Before you can get to the realm of FF (Financial Freedom) there is another “FF” that you must first master, namely the Financial Foundations. Luckily for us, there’s only five of them. But firstly, definition time: Mastery means being able to consistently produce a world-class outcome. You’ll get to define exactly what that means for you, based on your situation and on some recommended metrics you will need to compare your outcomes to. If your outcomes are not where they need to be you simply must change your behaviours and actions. Ok, let’s get into them below. The order I have written these in is in order of simplicity of understanding the concept, not order of importance. Like air, water, and food, they are equally important and each requires special attention.
1. Savings Rate (also known as “don’t buy dumb sh!t and get into consumer debt”)
Tell me your savings rate and I’ll tell you how rich you’ll be. The savings rate is a super basic concept and yet the most oft-neglected ingredient by people to building wealth. I get it, it’s not a sexy metric. It doesn’t have the appeal of “forward PE” or “internal rate of return.” I mean, who wants to be Boring Boris and track their savings rate, right? Wrong! Look, you can’t build a house without bricks, right, so if you have no bricks left over at the end of each month, how the heck are ‘ya gonna build your investment house? Or your wealth castle? You can’t. Period. Without a healthy savings rate, you’re just a rat in the subsistence race. Ok, you might be a very stylish and popular rat, but ‘ya still a rat in my books! If you’re not managing to achieve at least a 50% savings rate on average, then you need to honestly examine and then optimize the following areas of your life:
- Lifestyle / Social Circle
- Profession / Education Level
- Country / City
By tweaking the above parameters, and adding an all-important dash of self-discipline to the pot, you will come up with ideas to improve your savings rate. One thing is for certain though: it will take research, conviction in your new vision, and lots of (potentially painful but not always) change to get there.
2. Passive Income (arguably the catch phrase of anyone who is financially “woke”)
Is passive income really “getting paid for doing nothing”? Well, kinda. You see, that might be the definition from one of those dodgy pyramid schemers, but passive income is actually you getting paid indefinitely for doing a whole ‘lotta work & investing in the past. Picture this: due to your self-education, foresight, sacrifice, and most importantly hard work, you’ve been consistently saving and investing your money over a long period of time and now it is generating significant amounts of passive income for you “while you sleep” (and while you’re awake!). 24/7 baby! The thing about passive income is that once you start to accrue it, the additional income it provides you with is like a “special ability” in a video game which really makes you unstoppable. The trick is to stick with it long enough to let compound interest work: at first your passive income will feel like an insignificant trickle but after a time it will become a powerful torrent. I still remember the feeling when my passive income more than covered my rent. Did that then help me save and invest more, thus accelerating the virtuous process of MORE PASSIVE INCOME? Yes! Soon enough and my passive income will cover ALL of my expenses and I will save and invest 100% of my salary and other streams of income. just imagine how much faster wealth acceleration will occur at that point in time. You may need to imagine; I don’t… because I’ve had the discipline of saving and investing for years and I know I will get there (it just isn’t a big deal after a while and eventually you want to teach others how to do it).
3. Income Streams (affectionately known as “Income Growth”)
Ok, this topic is HUGE and a book can be written on it alone. The difference between ‘streams’ and ‘growth’ bears paying attention to because it will solidify how you think about this concept and should hopefully expand your mind. This is because for a large number of us (very likely the majority) our largest source of income has been from salaries. Salary = Universe of What We Know Works and Generates Income. This can be severely limiting thinking if it persists in the long run, as it does for most people. Ok, let’s just get a few pesky facts out of the way before we continue: Is your job your ‘true calling’? Probably not. Are you passionate about your job? Definitely not (c’mon, don’t lie to me!). Are you good at your job? Yes (or, you should be). Do you earn good money from your slave-bondage, I mean, from your job? Yes (or, if a “no” then you should change company or career RIGHT AWAY if you want more moolah). As we all somehow end up in a career, as if by magic, and then 15 years fly by before we know it, due to the sheer number of hours we’ve spent practicing more or less the same activity, we become “competent” or “professional” at said activity. We have now “made it” by keeping on keeping on and found some measure of success and certainly income growth along the way. However, we all probably could have climbed the salary ladder a lot quicker with the following tools:
- Complete a part-time professional development course for knowledge or status boost
- Self promotion (conferences, white papers, networking, recommendations, etc.)
