Do you want to work a job you don’t really like until you are 65 years old? Do you want to wake up with an alarm clock every morning during the best years of your life? If you do then this article is not for you.
If you don’t then you might want to read those steps to financial freedom.
What Is Financial Freedom?
Now let’s first ask ourselves why do we have to work? Well because we have expenses and we need to pay for them somehow. We do this by exchanging our time for money. Financial independence is when we don’t need to exchange our time in order to receive income.
This way we have our time and we have income that covers our expenses. This is done by generating Passive Income. In most people’s cases the passive income is their pension. The problem is that this pension comes after you have worked for the better part of your life.
So the average person’s life goes like this-
0-22——–>Grow up, go to school, go to college/uni (~22 years)
22-65——->Work (~43 years)
65-??——->Pension(~15 years)
Of course these numbers vary a bit depending on your country, your background and your gender, but these are the numbers on average. Is there anything that you can see there?
What I can see is that you put in 65 years of your life in exchange for 15 years of freedom. That freedom of course comes when you are old and will most certainly not enjoy life the same way as you would in your 30’s.
I don’t know about you, but I am not a big fan of the idea of having a boss and stressing out about my job when I am 60 years old. Life is too good to spend it working for someone else. Luckily you can make your own system and create your own pension on your own terms.
I am going to show you how to do this step by step.
1. Educate Yourself
The first 20-something years of your life are your time to learn things and figure out what you want to do. This is the time to find out the direction you want to go in life and find all the things that you are interested in. It is when you put in the groundwork for everything later on.
Once you understand what are your interests it is time to get into them. For example if you like photography go and learn more about it, gain some skills and consider a career in photography or open your own photography company. If you like finance go and finish a degree in finance and work somewhere in the field and so on.
It is important to do what you like in life, at least that is my point of view. After all I wouldn’t work something that I don’t like for 20+ years.
2. Get a Job
After you have figured what you want to do and what is that you enjoy it is time to find a job. If you have done the proper qualifications and learned all the skills needed that shouldn’t be too hard.
A quick tip from me is that money shouldn’t be your priority in your first job. Instead find a good company where you can learn a lot and get good experience.
The first couple of years should be all about experience. After that you can start looking for places to earn more money or start asking for pay-rises. Your first years in your job are again about placing the groundwork. You cannot build a house on lousy groundwork right?
It is the same with your career. You cannot demand more money if you cannot give something in exchange. Simply said in order to make more money you need to provide more value to your employer. In order to provide more value you need to have more skills and know more things in your industry. You do this by learning from people who are experts in that industry, simple as that.
3. Start a Side Hustle
Now that you have a job it is maybe a good idea to start a little side hustle. This is something that you do on the side of your regular job. It can be a second job, it can be something online, there are all kinds of things you can do. Here are some Ideas that you can use.
The beauty of a side hustle is that you can use 100% of the income and put it towards your financial independence. For example a big part of My Portfolio is from money I earned from doing Uber Eats and working a second or at times even a third job. I use a lot of my free time to earn some extra income, that way I can achieve financial freedom quicker.
Also some side hustles can end up generating you more money than your everyday job.
4. Get Out of Debt
Ok you have a job, you are earning money, those are some great news! The next thing you would want to do is get out of every high-interest loan that you have. I mean credit cards, things you have bought on installments etc.
At first buying a brand new 4K HD TV for just $100 a month might seem like a good deal. But the trick is that first you are paying like 20% interest and second things can add up really quick. First you get that TV, then you buy a new phone, then you buy a car and so on.
Nothing wrong with buying a phone or a TV, but only if you can afford to do so. My principle is that if I cannot afford to buy something outright I don’t need it. The only exception to this rule can be buying a house. That is also only in case the interest rate on the mortgage is low enough and makes sense to take it.
As a general idea living your life debt-free makes you much less stressed and much more in control. Having a lot of debt forces you to work a job you don’t like, makes relocation a harder decision and all in all removes a certain aspect of freedom from your life.
5. Make a Plan
Now that you have a job and have no debt it is time to plan your financial independence. That includes a couple of things that you need to decide for yourself.
Where do You Want to Live?
