Financial freedom sounds great, but what does it really mean and how can you achieve it? Most people mistakenly equate financial freedom with the size of one’s paycheck, yet most people with six-figure earned incomes are anything but free! This is because financial freedom isn’t achieved by having a big paycheck, it’s achieved by creating passive income. And once your passive income meets or exceeds your expenses, you are technically financially free – you could quit your earned-income job and all of your expenses would still be covered.
How do you achieve it?
Sounds great, right?! But how do you achieve it? How do you create financial freedom when you have a day job, when 100% of your income is currently “earned” income, when you don’t have a finance degree, when your only investing experience is buying mutual funds and contributing to pre-tax retirement accounts? No, it’s not by hiring a traditional financial advisor. Although well intentioned and knowledgeable in financial securities, the goal of most certified financial advisors is to help you save for retirement in a Wall Street backed “nest egg”, not to create passive income or to create financial freedom. I know this firsthand, as the retirement path WAS the path I started on! I loved my financial advisor (yes, I used to have one!) – he’s a man of high integrity and character, but I would have never become financially free under his guidance.
10 Essential steps
So how do you do it then? How can YOU work towards achieving your own financial freedom? This is a question with many answers, but I’ve compiled a list of ten essential strategies and actions that I think everyone must to take get there. I’ll cover the first five here and the next five in How to achieve financial freedom (part 2).
1. Invest in yourself before investing in an investment vehicle
When most people learn about financial freedom and investing for passive cash flow, they want to jump right in and start investing. However, we always recommend investing in yourself before you invest in an asset! The asset (aka investment vehicle) is only a tool, and by itself, is very unlikely make you financially free.
To reliably achieve financial freedom, you must focus on the inside before you focus on the outside. You must work to change your mindset about money, your knowledge around investing, and your habits and actions around finance. Otherwise, you’ll continue the same actions and habits you’ve always taken, and you’ll get the same results. Ask any lottery winner if their prize helped them achieve financial freedom! Without changing YOU, you’ll unlikely change your financial results, and just because you’re invested in a cash-flowing vehicle doesn’t mean you’ll achieve financial freedom.
So how do you change your mindset and knowledge? Through self-education! This is why the late Jim Rohn said “a formal education will make you a living, but self-education will make you a fortune”. I was no different – my formal education prepared me for my job but gave no direction or training on how to use my earned income to become financially free. I started my own journey by reading books and taking formal courses. I hired a wealth coach to jump start my progress. I attended seminars to both learn AND to meet others that were also on the journey. You don’t have to do ALL of these, but you WILL have to break out of your shell to learn something new and to do different things!
2. Define your “why” in wealth
Most people never have an overarching goal for their money. They pay the government, they pay their bills, they fund their retirement account, and they use what’s left over to buy “stuff”. But if you want to grow your wealth and achieve financial freedom, you’ve got to define your “light house” – your goal and destination of where your money is going to take you and what it’s going to do for you. We call this your “why” in wealth. It is the target and the motivation to keep you on course, to keep you learning and taking action towards financial freedom. And to be clear, your “why” isn’t the material goods you want to buy (although it might include some of them), instead, it is the LIFE you want to create. Among many other things, it is defining how you want to spend your time, what you want your productive purpose to be, where you will live and who you will surround yourself by. And all of these things take time freedom and money to achieve!
Before starting on the path to financial freedom, I had never thought of such an exercise. But defining my own “why” not only fueled my journey, it also helped me consider what I truly wanted out of life – somehow in my busy “earned-income” life, I had never really defined it. It helped me realize that no matter how big my earned-income, I would never be free to pursue and achieve my dream life as long as I was working 60 hours a week. Defining my why helped snap me out of the “earned-income” and rate race mentality; it helped me realize that financial freedom and passive income were the prerequisites to creating a dream life.
3. Follow the path of others who have already achieved financial freedom
Tony Robbins coined the phrase “success leaves clues”, and this is absolutely true when it comes to achieving financial freedom. Before I knew better, I was skeptical of any advice I received outside of my financial advisor and I was skeptical of anything outside of the traditional retirement path. I thought investing outside the market was risky! This mindset limited my growth and prevented any real progress. But that all changed when I came to understand that leveraging the knowledge and experience of others exponentially expedites one’s own knowledge and success.
Finding others who have already taken the journey and achieved financial freedom is invaluable in many ways: it guides your education to learn the things you didn’t know that you didn’t know, it shows you the general path to get there, it fuels and motivates you to stay on the path, it prevents you from making avoidable mistakes, and it guides you in an efficient direction so that you don’t waste time!
4. Treat your personal finances like a business
Most people spend a lot of time at their jobs but very little time working on their personal finances. According to an recent survey, people spend nearly 100 times more time watching television than they do on their personal finances! But actions have consequences, and if you want to achieve something different than most people achieve, you’ll have to do different things than most people do – that INCLUDES spending more time on your personal finances and treating your personal finances like a business!
So, what exactly does “treating your personal finance like a business mean”? It means that you know where your money is, you know what your income and expenses are, and you have goals and targets you’re trying to hit. It also means you track your finances on a regular basis. This starts by keeping an income statement and balance sheet.
The income statement tracks your income and expenses in detail; it is page one of the financial offense playbook, as it shows you where your opportunities are for expense reduction so that you can increase the amount you have leftover to invest each year. The balance sheet shows your assets and liabilities; it is page two of the financial offense playbook. The balance sheet shows you your net worth and it highlights which assets are earning you money and which ones aren’t. It shows you where you have opportunity to transfer equity from non-cash flowing assets to cash-flowing assets.
Most people never use an income statement or balance sheet for their personal finance, but then again, most people aren’t financially free!
5. Have specific financial goals
Most people don’t have any specific financial goals or plans, but if you fail to plan you are planning to fail, and vague goals produce vague results! In contrast, working towards and achieving financial freedom requires specific goals and specific plans.
When you are working towards financial freedom, you maintain an income statement so that you can track your expenses and thereby set a goal for your annual investable income. The less you spend, the more you can invest, and the true investor knows their targeted annual investment amount. Those working towards financial freedom also know their freedom number – the total amount they need invested in order to produce enough passive income to cover their expenses. By knowing their number, they are constantly working to achieve it. Those that want to achieve financial freedom also learn that their balance-sheet goal is to have the maximum amount of their net worth invested in cash-flowing assets. They therefore work to restructure their balance sheet and get more of their money working for them.
Great work! You’ve begun investing in your education, you’ve defined your “why” in wealth, you’re on a known and successful path that others have taken, you’ve defined specific financial goals, and you are beginning to treat your personal finance like a business! You’re definitely on your way, but you’re not done yet. Check out How to achieve financial freedom (Part 2) for the next five critical things you’ll need to do!