Become Financially Free Early Tips
Who would not want to be financially free? Instead of working for money, we would like money to work for us. The earlier we can become financially free, the better it is. After all, becoming financially free gives us the opportunity to pursue our passions and dreams.
So what exactly does it mean to become financially free?
The classic lifestyle model used to be one where a person would work with a few companies until they are in their early or mid-sixties. After that, they would retire and live comfortably on a pension and their savings. They would travel the world and spend time with the family.
However, we now hear stories about how people are retiring at the age of 35 or 45. But what exactly makes a person declare that he/she has retired?
The most basic requirement for retirement is the ability to cover living expenses from investment income or a pension. These incomes are considered passive incomes. Active income is one which you actively work for every day by going to the office.
Passive income is money which can be earned with minimal activity or daily work. This state of paying for all living expenses from passive income is known as financial freedom or financial independence.
Retirement is thus closely linked to being financially free. However, one does not necessarily have to retire if he/she is financially free. You can still be financially free and work if you really like your job.
Being financially free, however, gives you an opportunity to change your work from something that you may be doing for earning some money to something that is truly your passion. For example, you could quite your account manager job and instead write a novel or become a vlogger.
Who can be financially free?
Being financially free is not some fancy discussion that rich people have. Anyone with the willingness and the right information can become financially free. This state can be achieved in a short span of a few years if you are dedicated enough.
There are real-life cases of people who had zero passive income by the time they were approaching their 30s and yet they ended up with a passive income of $35000 to $40000 by the time they hit their mid-thirties.
Willingness is something you will have to develop. However, the knowledge to become financially free early in your life is something we can offer you.
Tips for becoming financially free
The following are the most important factors that you need to be aware of and practice in order to have a shot at becoming financially free by the time you reach the age of 40:
#1: Growth for the youngsters and stability for the older folks
Younger folks can afford to take more risks than older folks. If a young person’s investment drops in value, there is enough time in that person’s lifetime for the investment value to recover. However, for an older person, time is a luxury.
A young person can always replace investment income with his/her active salary. Older folks cannot go back to their companies and take up a full-time job to earn active income.
Hence, younger people are less susceptible to risks than older people. It is also the reason why younger folks should make investments in high growth areas. Even though growth assets might be risky, they have the potential to grow wealth in a big way.
As long as the investment isn’t taking money out of the young person’s pocket (e.g. a property with negative cash flow), it is worth holding on to that asset for a long period of time. Such assets can appreciate in value multiple times if held long enough.
There is no need to worry about short-term fluctuations in the price of such assets.
#2: Learn from your mistakes
When you are young, you have high energy to learn things. At the same time, you may also feel that you know a lot more than you actually do. You think in this way because life has not yet shown you that you actually know a lot less than you might believe.
Such ignorance can lead to costly investment mistakes. A young person might end up investing in stocks of a bad business due to lack of research. Or, perhaps the young person invests in real estate only to find out that the monthly expenses of the rental property far exceed what he/she may have calculated before making the investment.
Hence, it is important for younger folks to learn and listen to experienced investors. Always be humble and think that you only know as much as your experience as an investor. More importantly, if mistakes were made, then find out what went wrong and avoid repeating those mistakes.
The costliest thing for an investor is to repeat a mistake which has already caused losses.
Whether it was underestimating expenses, poor management of contractors, not conducting proper checks on a business partner, not doing deep research about a stock, overestimating profits and underestimating the probability of losses, etc. are all examples of mistakes which inexperienced investors often make.
It is important to recognize such mistakes and not repeat them. Even better is to watch others who make such mistakes and learn from their mistakes. That way, you can avoid the “cost of learning” by committing those same mistakes.
#3: Control your expenses
The more you save, the more money you have for investing and creating passive income. One way to create investment money is by controlling your expenses.
Young professionals and college students, who are in their early twenties, tend to have a reputation for spending big to show-off how successful they are. It is an impulsive tendency that comes from being young aged and having an eager mindset.
This behavior may be natural and something that is part and parcel of growing up. However, showing-off success requires spending money. The higher the money that is spent on buying expensive clothing/accessories/cars, the lesser the availability of funds for making smart investments.
In order to stay focused and invest for the future, you need to control your living expenses. The major sources of living expenses are food, transport, housing, and taxes.
Housing expenses can be reduced by finding a cheaper housing alternative rather than going for the fanciest apartment with all the thrills and frills.
Another smart way to choose housing would be to find a place that is close to public transport or close to your work. That way, you not only save on rent, but also on transport costs.
Imagine not having to use a car or pay for gas every week. What if you could walk or bike to your work? How much money would that free up?
For food, you can try and avoid eating out every other day. Not only will you save money by eating at home, but you will also save your health.
Restaurant food is not as nutritious as food prepared by you at home. You can literally plan your meals and use healthy ingredients.
#4: Think Passive Income
Passive Income is income that you can create without having a full-time job. This is the income that will make you financially free. Hence, your goal has to be maximizing passive income.
The most commonly known ways of creating passive income are rental income, stock investments, dividend income, or royalties. However, you have to think more creatively and try to create streams of passive income from other ways.