It is a good idea to know where do you want to live once you are financially free. This is because the cost of living varies a lot between states, cities or countries. Where you want to live is going to change all of your calculations.
For example if you want to live in London you will need a lot more money compared to Yorkshire for example. That means that if you want to live in London you will have to work harder or longer.
When do You Want to Retire?
That also depends on people. The sooner you want to retire the harder you will have to work to achieve that. For example I want to retire by 35 and that is why I have been working 70+ hours/week in the last 3 years.
You want to find that balance for yourself. For example if you have a family working 70/80 hours a week might not be healthy for them and for you.
The general idea is that the more money you make and the more you save the faster you are going to be able to retire. So you need to decide for yourself how hard you want to work and how much you want to save in order to have that financial freedom.
How Much Money do You Need?
This is the next part of the equation. You know where you want to live and when do you want to retire, now it is time to find out how much money are you going to need. This is again completely individual and someone might need £100,000 and other might need £10mln.
The idea is to calculate how much do you need annually to cover your lifestyle. For example let’s say you need £50k. That means you have to generate £50,000 of passive income somehow. Let’s say do this by dividend payments. For example you get 5% dividend yield for your investments. That means that you need £1mln in order to retire.
My advice to you is to be conservative in your calculations and have a little bit more income than your expenses. After all you don’t want to stress out about money once you are retired right?
Also make sure that you do proper calculations and really think it through before you retire. Make sure to think about the kids, any future kids, medical expenses etc.
How do You Plan to Achieve it?
So far you have made your plan and know how much money you need. Now it is time to figure out how to actually generate that money. Now in essence for you to be financially free the income needs to be passive. That means that you don’t need to exchange your time in order to earn it.
First here is a quick overview on some ways on How to Achieve Financial Freedom. There are a lot of misconceptions online that things like having your own business, running an online store or having a Youtube channel are ways to make passive income.
Yes they are ways to make income. They are ways to even make a lot of income, but it is not passive income. But why?
Well if you have a business of any kind you cannot just leave it for a year and expect to be the same when you come back. Don’t get me wrong having an online business is great and it is a great source of income, but you still need to take care of it. It is passive compared to a regular job, but you still need to put time into it.
I will try and list sources of income from passive to active and you can decide for yourself which one suits you the best.
Good news is that putting your money to work has never been easier. You can start investing with as little as a dollar with apps like Freetrade in the UK or M1 Finance in the US.
Bonds
This in my opinion is the most passive source of income. You exchange your money for a given bond and you receive your check every month. You need to do next to nothing in order to receive your checks in the mail.
Index Funds
Again a very passive way to generate money. The idea is that you buy 2-3 index funds/ETFs and they generate returns and dividends when you have to do next to nothing in return. Here the only difference is that you have a bit more risk from price fluctuations and that you still need to put in a little research before choosing your ETFs. Still once you do this you work is done.
Dividend Stocks
This one is similar to the index funds, but you need to put a little bit more research and maybe rebalance your Portfolio once or twice a year. You also need to put some work in putting together the portfolio in the first place. Still once you do that you need maybe a couple of hours a year in order to maintain it.
Stocks
Here the idea is to generate returns from your portfolio and withdraw a certain amount every month/year. It still acts similar to the dividend stocks, but the difference is that you need to put a bit more work and that it depends on your overall returns and price-appreciation.
Still once you put together a portfolio you only need a couple hours every now and again to maintain it and make sure everything goes well.
Real Estate
This one gets a bit more active, because you will have to maintain your properties, take care of your tenants and other things related to the property. You can minimize this by using a property manager, but you still have to manage that manager. Still once you set it up it is generally pretty passive, but you might need to have a couple hours extra work here and there.
Writing Books
This one can be pretty passive generally speaking, but you have to put in some work first. Also things change and your book might be selling well for the first year and then stop selling. It can be a good source of passive income, but it is not something that you can count your retirement on.
Online Business
There are a lot of different online businesses you can start and they all need different levels of your attention. Still for all of them you need to be there at least a couple of hours a week. Yes it is a great way to make money, but if you don’t take care of them they will probably slowly evaporate. Still they are a great way to generate some money with minimal effort from you. Most of them require a lot of work to build them out, but once you do it you can enjoy the benefits with just a couple of hours of work a week/month.
