Definition of Financial Freedom
Financial freedom is being able to do the things you want to do without having to worry about money. It can also mean having enough assets to make your money work for you. This is so you have the ability to work zero hours and still make money. You can also have financial freedom when you have all your assets combined, and pay for all your expenses and lifestyle. For example, if you own real estate assets, those assets should be able to cover your expenses in paying your bills and lifestyle. If you’re able to earn more money from your assets while covering your expenses, then that results in cash flow which will allow you to be financially free.
How to ensure you’re meeting your financial goals
When planning to meet your financial goals, you may need to think about your lifestyle. If your lifestyle includes going out every weekend, then this equates to additional expenses. Eventually, these expenses can add up and may make it difficult for you to reach your financial goals. Creating a system to monitor your expenses and how much you earn from your job or through assets is important. If you have a good system, then you can still maintain your lifestyle without having to worry too much about your finances.
Another system you can try to implement is to set aside $10 per day which will allow you to have $3650 each year. This budget can go to your savings and may help you reach your financial goals whether it’s to invest the money or buy assets.
Budgeting can be difficult and can be tedious for many people. There are two schools of thought whenever you look at budgeting. One is the Dave Ramsey approach which is to live off beans and rice and track every cent. This approach can be done for those struggling with debt and may help you be debt-free over time.
The other approach is from a book by Ramit Sethi called I Will Teach You To Be Rich, where you’ll find the conscious spending plan. This puts your income into four categories which are fixed cost, investments, saving goals, and guilt-free spending. He says you can be rich by just saving 10% of your income every month. Ideally, you can save 20% or even more, but there will be a 20% guilt-free spending piece. You don’t need to track everything you do down to the last cent, but cut down the things you don’t care about. Find out what you don’t care about and things you do spend on, and then cut back based on that. Always remember to pay yourself first and this comes from almost every financial expert.
When should you focus on paying debt ASAP vs. minimum payment?
There are two kinds of debt, the good and the bad. Good debt is when you use debt to purchase things you can make a profit on in the future, assets such as real estate. Bad debt is when you use the money to purchase liabilities such as clothing, cars, and anything that depreciates. There’s no need to rush paying off debt when you’re leveraging off it, then that debt is working for you and you’ll be able to focus on other debt.
Difference between an asset and a liability
An asset provides an economic benefit while a liability takes money out of your pocket. There are essentially assets and liabilities in everything that you do. In a relationship, it can answer questions like how much can this person take away from me or if the person adding to me and building me up. When you look at asset and liability from a sports perspective, someone who’s an asset to the organization can make great plays and help the team win. Someone who is a liability in sports can be a person who gets a big contract in an organization but often gets injured.
Should you invest in cash flow or capital gain
If you’re investing for capital gains, then you’re not necessarily going to have a lot of them. Whereas cash flow, it’s easier to get into it but will help you get capital gains in the future. Basically, capital gains are just the profit of a real estate or some type of investment you have. You purchase real estate and then renovate it to get more money upfront. The cash flow in real estate, is where you buy the property, fix it, and then rent it out. Your cash flow is everything you gain after you deduct expenses from the real estate such as maintenance and all the expenses of the house. Capital gains can be a gamble because you are buying a place just to hope it goes up in appreciation and sell it in the future. You won’t know if the property will go up or down.
The idea of cash flow is you use other people’s money and take home excess cash flow. The bonus is down the road and it’s a long-term investment. The goal behind building up your cash flow is to get to a point where your cash flow exceeds your salary or the money you’re making from your day job. When you have that steady cash flow, then you can consider capital gains because eventually, you’ll sell that.