For example, you could rent out your car and turn it from a liability which requires EMI installments to an asset which places money in your hand every month.
If you plan to invest in real estate, then try to purchase a multi-unit property where you can live in one unit and rent out the remaining units. That way, your housing expenses can become free and you may even be left with some spare money from all the rents that you will collect.
So, you have to think passive income in all aspects of your life. Your philosophy should be to start with one stream of passive income. Then, re-invest a portion of that passive income to create a second stream. Then re-invest a portion of the passive incomes from the two sources to create a third one and so on.
You will ultimately create a system of multiple streams of passive incomes which will total up to be more than all of your living expenses. That is the way to financial freedom.
#5: Grow your active income as well
Passive income is great, but you can also grow your active income. The more active income you have, the more money you can keep aside for investing. So, increasing your salary is a very important factor in achieving financial freedom.
To grow your active income, you need to do well at your full-time job and gain promotions. The more your career progresses, the higher your salary becomes.
You also need to do what you did so well in college, networking! The more you network with people within your industry or otherwise, the faster you will find out about any open jobs or opportunities which can boost your career.
However, once you do get a promotion and a higher salary, make sure that the extra cash is invested and not splurged on expensive toys. That would just defeat the whole purpose of increasing active income.
#6: Graduate quickly from the phase of trying to impress others
Every person goes through a phase in their life when they try to impress others by showing off their wealth. It is understood that the average person ends up buying a new car within a couple of weeks of receiving an inheritance.
There are also statistics about the average person buying a bigger house and going out more often for expensive dinners right after receiving a raise at work. It is human nature to show-off newfound wealth or status to friends, family, and work colleagues.
There is no denying that almost everyone goes through such emotional phases in life. However, what is more important is how fast a person “graduates” or evolves from this mindset.
The earlier a person can mature and come out of this mindset, the better of that person will be in the long run. The longer it takes a person to graduate and understand these emotions, the worse off they are. They might end up spending too much and then be forced to take debt.
A never-ending sense of “not enough” and “I want more” is what ruins people financially. It is absolutely essential that you divert your mind from such feelings and instead practice simple living and a frugal lifestyle.
If you live a simple lifestyle during your early years, then you will be sipping on pina coladas when you reach an older age. The key is to funnel your savings from a young age into investments which will allow you to retire early.
#7: Invest in multiple asset classes
In order to be financially free, you must make investments in multiple asset classes. Just investing in stocks is not enough. Just investing in real estate is also not wise.
You might have the notion that real estate gives steady predictable income. You may be right to some extent in this observation, but real estate rents can also crash if the economy tanks.
Infrastructure projects and other developments can make some locations lose their value as well.
Hence, you must invest some money in stocks as well. Stocks are more volatile than real estate, but they can also appreciate faster than property prices. Dividend income is a little bit steadier.
Real estate and stocks are the two highest yielding assets historically. Hence, it is a good idea to diversify your risk and invest in both.
Tax wise, investing in these two asset classes could have some benefits as well.
#8: Don’t time the market, invest regularly
Timing the market is more of an art than a science. Technical analysts might disagree, but it is very difficult for a layman to have an information edge over armies of Wall Street analysts and computer trading algorithms.
Hence, there is no point in timing the market or waiting for years to enter an investment at the most “optimal” time. For stocks, a systematic investment plan where you invest a fixed amount monthly into a fund or in a stock is the way to go.
For real estate, you simply need to focus on cash flows and whether they are positive after deducting all expenses. Cap rates are important and you should look at them and make real estate investments. But as long as you are not overpaying by a huge amount, it is better to not think too much about market timing.
Invest regularly and consistently rather than worrying about the “right time” to invest.
#9: Track important numbers
Finance is a numbers-heavy field. However, you do not have to feel overwhelmed or lost among all the math. You simply need to track the key numbers of savings rate, passive income to expense ratio, and the net worth of your investments.
The savings rate is simply the amount of money that you save from your income after paying for all your expenses and debts. This is the amount of money that is available to you each month for making investments.
The passive income to expense ratio is the ratio of all your passive incomes divided by your total living expenses. Ideally, you want this ratio to hit one or exceed one.
Initially, the passive income to expense ratio will be below one because your expenses will be more than your passive income. But eventually, it will get closer to one as you grow your passive income.
Lastly, investment net worth is the total current value of all your investments minus all debts and liabilities. You cannot count your home or personal vehicle as your investment asset. Only pure investments which you made with your savings can be counted.
Tracking these numbers regularly will allow you to understand your progress towards becoming financially free. When you measure something mathematically, you can pinpoint where exactly you stand in your journey. Many other measures tend to be subjective.
Now that you have read a few points about becoming financially free, you can tell that it takes dedication and discipline to become financially free. You will have to resist the urge to splurge the cash when you see your friend drive a fancy new car while you have to make do with an old clunker.
After knowing more about financial freedom, you understand how important delayed gratification can be. In order to be financially free, you have to train your mind to enjoy frugality rather than see it as a chore. You have to understand that being happy does not mean spending big money.
Once you make the mission of achieving financial freedom your lifestyle choice, you would have taken a big step towards achieving that goal of yours.
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