- Been more aggressive (changing companies, roles, and asking for more promotions, etc.)
But the key point of the above strategy is that for all people it all leads to the same outcome:
(Your Increasing Hourly Rate) x (Number of Hours Worked) = $$$
While more study, effort, charisma, risk-taking, and public speaking skills may budge the first part of the equation, we can’t change the second part. IT IS FIXED! There is a serious limit to it and therefore to your overall income. So, why focus your energy on “growing” something with limited growth potential? The success-guru answer is, “your model is broken and you’re wasting your time, here, let me share with you how to do it right by buying my online course.” The truth is, “you can actually make damn good money in a career, and I mean dayum good money.” So it comes down to you. If you’re happy to max out in your career at $350,000/year and that will make you happy then by all means you’re set. For more ambitious income goals, you need:
- Multiple streams of income (check out my no-fuss article on this)
- Sales model with growing sales
- Healthy profit margins that can be maintained
4. Investment Diversification (also known as “Portfolio Allocation Strategy”)
Most experts will tell you that this is a defensive investment strategy. And they’re 100% correct. However, I would think of this as an offensive strategy. Please try and wade through the following analogy with me. Imagine that you’re a general of an army. Your own personal army, we’ll call the soldiers in it the Greenbacks. Now imagine that if your army was simply comprised of 1 Residential Property soldier. This soldier is fighting for you on the front lines 24/7. He is doing a decent job but what if he gets hit by a bullet? Maybe his trench gets taken over by the Neighbouring Forces, or perhaps he gets bombed by Local Job Losses. Whatever the case may be, in this army you have a lonesome soldier. Surely I’m not alone in thinking he could do with a bit of backup. Maybe some cavalry, archers, grenadiers, special ops, etc. could help him out. So you go ahead and add 100 Rio Tinto and 50 Wesfarmers soldiers to help him out. Now your army is looking a little tighter, you can make formations, change your strategy, and conquer new lands! How exciting. In time you decide to bolster your forces with 200 all-rounder Vanguard VAS ETF shares. These guys are sturdy little diggers for sure! They will fight for you when the war is going your way and when it isn’t. In time you add another Residential Property soldier. This one’s a girl. She complements old mate beautifully and your army suddenly feels unstoppable. New terrain emerges that you weren’t aware of and your shrewd Generalship skills thus far will enable you to make the most of it.
Ok, do you now understand how diversification works? If one of your soldiers is “down” or “not firing”, your other soldiers in your army will keep fighting in the Compound Interest war on your behalf while you sleep, thus ensuring you ultimately experience that sweet victory.
5. Know Thyself (also known as “Don’t be a Dingus”)
This final point is really the glue that holds everything together. Your ability to learn about yourself is far more valuable than learning about shares or how to optimise the above concepts. Have you ever honestly looked deep inside yourself. At your flaws. Kept track of your mistakes and conceits? Been honest about your greed? About your fears? About your inability to process large amounts of information and take any meaningful action?! Now why is that? What or who is holding you back?
To quote Rocky,
Now if you know what you’re worth, then go out and get what you’re worth! But you gotta be willing to take the hits. And not pointing fingers saying you ain’t where you wanna be because of him, or her, or anybody! Cowards do that and that ain’t you! You’re better than that!
Ok, feeling a bit more inspired now? Good. The first hit you take isn’t going to be from the Mr. Market. I promise you. It will be from yourself. But sometimes it takes raw experience, repeated over and over again, for lengthy periods of time, until we begin to understand the truths told to us and laid bare before us. This is because as you gain experience, your reference point naturally changes. Your wisdom increases, even if that was never your intent. We are learners from doing, not from being lectured to.
So go out there, invest. Learn. Read. Ask questions. Don’t be shy about it. Read some more. Meditate. Make a plan. Invest some more. Ask better questions. Unlearn what you learned before. Read some more. Write a bit. Invest some more. Read and write some more. Teach others what you’ve learned. Be humble.