If you’re following the financial freedom equation, achieving a life (and lifestyle) of your choosing should be well within your grasp. The challenge for most people is, they’ve never identified what financial freedom means to them and have no way of keeping tabs on their progress towards that end.
Recurring revenue should exceed expenses
A software engineer turned multimillionaire I know once told me that financial freedom for him meant that he had more revenue coming in from passive sources than he had monthly expenses. Once he crossed over the line of having more money coming in (without having to “work” for it) than he had bills to pay monthly, he considered himself to be financially free. This is the definition I’ve used since he told me to drive my family finances towards being financially free.
For a majority of working Americans, the goal is to fully fund ROTH IRAs, 401k plans, any other qualified investments (meaning tax “advantaged”), and hope that the pile of investments they’ve amassed someday grows to a number that they can then live off of for the rest of their lives. The problem with qualified accounts is the government has essentially told you that you have access to these funds between 59½ and 70½ with no penalties. Try and access that money prior to the magic age and you’ll be penalized for it. After the upper golden age limit, now there are mandatory distributions. Again, the government telling you how much of what you’ve saved you need to withdraw.
Oddly enough, rarely is passive income, recurring revenue, licensing revenue or any of the other streams of ongoing income mentioned when planning for retirement or financial freedom. One of the reasons could be that the “helper class”, the advisors and financial planners of the world are compensated to get you into mutual funds, insurance products and other investments that may not necessarily fit into my software friend’s equation. Where are the advisors that are steering people towards passive income products, that if done right, could have you living the lifestyle you’ve always imagined within 5-10 years?
My software designer friend used the vehicles of building a business, selling it, then buying real estate which provided him with a steady stream of income for the rest of his life. For me, I’m relying on real estate income, royalty income from books written and my student loan documentary, as well as business income from a software product that has a subscription model attached to it. All of these require little to no effort on my part to make money on a monthly basis.
The challenge to overcome when transitioning to a financial freedom equation is largely mindset. I’ve met with or spoken to individuals who will tell me that owning real estate really isn’t their deal, they’re not interested in building a business (too risky), and creating products to sell doesn’t really appeal to them. So what are they to do?
Two of the best pieces of financial advice I’ve ever received…
There are two pieces of advice that I’ve followed ever since hearing them.
- To achieve financial freedom, you must be creating massive passive permanent streams of income. MASSIVE PASSIVE PERMANENT. Remember those words.
- The goal should be to do work, then get paid, get paid, get paid, get paid, get paid, get paid to infinity. Do the work once and get paid forever. This is the business of content, licensing, subscriptions, and the automated sale.
Whatever your personal definition of financial freedom is, first get to the heart of that. Is it a million dollars in net worth? Identify that. Is it $4k, $5k, $8k, $12k a month in recurring revenue? Know that number intimately. What is the number that is keeping you from who you are meant to be? For some people, it could be as small as an extra $1500 or $2,000 a month in recurring passive income that would allow them to feel financial freedom. I’ve visited with people who’ve told me that if they had their credit cards paid off, they’d feel free. Cool, let’s figure out how to make that happen.
Parkinsons Law
One of Parkinson’s Laws states that expenses will always rise to meet income. I’ve discovered that one of the most profound ways to impact your financial future is to continually increase your income while decreasing expenses. When there is an inverse relationship between the income you make and the expenses you have monthly, the spread between the two can be used to dramatically and exponentially increase your wealth building capacity.
The most obvious way to decrease expenses is to spend a year or two blasting away debt. The debt payments that you currently have each month are eating away your ability to grow your wealth. That debt is carrying a corresponding amount of interest on it each month and the interest you’re paying may be keeping you from creating passive income streams. Focus your efforts like a laser beam on knocking out those debts and give yourself a monthly raise with each debt you knockout.
One of my friends has about $120,000 in student loans. He’s a brilliant PhD who struggles financially each month. Part of the reason he does is his payments are approaching $1200 a month ($14,400 a year) and the majority of the payment is interest. Granted, it will take him about 4-5 years to take all of that debt out, but imagine giving yourself a $15,000 a year raise. His income will no doubt be rising at the same time, so as he pays his debt down and his income rises, he’s beginning to activate the inverse action of income and expenses. He could legitimately be financially free within 10-15 years or sooner depending on what he does with the extra funds.
Limit monthly expense increases to 25% of additional income
If you’re someone who bristles at the thought of limiting your monthly expenses (what, no splurging?!), then consider increasing your spending categories, but only by 25% of whatever your increase in income is. That way you’re bucking the trend of parkinson’s law — expenses will always rise to meet income unless you’re focused on keeping them from doing so.
The financial freedom equation is going to be somewhat different for everyone, but it relies on a few variables:
Your income must ALWAYS be greater than your expenses.
More than one of your sources of income should be passive.
Paying off debt leads to an increased amount of discretionary (investable) income
Ideally there should be an inverse relationship between income and expenses
Focus on massive, passive and permanent streams
Good luck in achieving your own version of financial freedom!
We cannot choose our parents. It is not our fault if we born in a poor family but to die poor is an another story. So start your journey now from being financially handicapped to financially able and independent by following the suggestions that were mentioned above.