When you’re constantly talking about financial freedom you often forget that the majority of people that you meet have no idea on how to become financially free. There are some that aren’t even aware that it’s possible to do!
With everything in life you want to succeed in, you need to develop a plan in order to reach financial freedom. The primary reason for this is to give you a direction to head toward. I mean, if someone told you “go and become financially free,” your mind would be overwhelmed with ideas and possibilities and you’d be unable to lift a finger.
In today’s article we’re going to go step-by-step on creating a financial freedom plan.
1. List your current assets, liabilities, and sources of income
The first thing you need to do is basic financial housekeeping. Take a look at what you’ve got, and list your assets under four columns: active income, passive income, savings, assets. Active (or “working”) income is money you get from working, passive income is income you get when you’re not working (rent from properties, stock dividends, etc.), and assets are anything you could turn into cash quickly (jewellery, antiques, etc).
Liabilities are anything that costs you cash. Things like; student loans, mortgage, car repayments, outstanding credit cards, basically any debt that you currently have. You don’t need to include things like food, clothing, and other things that you buy regularly.
Note: the reason we’re not including traditional assets, such as your home, is that they don’t have a high level of liquidity and take away money from your monthly budget. This means that they need to be included your next set of calculations.
2. Figure out how much you need to cover your lifestyle
Next you need to figure out how much you need for financial freedom. Your end goal needs to be “build passive income streams to pay for the lifestyle that I want”. Think about your living costs and determine how much it is that you’ll need per month to satisfy your wants.
Be sure to itemise each want so you have a clear idea where your priorities lie, it should look like this:
- Car/Home/Life Insurance £50
- Car maintenance £100
- Clothes £150
- Fuel £200
- Food £200
- Entertainment £300
- Rent/Mortgage £1,000
- Investing £1,000
This is just an example, so your list is likely to have a lot more to it. Once you’ve completed your list, add up all the items and BAM! You’ve got your financial freedom figure.
It’s also worth thinking about when you’d like to buy upgrades for things. For example, you’ll probably want to buy a new phone every three years. Say that a new phone costs £500, you’ll want to include that in your monthly budget. The calculation is 500/(3 x 12), or amount/(number of years x 12). You’ve now budgeted £14 per month to buying a new phone in three years.
3. Decide what passive income streams you want to focus on
After you’ve written down all your assets, liabilities, and found your financial freedom figure, you now have an idea of how much you need to grow your passive income asset box by. Now, you’ve got four basic options to increasing your passive income:
- Stocks and shares
- Intellectual property (books, songs, movies)
- Building businesses
By the end of your journey, it’s likely that you’ll have dabbled in all of the above. However, when your starting out choose one. Each option of that brings you passive income requires a huge amount of learning, time, and effort in order to be effective.
I’m currently focused on building a property portfolio, so the majority of my time (and financial) investment is in that area. However, I’m still committing time and a smaller proportion of my resources into the other areas.
4. Develop a budget to reduce your liabilities
The law of compound interest works for you as well as against you. Before you start pumping cash into passive income streams make sure that you’ve paid off all your liabilities. Think of it as investing in yourself by building a debt-free foundation to build your freedom on.
Learning how to manage your money is a huge part of financial freedom. Learn how to do it effectively with smaller sums, and you’ll have the skills to use larger sums effectively. You’ll also gain a greater understanding of how much money you actually need to be happy.
A great baseline is to set aside 10 per cent of your income to paying off debt, and each week evaluate your spending and look for ways to cut costs. By looking for ways to increase that percentage you set yourself up, so that when you escape debt, you can put the same percentage into investing into your passive income bucket.
5. Buy a book
You also need to be committed to lifelong education if you’re going to reach your dream of financial freedom. The following three books will be a massive boon to you at the beginning, middle, and end of your journey to financial freedom:
- Secrets of the Millionaire Mind – T Harv Ecker
- The Richest Man in Babylon by George Clason and can be found here, it’s basically the same advice but it’s in the public domain
- The Compound Effect – Darren Hardy
- As a Man Thinketh – James Allen (this one’s public domain, you can read it here
These books cover the basics of the mindset required to reach your financial freedom goal, and the practical mechanics of how you can complete this mammoth-sized task.
Write it all down!
Open up a word document, or get a pen and paper, and keep a record of:
- Assets, liabilities, and income streams
- A list of all the things that you’ll need on a monthly basis
- Your goal for how much you’d like to have invested in your chosen investment in one year, three years, and five years
- Your favourite quotes and advice from the books you read