What does it mean to have financial freedom?
This question may be answered differently for everyone. For me, financial freedom means not having to worry about money and waking up every day on my own time.
Financial freedom is important because it can alleviate stress in our life. According to CNBC , more than half of Americans live paycheck to paycheck. This fact has always astonished me.
We live in the wealthiest country in the world, yet most people must go to work on Monday so they can pay their bills.
This is probably the single most important reason why financial freedom is important to me. I don’t want to have to depend on someone else to support me financially.
That being said, there is a focal point that each of us should use to reach financial freedom. That focus should be, cutting expenses and increasing income.
I know this is a topic that we have all heard before. However, I think that we can all put our own unique twist on the matter and apply this to our lives. This way, we find out how managing our finances works best for us.
Here is a list of the top 5 ways to ready yourself for financial freedom. Each of these plays into the theme of cutting expenses, while also looking to increase income.
- Have a second income
- Automate savings transfers
- Own a rental property
- Be frugal
- Reinvest your profits
1. Have a Second Income
What better way to increase your income than finding a second source?
Warren Buffett once said, “Find a second way to earn money or you’ll work until you die”. The reason why this is true is that it is so hard to prepare for retirement.
First, we don’t know how long we are going to live. People are generally living longer which means we will need more money for our retirement. Still, the range is going to be different for everyone. Think about the difference in money someone might need who lives 10 years into retirement versus someone that lives 30 years.
Second, we don’t know how inflation is going to affect our purchasing power. By purchasing power, I mean what is the value of our dollar going to be and therefore what can we get for it. Milk may cost a few dollars today but what will it cost 25 years from now?
Here is a list of my favorite options to earn a second income:
- Start investing now
Opening up an investment account is one of the best ways to secure financial freedom. Some of our best businesses are free to invest in. All you have to do is start. Not to mention, the best perk of investing in individual equities is receiving dividends which will be mentioned below.
- Drive for Uber/Doordash/Shipt/Instacart
Delivering food/groceries is a great way to earn extra money. The tips are the best part. I once earned over $100 on a single tip for a grocery delivery and $150 for the whole trip.
- Sell on Ebay/Amazon
Selling old items on Ebay can earn extra cash to pay bills. Think of stuff you don’t use anymore. What is sitting in your basement or garage that could be useful to someone else?
- Start an website
Do you have an idea for a small business? With the growth of ecommerce, starting a website to sell a product or service is easier than ever. You’re using one right now!
One thing we can all agree on is that we are transforming into a digital world. Adopting to this trend can be a great way to earn more money.
- Work overtime at your job
I know this doesn’t seem worth mentioning but working overtime is a great way to earn extra money to secure financial freedom. Many employers will pay time and a half or double time as well. If none of the topics above are interesting enough, working a few extra hours can be the way to go.
The sooner you find a second income, the sooner you can start saving more money. However, I would argue that saving is not enough.
Why saving money is not enough for financial freedom
Saving money alone is not enough to reach financial freedom because of inflation. We don’t know what our daily needs will cost late in life. Ensuring that we do everything we can to increase our purchasing power is the best way to prepare for the future.
Therefore, it’s important to start investing now.
The reason being is that time is the most critical factor when it comes to investing.
Albert Einstein once called compounding interest the 8th wonder of the world. One example that proves this when using investment funds could be the following: Suppose someone had a $25,000 balance starting out and worked a total of 30 years (assuming a 7% return and additional savings each month of just $250), this investor would have nearly a half million dollars for retirement.
Another example comes from investing in an individual company. Take Amazon for instance. One investor had the opportunity to make almost 730%. You can read the article here that gives more information.
This individual invested a little over $5,000 in Amazon in 2004. If they still held there invest today in 2022, that investment would be worth nearly a half million dollars.
Now I know what everyone if thinking. How do you know early on which stocks are able to have this kind of growth? The answer is that it isn’t so hard to find these great businesses. The hard part, as we can see from this example, is to think long term and hold onto the investment.
I encourage you to read more about investing in individual stocks here.
Nonetheless, it is important to start investing sooner rather than later. Investing allows someone to earn a second income which is important to reach financial freedom.
Investing in stocks also pays dividends to investors. Dividends are distributions to investors for their share of the earnings from that business. Dividends are one of the best sources for a second income because it is passive. You don’t have to do any work to receive your portion other than reading about that company.
Here is a list of some stocks that offer decent dividends:
- AT&T
- Current dividend payout as of August 2022 is .28 cents a share. This means that a $10,000 investment would yield about $150 every 3 months.
- Verizon
- Current dividend payout as of August 2022 is .64 cents a share.
