I put most of my investment into something called the S&P 500. To put it simply, it mirrors the worth of the top 500 companies in the US. If the top 500 companies go up in value, so does the S&P 500. It’s widely considered the safest thing to invest in, as it is unlikely that all these companies are suddenly going to go bust.
The main point of this section is not to wait to invest. Even if it’s just a little every month. Investing seems very intimidating but it’s easier than it has ever been. I use an app called ‘Freetrade’. My only wish is that I started earlier.
If you’re in the UK and are looking to get started investing, get yourself a free share by clicking here and signing up today.
7. Sit Back and Let Your System Do the Work for You
That’s about it! You’ve done all the hard work, just keep up the good habits and wealth will find you eventually as long as you stick with it. Remember, the vast majority of wealthy people aren’t wealthy because they got lucky once. Wealth comes from repeated small decisions over a long period of time
- Figure out where you are and where you want to be
- Change your habits, and track your finances with a spreadsheet (send me an email!)
- Above all else, get out of debt
- Build your emergency fund
- Create more than one stream of income to speed up your journey
- Invest in companies and mutual funds – don’t let your money sit there.
- Watch your net worth go up and up