As you know, I'm a big proponent of finding your own definition of financial freedom. This is a guest post from my friend Elad Mor about how he is working toward financial freedom.
Personal financial freedom is the goal for all of us.
We wake up each day to go to work or run our own small businesses. We want to afford to live a happy life and pay for the basics of life without having to struggle financially or being dependent on others. However, we often do not take
However, we often do not take the?time to critically think through the process of actually moving out of financial slavery and into the promised land of financial freedom. It all starts with planning?and then executing your plan with a lot of discipline.
Robert Kiyosaki in his book Rich Dad Poor Dad explains that if you are not careful, you will find yourself in what he calls the rat-race. This is a financial situation whereby you are trapped in a cycle of activities that enslave you to work and trying to earn money just enough to pay your bills and debts. You could end up in this trap and transfer the same financial habits and outlook to your children who then take over the rat-race and the process continues from one generation to the next.
Reduce Your Debt
This trap can be avoided and it all starts with your conscious decision to reduce your personal debt burdens. This includes your credit card debts and any other loans that you have taken to finance the?purchases of personal or household items that depreciate in value.
Start by repaying the debt with the highest interest. Once that debt is paid off, move on to the next. You can also start with the smallest debt and move up. The idea is to take a measured approach so that you can get rid of your debt in an orderly fashion. Eventually, you end debt-free or with very minimal but essential debts.
Boost Your Savings
Once you have freed yourself from the bondage of debt, your next step is to start saving. All the money you were using to repay loans is at your disposal and your bank account balance will start growing. You need to consciously make a decision to deposit a given amount of money out of your monthly income into the bank account. Discipline is required in order to ensure you remain consistent and do not default on your monthly deposits.
As your savings grow in the bank account, you might be tempted to spend the money on temporary luxury from time to time. To get over this, consider an investment strategy?that locks your money away for a longer period of time. Tax-advantaged retirement accounts are ideal for building long-term wealth that you can't immediately get at.
Investing and trading can be risky affairs and many individuals would rather have their money sitting in their bank accounts than try to invest it. However, with the higher risk in investing also come higher rewards in terms of higher returns which grow your wealth much faster. For risk averse individuals, consider indexing. It's a way to take advantage of long-term market growth without the risks that come with stock picking.
Build Passive Income for the Future
After clearing your debts, saving and investing your money, you can start enjoying a better lifestyle from the passive income you draw from your side investments besides your job. It's important to apportion your passive income into two sections so that it lasts: one-half should be re-invested to keep growing your wealth, and the other half should be for your own use.
What do you think of Elad's strategy? How are you building your own financial freedom for the future?