You Need A Master Plan On The Way To Financial Freedom
In a previous newsletter, I discussed the psychology behind wealth creation. Now I will get to more of the practicality of wealth accumulation. You’ve heard the phrase, “If you fail to plan, you plan to fail”; in most cases, that is true. Sure, some get wealthy through sheer luck, but most of us need a plan with a strategy and flexibility.
Unfortunately, some have had to learn the hard way after years of financial mismanagement. Because of the compounding effects of money, if decades go by without careful planning, money and wealth dissipate. Making things worse are the ravages of inflation––as we are currently experiencing––which further depletes wealth accumulation.
We as individuals need to take more financial responsibility to secure financial freedom. What we mean by financial freedom varies from one person to another. Still, this is only possible with the knowledge and tools to implement a strategy.
Having A Purpose
The first step is to have a cause or purpose, meaning something greater than yourself. It could be a charity, a scholarship, or a purposeful business you create that can exist after you are no longer here.
You may donate some of your money to a cause or institution that you find worthwhile. This is the age-old principle of tithing: what you give out comes back to you in many ways.
So before you can implement a financial plan, know what you are planning for. It could be a comfortable retirement or starting your own business after you have worked for someone else for many years. Yes, many retirees do something new and different that inspires them.
I can recall some years ago reading about an orthopaedic surgeon who retired by the time he was 60. Often surgeons don’t have long professional lives because the intricacies of using their hands become more complex as they age. This particular surgeon was passionate about skiing. So he decided to become a ski instructor. Obviously, he was very comfortable financially that he could pursue his passion.
To be financially free, this is the formula:
Passive Income - Lifestyle Expenses = An amount greater than zero
In other words, if you didn’t have to work, your income from your financial investments is more significant than your expenses to enjoy your lifestyle.
Step 1: Pay Yourself First
Many people earn money; if they have any money left over, they decide to save it. Often, they end up with more month at the end of their money. They may need more discipline to put money away, which goes on month after month. They have little to show for their work and live paycheck to paycheck.
So there needs to be a savings plan. For many people saving doesn’t sound sexy, they want the quick fix, the get-rich-quick scheme. These rarely work out well. A financial plan is like a pyramid. The base or foundation has to be on the bottom to support the rest of the structure. If the pyramid is upside-down, the whole system can topple.
When savings are minimal and risky investments are at the top, you have instability, and often, the financial structure collapses.
So learn this one secret, as I did some years ago: pay yourself first. You must pay yourself first to earn the right to move up the investment pyramid.
Until recently, saving was a poor way of accumulating wealth as interest rates were near zero; now, they are earning a higher percentage. Some people use a redraw facility on a mortgage account for savings. Suppose you put extra money into a mortgage account, and the interest rate on your loan is 5%. In that case, you make 5% of the money you contribute. The only trap is that you must be disciplined not to “rob” money from that account.
The rule of thumb is to save at least two months of income before moving up the ladder to other forms of investing. The mechanism of paying yourself is using an accelerated savings plan. So how do you do that?
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