Climb Your Way to Financial Freedom

Financial Freedom Definition

Financial Freedom can mean different things to different people. Some define it as having enough money to retire. Others will say it is having $1 million in their bank account. To me, Financial Freedom means having the ability to do whatever I want without having to worry about where the money is coming from. In practical terms, it is having a consequent number of passive income streams that cover the lifestyle of your dream.

The key point here is passive income. As opposed to active income, where you exchange your time for money, passive income is money earned on investments.

The entire process to achieve Financial freedom is to build and grow multiple passive income streams.

Financial Freedom is a Journey

Achieving financial freedom doesn’t happen overnight. It is a journey and there are multiple milestones along the way:

  • Financial Security is having the ability to cover the basic living expenses (home, food…)
  • Financial Independence is the step where your current lifestyle is covered by passive income
  • Financial Freedom, as defined earlier, is a step further. It means having enough passive income to do all the things you want without having to worry about where the money is coming from.

The Roadmap to achieve financial Freedom

  1. Educate yourself about personal finance
  2. Know the number to set the goal
  3. Calculate your Net Worth
  4. Pay your debts
  5. Budget
  6. Increase your savings
  7. Invest to create passive income

Educate yourself about personal finance

Financial literacy helps individuals know how to best manage their money in terms of their life goals and their economic and financial situation. It should enable everyone to make informed financial decisions. In my opinion, this is something that should be taught in school but for some reason it is not. In addition, personal finance is often a taboo subject with family or friends. So how are we supposed to learn all that?

Until the age of 35, I was not interested in the topic. I had a high paying job and while our family didn’t have an extravagant lifestyle, we were not paying attention to what we were spending our money on. We were also not interested in investing our money and we simply saved the extra in our savings account as an emergency fund. 

That personal finance “style” was the result of simply observing what our parents have always been doing.

Thankfully, the internet is a rich source of information with people sharing their journey and their experience. We started our education in personal finance by reading blogs, watching youtube videos, reading books and even bought courses on the topic.

It is never too late to start learning. As you are reading this article, you are already on the right path. 

Know the number to set the target

“If you don’t know where you’re going, any road will get you there”. – Lewis Carroll

I love this quote from Alice in Wonderland. It illustrates that we need to define goals, and in this case financial goals. Setting goals enables you to measure your progress along the way and know when you achieve them.

Depending on where you are in life and what your age is, you can either define a number per month or use the one your currently need to sustain your actual lifestyle

Remember that either along the way or once you reach that goal, you can setup a new one with a higher number.

Create your net worth statement

A net worth statement is a financial snapshot that shows your financial wealth at a given point in time.

Knowing your net worth is important for two reasons:

  • It lets you understand your current financial situation.
  • It gives you a reference point for measuring progress toward your goals.

To create one, you simply need to

  1. list what you own, all your assets and their value (stocks, mutual funds, real estate…)
  2. list what you owe, all your liabilities (mortgages, line of credits, credit cards…)
  3. calculate your net worth by subtracting the sum of all your liabilities from total value of your assets

It is a very interesting exercise and I personally like to do it every year. It gives me a good overview of where I am at.

Pay your debts

When you created your net worth statement, you had to list all the liabilities you had which include all your debts. 

I will differentiate two types of debt here: good debt and bad debt. 

Some people draw the line between the two simply by the level of the interest rate. I personally look at it differently. Indeed, would you be ok to borrow money at 15% interest rate if you could invest it securely in something giving you 20% back. Of Course you would! 

There are risks involved with doing something like this but this is not the topic here. 

I prefer looking at it this way:

  • Good debt: debt taken on to purchase assets (rental property, your education, a business…)
  • Bad debt: debt taken on to purchase depreciating assets (cars, clothes, consumables…)

There is a big debate about a personal home being an asset or not and we will not get into it here. Simply put the mortgage on the personal home on the good debt side.

So list of all your bad debts out of the liabilities of your net worth statement and sort them out from the highest interest rate to the lowest. Start tackling them one by one from top to bottom. It can be a long process, so take some time first to analyze those debts and look for ways to reduce their costs like consolidating them into a lower interest loan for instance.

Create and monitor your household budget

The household budget is similar to the net worth statement. Instead of giving you an inventory of your assets and liabilities, it gives you an inventory of where your money is earned and where it is going out every month.

To create one, simply start by listing all your monthly incomes first (wages, pension…). Then, list all your monthly expenses (rents, utilities, groceries).

Finally,  subtract the total of expenses from the income total and you get the leftover.

Analyzing this leftover. 

  • The result is negative. You are spending more than you can afford to spend and you need to look at how you can increase your income or find expenses to cut.
  • The result is positive. Congrats! You are saving money every month. Now you just need to put this leftover to good use.

If you want to learn more about how to create a Household budget and save money, checkout this article: https://affordfreetime.com/how-to-create-a-household-budget/

Increase your savings

The prerequisite to this step and the next is to have a positive leftover on your budget. 

Now, the game is to increase this leftover as much as you can. The more you save, the more you can invest in assets generating passive income which will accelerate your way to financial freedom.

To increase your savings rate, you can start by looking at ways to create additional streams of income, like having a side hustle (drive for Uber, flip stuff for profits, host on Airbnb…)

The most important thing is to keep living below your means and avoid lifestyle creep.

In fact, you should even look at reducing your current expenses. You probably can skip a few dinner out, reduce take out orders, downgrade or cancel your cable TV plan…

Invest to create Passive Income

To create a passive income stream, it requires an up-front investment of money and/or time. The first step to accessing passive income is buying, creating, or contributing to assets that produce cash flow. Your reward for that initial investment is an ongoing stream of income you can enjoy over time.

It is possible to invest solely time into creating a passive income stream. For instance, building an online business that grows enough for you to be hands off. While this is a great option, in this article, I will only focus on the second type that requires investing money.

The traditional ones:

  • Bonds (fixed-income securities): loan made by an investor to a borrower (typically corporate or governmental)
  • Dividend paying stocks
  • Index Funds: a mutual fund or exchange-traded fund (ETF) designed to follow certain preset rules so that the fund can track a specified basket of underlying investments
  • REITs (Real Estate Investment Trusts): companies that own or finance income-producing real estate across a range of property sectors
  • High Yield Savings Account
  • Rental properties: own real estate and rent it out. To be passive, make sure to outsource the property management.

The less traditional ones:

  • Earn interest on cryptocurrency stablecoins: stablecoins are cryptocurrency pegged to a fiat currency. For instance 1 USDT = 1 US Dollar. There is no fluctuation on the value of stablecoins, this is quite different from the volatility of other cryptocurrencies as you have probably heard. You can put your stablecoins in a sort of “savings account” that will earn some interests.
  • Invest in Trading Bots: Trading bots are robots that will trade automatically for you. You put the money on a brokerage account and the bot will use this account to trade for you. The most popular bots trade on the Forex and on the crypto market.

Conclusion

While the end goal seems to be very far and difficult to reach, as you can see the process is not very complicated. The difficult part in my opinion is to commit to the process and stick to it. More than simple motivation, it requires daily dedication. It seems that anyone who attempted that process has not regretted it. So that is why we decided to embark on that journey.

At which step are you at right now? Let us know in the comment! We would love to connect!

Climb Your Way to Financial Freedom

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