6. Start Saving Money
Now that you have your plan and have your goal it is time to start saving money to achieve it. The idea is that the more you save the faster you are going to be financially independent.
Also don’t forget that the higher your income is the faster you can reach your goals and the more you can be saving. Also be frugal, but don’t be stingy. Don’t miss out on good experiences just so you can save a little extra.
Saving is important, but what is also important is having a balance. Make sure you are saving towards your goal, but don’t miss out on your 20’s because of it.
7. Send Your Money to Work
Now that you are saving money it is important to make them work for you. Don’t just leave your them in your bank account, because that way you are actually losing money thanks to Inflation.
I like to put it this way. Leaving your money in a bank account/ low yield savings account is like putting them to sleep. They are just sitting there slowly losing their value and providing nothing in return.
Putting your money in high-yield savings account/ bonds is like sending your money to a low-paying government job. They are doing something, but it is the bare minimum in order to keep them in-line with inflation. Still it is pretty safe, but with nothing in return.
Putting your money into stocks/ real estate is like providing them with a nice career, where you can see a good long-term return. Educating yourself is like sending your money to college, so they can have a better career and bring you back better returns.
Make sure you respect your money and find a good place for them to work. As a reward they are going to bring you some great returns.
If you treat them poorly though they are going to run away and go to someone who is going to treat them better than you.
8. Generate Passive Income
Now that you are saving and have sent your money to work you are going to see some returns. Those returns can be in the form of dividends, rent, equity etc. Those are all sources of passive income.
This is because your money is doing all the work for you. You just need to be smart in how you manage them.
So now that you are generating this passive income it is time to check you goal. Check how much money you need to generate in order to quit your job and achieve that financial freedom.
9. Enjoy Your Life
Congratulations! You have followed all the steps and are now financially independent, this is great. If you have done everything right you now have enough time and money to do all the things that you have always wanted. You can travel the world, pursue some of your hobbies, meet new people or do whatever it is that you want to do.
Now that you don’t have the pressure of paying bills you might actually find that you like your job. Being financially independent doesn’t necessarily mean lying on the beach for 40 years. For some people that might be nice, but not for everyone.
10. Get Back to Work!
Being financially independent is great, but it can get boring at some point. People are obviously different, but I personally start going crazy if I don’t do anything for a longer period of time.
For example I am waiting for my next job and have been back home for almost 2 months now. In the first couple of weeks it was really nice having some time to relax and have some free time. But after a month or so I just couldn’t stay still so I started doing a couple of things on the side until I am waiting for my next job.
The good thing is that without the financial pressure you can truly do what you like. You can start your own business, you can work for a charity you care about, you can work for an exciting new project etc. For example I have always loved nature and cooking and I am planning to open a little restaurant outside of town and grow my own produce and experiment with new dishes, methods etc.
The beauty of this whole thing is that I wouldn’t care about the financial part of the business. Worst comes to worst I will break-even, but once I am financially independent that wouldn’t really matter to me. It is a totally different atmosphere than if I have to take out a loan, pay rent and have to make ends meet somehow. Hope you get my point.
Of course if that is not you and you would love to spend your time lying on the beach and watching TV all day there is nothing wrong with that. As I said people are different and everyone should be doing what makes them happy.
11. Don’t Forget About Your Kids
The good part about this whole journey is that you are going to have a good amount of assets. If you live on a pension you will not be able to pass that down to your kids. On the other hand if you have built your own portfolio you can give it to your kids.
The beauty of this whole thing is that compound interest is truly starting to do wonders in the second generation. That wealth is is going to grow exponentially and your kids can have a financially secure life. Better than passing them a ton of debt right?
Conclusion
People are used to work until they are 65 years old and then enjoy a couple of years of having the freedom to go to the pharmacy and take all the pills that they need every day.
I don’t want to live this kind of life. I want to have my freedom when I am still in good shape to enjoy the most out of it.
If you want this too the good news is that you can by just following those steps. Yes it is not an easy journey and it is going to take some sacrifices, but the rewards are far bigger.
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