- Know your number (Track your income and expenses)
- Reduce personal debt
- Get your emergency fund in place
- Feed your mind – Read and get educated & build your team
- Build your freedom fund
- Develop your passive income stream & build you flywheel
- Protect your assets
- There are many online tools available today that allow you to look across all of your credit cards and bank accounts to track all of your expenditures and understand what you are spending your money on. My personal favorite is www.mint.com . Despite the ease of keeping track of finances, it still surprises me how few people really know exactly how much they need to cover their basic living expenses.
- Once you know your number creating an initial target to aim for is essential. This initial number should not be some arbitrary number that you think will make you happy of sounds good but should be the exact number you need to cover food accommodation and other essentials. When your investments generate that income level it removes a lot of pressure from your life.
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Many financial gurus talk about eliminating debt altogether, I disagree with this philosophy, primarily because it makes it very hard for most people to ever get free. The key is to get rid of all expensive personal debt. The first step is to list out all of the debt payments you make every month e.g.
- Mortgage – Interest 4% $1200 principal $300 – Total – $1500
- Car Payment- Interest 5.5% $200 principal $100 – Total $300
- Instalment loan Interest 7% $60 principal $ 100 – Total $160
- Credit Card Interest 18% $80 principal $10 – Total $90 minimum payment
- The next step is to figure out a plan to pay off the highest interest items such as credit cards which over the long run are the biggest financial drain on most people. If that is not possible try to find a way to move the credit card debt to a loan such as an installment loan with a lower payment. The key is to focus first on the loans with the highest interest rate and the highest principal payment as a percentage of the loan i.e. the shortest term. Once these are paid off, keep the total amount of money you were using to pay off debt the same but redirect the extra money each month to pay off other high interest debt, once achieve then redirect money to your freedom fund . The 2 type of loans that are OK are house and car payments, I will explain why in a later blog post.
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If you don’t have 6 months of cash in the bank to cover you expenses forget investing in a 401K. Creating an emergency fund is the most important thing most people need to do. There are a lot of unexpected things that can happen in life e.g. losing a job or a major illness. Having the ability to absorb financial shocks, life may throw at you, will significantly reduce stress in your life. The key is not to touch this money unless you have a true emergency such as a job loss or a health issue.
If you are already at this point well done you are already better than most people
- Feed Your Mind- Read get educated and build your team
- Get Educated read at least 1 book per month on Finance, Asset Protection, and Tax. Click on the following link if you need some suggestions to get started. 10 Books to expand your financial acumen .
- Build your team. Investing is a team sport depending on your chosen path it takes many different types of skills to help you along the way. 2 of the most important roles are the accountant / CPA you have and the Attorney you seek advice from. One of the first questions to ask the CPA / Attorney is do they invest themselves outside of the stock market. If they don’t or most of their clients don’t, seek other advice. Once you find a great CPA or attorney they will often have a network of other people who can help you along the path. Always remember A’s work with A’s and B’s work with C’s. Choosing who you listen to is very important.
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Many of the common assets that can start to develop a passive income stream require a minimum investment of $20-50 thousand dollars, e.g. for a down payment on a rental property.
The hardest and slowest part of the process is saving enough for the initial investment. The key to the whole process is getting yourself into a position where you can eventually save 30% of what you make and don’t expand your lifestyle as your income increases.
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Once you have enough money to buy your first income producing asset and have taken the plunge, make sure you feed the returns it generates back in to your freedome fund to aquire more assets, as time goes on more and more assets accelerate the rate of accumulation and you reach escape velocity, the point where your income matches your expences and you have choices you can make. Your knowledge and experience also have the effect of speding up the process too. The key is not to get too impacient. The process is painstaking in the short term and lightening fast in the long term.
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We live in an increasingly litigious society. There are lots of people who would like to help themselves to the assets it has taken you many years to acquire. Once an event happens it is too late to protect yourself, this is one area where prevention is definitely better than the cure. When you start to accumulate assets it’s a good idea to get umbrella insurance and use entities like an LLC to protect them and you from various liabilities that can arise. This will save you a lot of heart ache in the long run but requires a lot of effort to understand the implications of different decisions, books and good advice are great investments.
- When your income matches your expenses you can have choices in your life. Imagine where you could go or what you could do if time and location were not limiting factors in your life.
After living in 3 countries and experiencing different financial systems, I found myself questioning things that a lot of people took for granted. My uncle, who was an international currency trader in London, reinforced this by sharing stories of how a few individuals where able to change the forces of governments-take them on and win. In the process I became an unintentional economist. Thus, I have an alternative view of financial forces and headwinds that affect people’s lives such as the power of debt for good and bad, the true risks associated with different types of investing, and how different people hack the system. To do well today most people need to overcome the financial headwinds they are burdened with. By applying this knowledge it has allowed me to gain time back in my life to spend it on things that create meaning not just the daily grind of trading time for money. I have a great desire to share what I have learned along the way, mentoring others and helping them find their path and devising creative ways to capitalize on various market and economic events. Nowadays, having fun, presenting at conferences on economics and other financial topics, and building a coalition of the willing to take on the world, is my passion; I hope you can join me on this journey.
Great post. To get a better sense of your number, you’ll need to know how fast your money is growing and what the cash drag is on them. I’d recommend using http://americasbest401k.com/ or https://www.strongholdfinancial.com/ and use their free analysis. Just put in the fund names you are invested in and they’ll tell you the fees that many do not report as they are not legally required to.
Excellent site, thanks! I’ve bookmarked it 🙂