So, what does being financially independent mean? What is financial independence? And how do you know you when you got it?
Let’s break down the questions and attack them one by one.
The Basics of Being Financially Independent
In the most basic terms, it means that your passive income exceeds your living expenses.
So, for example, if your expenses are $5,ooo per month, your passive income will need to be $5,000 per month. This is the most basic way to look at it. And this strategy is a wash! Meaning, what you earn, you spend and there is no more left.
This way of looking at it is where many individuals get stuck. And while this is what you are initially shooting for, this is not the end. Don’t stop here.
The Advanced Way To Think About It
While the basic way to look at is a great start, it provides some risk. I like to think about it all in slightly different terms. I am risk averse, so I want a strategy that provide less risk!
If it’s a wash, that means that I cannot put any additional money towards more investments. As a result, I cannot increase my standard of living or keep pace with inflation (the rising costs of goods and services).
The wash strategy also means that, if I get sick or anything happens to my expenses, I am back to depending on income through activity (a job, for most of us). Or I have to sell my assets to get the money, which reduces my income, yet again.
What I prefer to do, is to structure my income to be at least 10%, preferably 50% higher than my expenses.
Yes, doing this may take slightly longer time, but the wait is well worth it.
What happens when your passive income exceeds your living expenses?
Well, now I can not only cover my expenses, but I also have additional money that I can re-invest. This allows me to acquire additional assets and start new businesses.
With more assets, I get even more income. And, with more income, I have an ability to increase my living expenses (my standard of living). This strategy creates wealth.
The key is to invest in income producing assets that keep pace with (and preferably, beat) the inflation. Having a contingency fund for the unexpected things in life, provides additional cushion and reduces your risk further.
Where do I start and what do I do?
The question begs now, where to start and what to do first. Here are my recommendations:
- Eliminate your destructive consumer debt
- Learn how to manage your money better
- Take action on what you learn
Eliminate Destructive Debt
This is the absolute first and must part of the equation. Debt is bleeding you dry. It is an expense that you must pay and if that expense is not creating additional wealth creation in your life, it is destructive and it must go. An example of destructive debt are credit cards used to purchase consumer goods and I would even argue student loans.
By eliminating your debt, you are keeping more of your money, which allows you to use that money for investing and business creation.
Manage Your Money
Becoming a better steward of our money, means that we are able to preserve it and grow it. Contrary to popular belief, it’s not how much money you make, but rather how much money you keep.
By creating 3 simple funds in your life, you are able to start leveraging your time and money for greater financial success. You are able to invest in the top 3 investments with the highest ROI. The 3 funds to have are:
- Contingency Fund
- Education Fund
- Investment Fund
These 3 accounts will give you ability to reduce risk and sleep better at night. The contingency and education funds reduce your risk. You have a cushion in case something goes wrong. And you have education to invest and build businesses better. Finally, with investment fund, you actually have capital to make the moves.
Reading all about it is the first step of the process. The second step is to go deeper into your education of how to create this income (it’s a bit different than active income, but so well worth the time and the effort). Finally, you must take action consistently to become financially independent.
It does not happen overnight and it does not magically just appear.
Every person that has created passive income and wealth in their lives, has done that by taking action. Depending on where you are in the process and what you know, your action steps may include one or all of these:
- Learn how to eliminate debt and manage your money better
- Discover how to build a business for greater income generation
- Understand how to invest for income
- Do the work on daily, weekly, and monthly basis
What Do You Do When You Become Financially Independent?
Many people wonder what they would do with their time and energy once they reach the ability to retire early and stop working. Because, reaching this goal allows you to do just that: retire early!
For some that’s super exciting and they already know they want to go on vacation, sit on the beach, travel the world. For others, sitting still for years on end is not a paradise.
What I have found is that majority of people who are driven to create all these things are productive and action taking kind. Sitting still is not appealing to them at all. They, often, quit their jobs and start their own businesses. Not because they need more money, although additional income is always welcome. But because they want to use their time productively. I shared my views on this on my YouTube channel.
So, what are you waiting for? When will you give yourself permission to start living a Money Blessed Life?