Looking to build financial freedom? There are more get rich quick schemes out there today than ever before – I’m sure you’ve seen the ads from ‘experts’ with a proven system to trading oil futures. So much so that robbing banks has become a thing of the past. I wonder what John Dillinger would do today?
Even among all this noise, there are tried and tested methods to create real wealth and achieve financial freedom. To do this, you need to generate enough income from your assets to pay for your ideal lifestyle. This gives you options. It allows you the flexibility to consider things like:
- Working less hours
- Starting a business
- Travelling and working abroad
Yes, it also means you will have things like a nice house, car and holidays. But most people find that the real treasure of being financially free comes from the ability to devote your time to things that excite and engage you.
So here are six steps that you need to follow to reach true financial freedom:
Step 1 – Decide to become financially free
Realise that it’s possible for you to achieve financial independence, even if it may not feel like it right now. Envision what your ideal life looks like. Get a clear picture in your mind – the house, the car, the holidays. Will you want to look after your parents? Do more study? Buy a sports team? At this stage these dreams will be miles away so don’t get caught up in how you will achieve them.
Brian Moran has a great tip in his book The 12 Week Year to help take your thinking from Impossible to Possible – instead of asking How? at this stage, ask ‘What if?’. Right now, you don’t know how, or you would already be doing it! Ask what if – this will get your mind working in overdrive!
Step 2 – Take stock of where you are now
This is where you need to do some work. Write down all your assets – home, contents, car, savings, super, shares, etc. Next, write down any debts that you have – this includes your mortgage, car loan, personal loan and credit cards. The difference between these two amounts is your net worth.
Once you have done this, work out your current income & expenses using a cashflow tool. Your first target is to build your assets to an amount that will pay for your current expenses. Then you can aim for a level that will fund your ideal life. For a rough idea on what you will need for this, add up all of your expenses and multiply the total by 20. This number might be mind-blowing but keep asking yourself ‘What if?’ for now.
Step 3 – Eliminate personal debt
Here we are talking credit cards, personal loans and car loans. Don’t worry about mortgages at this stage. Personal debt is the worst kind of debt and can financially cripple you. Do whatever you can to pay this off, get help if you need to. If possible, take 10-20% of your income each pay and pay your debts down, then live off the rest.
Step 4 – Build a safety net
Once you have paid off your personal debts (or if you don’t have any), it’s time to lay the foundations of your financial house. Put aside money every pay to build a cash reserve. Again, aim for 10-20% of what you take home, but start with whatever you can. You may need to cut down on your expenses. You want to build your cash reserve up to having 3-6 months of your total expenses. This isn’t for holidays or even investing – it is to be kept aside as an emergency fund.
Step 5 – Expand your means and invest aggressively
Now we get to the fun part! Continue to build your earning capacity – this can be your job, your business, or a side hustle. Invest in yourself and your business so you can grow. Use this extra income to invest in more assets. These can include:
- Managed Funds
Let the magic of compounding take over – these assets will produce more income and growth for you to re-invest and grow further. Before you know it the snowball will be gathering real speed.
Step 6 – Protect yourself
While you are building your wealth, make sure that you are protecting it and yourself. Get advice on the right structure to invest in. Make sure you have insurance against something serious happening. The most crucial things to have covered are:
- Your home
- Your health and income
- Your family
- Your contents and vehicles
This ensures that you aren’t back at square one if you suffer a major setback. Your plan will stay on track even if something unexpected happens, such as a job loss, illness or fire. You don’t need to spend a heap on this, but your protection plan needs to be tailored specifically to you.
Although these steps are simple, they are not easy. If they were everyone would be financially free. But they work. And the effort is worth the reward!