First, it should be clarified what financial freedom means at all. There is no single definition for this term, and everyone understands it differently. For one, it may mean that one person can no longer be indebted and free to decide on his entire salary, while the other is still miles away from his financial freedom. For me, it means that my entire expenses are covered by passive income. Income is passive when I do not have to invest my time in exchange for money so I can decide freely about my time.
There are several ways to build a passive income:
• Interests and dividends on invested money (shares)
• Renting a property
• Write a book
• Build a blog (for example with affiliate marketing and advertising)
Of course, all of these methods require a lot of work in the beginning, and it takes a long time to reach (good) passive income. Each step of the road to financial freedom requires certain steps.
Here on my blog I would like to show you the individual steps and help you to implement them.
Financial freedom in 6 steps
Step 1: The right mindset
To me, the word mindset is the sum of all thoughts, beliefs, opinions, and the way of thinking that ultimately determines one’s personality and behavior. Some may wonder why this is the first step on the road to financial freedom for me. Therefore, understanding the impact of the mindset on financial success is hugely important.
So the basis for any action is always a thought or attitude that you possess. Your way of thinking has brought you to the place where you stand now and without changing it, you will not achieve any other results.
I would like to give you an example:
In the area of weight loss, the yo-yo effect makes it very clear. Many people are highly motivated to start a diet to get rid of their overweight. They do sport and change their diet. The practices are correct, but they are of no use if practiced for a short period of time, only to fall back into their old habits. Therefore, many will regain just as much or even more after the diet compared to what they have previously lost in weight. In order to achieve its goals in the long term, it is necessary to change your mindset and habits once and for all for good.
In addition, you will never take the right steps if you do not know where you want to go and set no goals for you. Therefore, think about exactly where you (financially) go, set goals and then take action and implement.
Step 2: Financial analysis
Before I can achieve anything, I have to formulate a goal. Then I analyze: Where am I standing? It depends on what the next steps are. Many people skip this enormously important step and then wonder why they are not reaching their goal. You can try so hard to come to Paris with your bike if you are in the USA. When you arrive at the ocean coast, you will realize at the latest that you can not reach your goal.
Therefore, in the financial area, first consider how much assets and how many debts you have and how much your monthly income and expenditure are. Afterwards, it can be considered in more detail, what are the appropriate steps for financial freedom or another of your financial goals.
To look at the income and expenses it is worth using a budget book. You can make yourself an Excel spreadsheet, use free apps that are available online or just use a classic paper-based household book.
Step 3: Saving
If you now know what the monthly income and expenses are, then concrete steps can be taken. Saving means spending less than you make and it is logical that only in this way assets can be built up. Therefore, it is also imperative that you never spent more than what you earn.
If you have found out in the financial analysis that you spend more as you earn, then immediately the expenditure should be drastically reduced. Your high spending makes your wealth smaller and smaller and at one point you even have to borrow money. In this case, interest must be paid additionally, which in turn increases expenditure even more. So you get into a vicious circle and the financial situation gets worse and worse. Therefore, the goal should be to repay loans as soon as possible and not to take up any other loans anymore.
If you are free of debt, then you should continue to save money each month, because this increases your wealth more and more. Investment can build a passive income.
Often it is underestimated here how much can be saved monthly, because with each increase in income, the expenses are adjusted to this and habituation has occurred. So says a thousands of years old quote:
“What you call” necessary expenditures “will always grow – up to the amount of your income.”
Therefore, you should first take care of and reduce the amount of expenses before you increase your income and thus your expenses again.
To learn how to create passive income for real, you should grab this book here “The Passive Income Myth”
Step 4: Investing
This step is likely to be the most significant as most people analyze, save and earn more, but invest little or no money. Only by investing (if there are no other passive sources of income) can financial freedom be achieved. If “only” wealth is accumulated and not invested, then it must be used up when there is no income. In addition, the money saved is leveraged by investing. When investing, you not only receive a certain interest rate on the money saved, but also interest on the interest. As a result, the assets increase exponentially, which people can hardly imagine, because they think linear. The longer the investment period, the greater the compounding effect. For this reason, investing should be started as early as possible.
Here’s an example:
We have twins who both want to buy a holiday home for $100,000 when they retire at the age of 65. Both invest in the same product with a net yield of 5%. One saves a lot at a young age and invests a single sum at 25 years. The other waits, because he also wants to enjoy life when he is young and he will earn much more later. Therefore, he invests at 55 years once a sum. Well, what do you appreciate? What do they have to invest to end up having the money for the house? I was also surprised by the result. One requires $14,200 and the other $61,400. Both have the same amount at the end and can both buy a house for $100,000, but the money they need is extremely different.
I think that makes it easy to see why investing is so important on the road to financial freedom.
Step 5: Earn More
For most people, the step of earning more is the only solution to financial problems. This is only effective if part of the additional income is saved and the expenditure does not return to meet the level of the new income.
In principle, this step is even superfluous, if the four steps before it are heeded. So it is possible to achieve financial freedom with the current salary and a certain savings rate. If, in addition to the first four steps, the salary is increased and part of it is saved and invested, then this process can be extremely accelerated. Some will probably now argue that, for one reason or another, they can not save anything and therefore need to earn more.
Of course it is easier to save money with an income of $5,000 per month than if you only earn $500 per month. In addition, other factors, such as the place of residence (city or a small village) play a major role, in the ability to save money and thus can make it much more difficult. For most people, the aggravating factors are used as an excuse for not being able to save anything anyway, as they would have to earn more first. If they then get a raise, then again the money is not enough.
Most people have already had quite a few salary increases and each time the expenses have grown as well or have you always earned as much as a student or trainee as you do now? In part, the income has quadrupled since that time and yet there are supposedly no opportunities to save, because more must be earned first.
On the subject, I can highly recommend the book “The Millionaire Fastlane“. It makes you think about the topic of making money and building wealth in a very different way.
Step 6: Repetition and deepening
The individual steps are not to be understood so that step one is completely completed and then you can only moved to step two. Rather, the individual steps build on each other so that the basics should first be laid in the previous steps, so that a long-term success can be achieved. Here, apart from step 5, none of the steps can be skipped to succeed. In addition, you should understand that no step can really be completed because more can still be learned in each area. So the true master always remains a student and never has the mindset that he already knows everything in one area.
I hope I have been able to give you a good overview of what the steps towards a better financial situation or individual financial freedom are. Of course, this was only a superficial consideration to give an introduction and overview. If I had gone even deeper into the subject, then this would have cleared the frame. There are already a number of books that describe the path to financial freedom on hundreds of pages. So I want to be more specific with my individual contributions and answer individual questions here below.
Now what’s your take on this subject? Feel free to share your opinion in the comment box below and ask the questions which burn you under the nails.