Four Steps to Financial Freedom

I am financially free, in that I have enough passive income to meet all of my current and potential future needs, some of my wants, and having enough left over to pass something along to the next generation. So, what are the four simple (but not easy) steps I took to obtain this financial freedom?

The following post is by MyPFJourney staff writer, Marie. You can read more of Marie’s articles over at her own blog, Family Money Values. Enjoy! 

I am financially free.  People define that term differently.  My definition is:

• Having enough passive income to meet all of my current and potential future needs, some of my wants, and having enough left over to pass something along to the next generation.

Looking back on my life, I realize now that we (my spouse and I) followed four simple steps to get to this point.  Yes, the steps were simple, but in no way were they easy.  It took years of  hard work and delayed gratification to get here. 

But, I also realize that most of the things that we delayed gratifying really didn't matter in the long run.  Looking back now, it is irrelevant that we did not buy a different car every few years.  It doesn't matter that I didn't buy brand name clothing for the family, and I doubt that we would even remember now whether or not we went out every weekend to a concert or restaurant or movie.

So, what are my four simple (but not easy) steps to financial freedom?

Financial Freedom Step 1 - Want it

As with any goal, you have to want it badly enough to endure the struggles along the way.  You have to persist in working towards your goal year after year, even when you are sick to death of doing so.

Set a goal - a specific goal but make it realistic.  Sure, we would all like to be millionaires before we turn 40, but it may not be possible for you in your situation. 

Define what YOU mean by financial freedom.  You can get there many ways.  Some prefer to tone down on the things they need and want.  Others prefer to ramp up their earning possibilities so they can achieve the lifestyle they want to live after they no longer have to trade their time for money.

Financial Freedom Step 2 - Earn some money

Unless you are cursed (some say blessed) with a huge inheritance, you will need to find a way to generate an income that can support you and keep supporting you while you are working towards your goal. 

Find a job (or found a business) that you enjoy and that pays well enough to pay your way.  Remember that any job or business will have ups and downs, things you love and things (or people) you could get along quite well without.

Keep that job or business by giving good value, continuing to grow and become more effective and productive and watching for opportunities to advance (either from within your current situation or by switching to a new one).

Financial Freedom Step 3 - Save, save, save

Once you are earning, no matter how much or how little, you can start saving.  You might need to cut expenses to the bone to do so, but (in my opinion) it is possible to save, even if just a few dollars a payday. 

Build up that safety net to the point where you can handle the possible year long without income and have an adequate for you emergency fund as well.

This is the part that takes persistence over the long haul.

The following quote, (an excerpt from the 2003 book Damn Right!: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger by Janet Lowe) which expounds on that:

• "Munger has said that accumulating the first $100,000 from a standing start, with no seed money, is the most difficult part of building wealth. Making the first million was the next big hurdle. To do that a person must consistently under spend his income. Getting wealthy, he explains, is like rolling a snowball. It helps to start on top of a long hill—start early and try to roll that snowball for a very long time. It helps to live a long life."

While your situation may not require you to have $100,000 in the bank before you start investing, it most probably will require you to have tens of thousands socked away.

It is particularly discouraging in the post-Great Recession decades to put that money into the bank or similar institution because savers have been hurt by the extremely low interest rates available to them in these decades, but having that safety net is essential if you don't want to get wiped out have to start over.

Financial Freedom Step 4 - Invest and build passive income

The last step for many is being able to build up passive income streams.  Passive income, as you no doubt know, is income that you get over and over again from work you do once or a few times up front.

Investing money you worked for once in the stock market can generate passive income in the form of dividends or interest or in the form of growth in stock prices (or both).  But, as with saving, investing requires patience and endurance.  Building passive market income requires buying and holding - through the highs and lows.  It also involves allocating your portfolio to reduce risk and careful selection of your investments, managing costs and being tax efficient.

Of course, there are other ways to generate passive income, but (in my opinion), stock market long haul investing is one of the most passive streams you can build.  Some folks like to invest in real estate, but real estate requires more ongoing effort, expense and liability than does stock market investing.

Conclusions

In each of the above steps there is an element of luck.  However, much of what we call luck is just either good or poor planning.  Are you lucky if you don't get laid off from a job (or did you work extra hard, provide excellent value and position yourself to last through a layoff?).  Are you lucky if your health holds (or do you eat right, exercise and take preventative care measures to stay healthy). 

Notwithstanding the above, truly bad luck, something totally beyond your control, can set you back and make it much harder to achieve your financial goals.

In summary, if you have the time, the patience, the persistence (and a certain amount of luck), following these 4 simple (but not easy) steps can lead you to financial freedom.

***Photo courtesy of https://www.flickr.com/photos/meddygarnet/4222474443/in/