Summary: In this article, we re-visit our second-ever blog post that was published in January 2018. In blog post #1, we shared our definition of financial freedom and why we think it should be your goal. In this article, we transition to actionable items for achieving financial freedom. CliffsNotes version: come up with a target, spend less, continue to work, build a substantial source of additional income, lower your taxes, reinvest the cashflow and tax
savings.
[Disclaimer: We are not accountants, lawyers, or financial advisors, so please consult your own team of professionals about the topics covered in this article.]
Financial freedom.
You know what it is. You’ve been thinking about it. It’s calling you.
Now what?
It’s time to take action and start your journey! You might be wondering, how do I achieve financial freedom? Where do I even start?
That’s what blog post #2 is about. It’s our step-by-step guide to achieving financial freedom.
Check out our Vendor Referral Directory to help you along the way with finding someone to help you with everything from Asset Management to finding a lender.
Step 1: Define Your Financial Freedom Number
We define financial freedom as the point at which you generate enough income to cover your daily living expenses.
So the first step to achieving financial freedom is to come up with your target. How much does it take to cover your daily living expenses?
This will require you to come up with a list of basic necessities and figure out the cost of each. Everyone’s list of basic necessities are going to be different. Some might consider private school for your children a basic necessity. Some might consider the high cost of living in California to be non-negotiable.
Our perspective is, if it’s important to you, call it a basic necessity and include it in the financial freedom number.
Ultimately, the number doesn’t matter. It can be five figures or six figures. What’s important is to establish the target so you know where you’re going. You can’t get to your destination without knowing both where you’re starting from and where you’re going.
Step 2: Reduce Your Spending
We aren’t huge advocates of living frugally, however, when you’re building towards financial freedom, reducing the amount you spend will help you get there faster.
We’d suggest evaluating your spending habits carefully and then determine what can be eliminated and what is non-negotiable.
For example, some people value their children’s education, so private school is a must. Others are happy sending their children to public school. Some people choose to buy a large luxurious house, while others are happy renting a basic home. Some choose to live in a high cost of living market, whereas others would prefer to live in a lower cost of living market.
Each of these lifestyles is a choice. If you choose to spend more money on daily living activities, then achieving financial freedom will require more money. Your financial freedom number will be higher.
And that’s OK. People have different values and get joy in different ways from different things.
The key is recognizing your spending habits (and changing them if you want to or not changing them if you don’t) and being honest with yourself as to how much your spending is going to affect your trajectory towards financial freedom.
Step 3: Continue to Work
This one might surprise you. You want to achieve financial freedom and we’re saying you should keep working?
Well, we’re not saying keep working in the same job if you’re miserable. We’re just saying, you’ve invested a lot of time to become a doctor or whatever other high-income profession you’re in. So use it. Take advantage of it. Use it as a tool to help you achieve your goals. It’s a means to an end, not the end itself.
Also, you don’t have to stay in the same job or work the same hours. We’ve had numerous members of our communities change jobs so they can get out of a toxic environment to a much better one. We have also seen people negotiate higher pay. Or cut down their hours to something more manageable.
The bottom line is, if you’re willing to continue working early on in your journey, the easier and faster it will be to achieve financial freedom.
It makes sense that if you’re earning a high income and you limit your spending, you’ll have more money to invest in other things.
Again, this is a balance. You may value time with your children while they are young. You may value taking mini-retirements while you’re still young enough to enjoy them rather than deferring them until you reach retirement age. These are choices that you should make depending on what’s best for you.
For example, we love to travel so we carve out time to go on trips with our children and parents. We knew that spending money on trips and taking time off will mean less money for investing. However, we were willing to make that choice. We wanted to spend time with our children while they are young and with our parents while they are still healthy.
Be honest with yourself and make well-informed choices about work based on you and your family’s values and needs.
Step 4: Find a Way to Build a Substantial Source of Income
The key to reaching financial freedom is to build a substantial source of income. We’re not talking about pocket cash. We are talking about enough side-income to replace the income from your day job.
While there are many “side gigs” out there, very few generate enough income to pay for your living expenses. Also, many of the side gigs are second jobs. Most of the doctors I know don’t want a second job. And most aren’t as high paying as what you can earn as a doctor or in your chosen profession.
This is why we like investing in cash flowing rentals. The cashflow can be substantial, you can grow it quickly and it can be earned passively.
Many people in our community choose to be more active in their investments so they can achieve real estate professional status or take advantage of the short-term rental tax loophole. But this is a choice and many enjoy the time they spend on real estate.
This is what this blog and our real estate courses (Zero to Freedom and Accelerating Wealth) are all about. Use this site to learn how to generate a substantial source of income through real estate investing and then start to take action to reach your financial goals. Another good resource is our mini-course, called Ignite Your Journey: Crash Course in Cashflowing Rentals.
Step 5: Lower Your Taxes
I know most people don’t want to think about taxes, but take a moment to really think about it. Taxes are your single biggest expense in your lifetime. Each year, the typical high-income earner pays 30-40% in combined Federal and State income taxes. That’s over six figures in taxes!
Now imagine instead of paying the government, taking that money and using it to buy a cashflowing rental each year. With $100,000 to invest each year, you could buy a $400,000 property (assuming you get a loan for 75% of the value of the property). In some cases, you could put down less. We have one investor in our community who regularly gets 90% loans. This means he could buy a $1 million property each year.
Imagine adding this to the money you set aside each year. Assuming you set aside another $100,000 in savings, you could buy two $400,000 properties each year!
You’ll find a lot of information about tax savings through real estate throughout our blog and podcast. If you’re just getting started, we’d recommend learning about real estate professional status and the short-term rental tax loophole.
Step 6: Reinvest the Cashflow and Tax Savings
One last step is to reinvest all of your cashflow and tax savings back into real estate. When you reinvest what you earn, you can grow your wealth faster than if you use the money for living expenses. It’s how you can take advantage of the power of compounding.
Ben Franklin said it best, compound interest is when your “money makes money. And the money that money makes, makes money.” This is what people mean when they say, “I make money when I sleep.”
If you want your money to make money, you should reinvest all of the cashflow and tax savings. This is another reason why Step 3 is so important. By continuing to work, you are able to reinvest the cashflow and tax savings because you don’t need it to live.
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Take the First Step
Now that we’ve gone over the steps to achieving financial freedom, it’s your turn to take that first step. Sit down and really think through steps 1-3. When you get to step 4, decide if cashflowing rentals is going to be your vehicle for achieving financial freedom. If so, take the next step by signing up for our free mini-course or take even bolder action by signing up for one of our real estate courses: Zero to Freedom or Accelerating Wealth.
Just remember, financial freedom is achievable and it doesn’t have to take a long time. Just follow the steps and we’re confident you’ll get there!