- Honda Motor Company
- Despite this being an international equity, Honda is a great business that offers a great dividend. Current dividend at the time of publishing is .3 cents a share.
- Hanesbrands
- On top of being one of the most recognizable brands in the world, Hanes offers a .15 cent dividend and makes a nice addition to any portfolio.
2. Automate Savings Transfers
As Tony Robbins claims in his book, Money: Master the Game: The 7 Simple Steps for Financial Freedom, automating savings transfers is a necessary step to secure this financial freedom.
Automating savings transfers is arguably the most important factor that has helped me start my financial journey.
I was naïve when I started this journey because I thought I could start building wealth without automating my savings.
Still, I thought that it wouldn’t be hard to add $50 or $100 a paycheck to my other account. Yet, whenever the weekend came and I started spending money, I soon realized that it was harder than I thought.
One of the most popular methods of doing this is contributing to a 401k account. A 401K is one of the most popular ways for Americans to save for retirement. Therefore most of us already automate our savings transfers because we add a certain percentage of our paycheck to our 401K every pay period.
Yet for those who have other forms of investing, such as an individual brokerage account, you’ll have to automate these transfers on your own. Most major banks have a transfers page on there website that allows anyone to automate a transfer. I have used this method for years and I don’t think I would have saved anything close to what I have now if I had not done it.
3. Own a Rental Property
This one may seem out of left field. Yet, owning a rental property or an investment property is something that I feel should be a more routine investment for average Americans.
Real estate is in a class buy itself when it comes to investing and is the sole reason a lot of people reach financial freedom.
The great thing about real estate is that we know we will always need it. We are always going to need a place to live. Therefore, by buying a property for investment in a great location it is hard to not make extra money.
With real estate, there are 3 main ways to become financially free:
- Appreciation
- Cash flow
- Debt pay down
With appreciation, this is the rise in price of your property over time. Real estate prices generally rise with inflation.
Cash flow is the money left over each month after you pay all capital expenditures and your mortgage. This is one of the most popular reasons to own real estate.
Lastly, debt pay down is just what it sounds like. When you have someone else living at your property, they are essentially paying for you to own that house. Even if your property never appreciated in value and you did not make any extra money via cash flow, by having someone else pay your mortgage you could still sell your property in the future and make what was paid off on it.
I haven’t even mentioned yet the tax benefits of real estate-one of the main reasons investors get started in the space altogether. When you own property, the IRS has tax laws that allow investors to write off certain items.
One of these is depreciation. Depreciation on a property may be written off every year you own that property usually up to 27.5 years. This allows for major savings come tax time.
When you add all this up, you can see why real estate is a great investment to make. The best part is that anyone can do it and everyone should. A house is usually the most expensive item a person will ever buy. By adding a second property to your portfolio, you greatly increase the chances of reaching financial freedom sooner rather than later.
4. Be Frugal
One of people’s least favorite things to hear is to be frugal.
However, if you study people who are already financially free, you will see a common theme with them. They don’t spend money on things that don’t need when they are starting out.
This includes items such as food, clothing, and housing. Looking at what we spend on our basic needs is a good indication of how frugal someone is. For example, if you’re someone looking to save money, go in your closet and see how many pairs of shoes you have. What about food? How many times do you eat out every week? Also, what is your mortgage or rent costing?
When it comes to shoes, if I really need a new pair, this is a good gift to ask for. As far as eating out goes, my wife and I try to limit these occasions to a couple times a month. Moreover, our housing payment would probably fit in the average range for most people in our town.
Additionally, one of my favorite places to check if someone is watching their expenses or not is their car payment. How much do you pay? Over-paying for a car is a great way to put off financial freedom. No matter what you are paying, any vehicle stills gets you to your same destination.
As a rule of thumb, if you pay almost as much for car as you do your housing payment than you clearly are over paying. If you are interested in becoming financially free, than eliminating this payment altogether is a great way to make it happen. You can also try these options:
- Shop around for a lower interest rate
- Make additional payments every month (even if their small)
- Make the tough decision to trade in for a cheaper car.
My first car had a payment of $260 a month. The total amount I paid was $15,800 and I paid this loan off early.
5. Reinvest your profits
Although many financial experts argue to pay off your debt before you invest, I believe you should do both at the same time.
Again, waiting to invest is a big mistake. The longer you wait, the more time you are giving up that could be helping to produce compound interest.
This advice goes for all investments. Whether it is a small business you own or an investment property you rent, putting money back into your investments only helps them grow faster.
By following each of these steps and sticking to the game plan, all of your effort will begin to compound itself. It is amazing how a little money saved can turn into financial freedom one day.
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