What I love about financial independence most is there are many ways to get there. You may love your job and want to advance in your career but you also want to retire at 50 to Nova Scotia. Or, you may dream of the day you can quit your job and do something new. You may be living paycheck to paycheck, have student loans, want to be free of debt, or live on a beach.
Overcoming each of these is a milestone in your path to FI. Whatever your driver for financial independence, which is a state of living where your expenses are covered by income you receive from sources other than a job, you’ll want to focus on getting there in a way that is sustainable for you. That means you can stay on track over a period of time, while enjoying the journey.
There are three ways to reach financial independence
- Through your cash flow
- With your income
- With assets
Regardless of which one you choose, and perhaps it’s a combination of the three, the starting point, and the rules, are the same. Focus on your cash flow first, but know that over time you’ll use all three to build wealth and reach FI.
The Starting Point
The starting point to financial wellness is a steady income. If you don’t already have that, focus on doing something right now to create an income you can rely on every month. That may mean in the short term you work at Starbucks, nanny, or drive for Lyft. Whatever you can do to create quick, steady income is your goal right now. It’s a stepping stone to a great financial life.
Once you have steady income, identify your Impact Factor. That’s the bottom line of your monthly cash flow statement when you subtract your expenses from your income. If you don’t have a monthly cash flow statement, make one right now. This strategy doesn’t work if you don’t know where your money is coming from or going.
You can use MS Excel, Google Sheets, a pen and paper, or check out my favorite FinTech budgeting app Tiller that syncs with Excel and Google Sheets.
When I finally wrote down how much my debt minimums were each month, I was shocked. I thought if I could eliminate those payments I’d be free. Little did I know once I got there I’d be propelled to keep going.
When I started this journey I just wanted to stop living paycheck to paycheck, but over time I’ve realized there are a lot more things I want in life, and none of them are “get a job.” That’s not to say they don’t require me to earn. There is a difference.
You must know your Impact Factor. It is your power, and it’s the amount you are going to put to its highest and best use each month, including eliminating debt and building your personal assets. Aim for 15% or more of your net income.
After you pay bills and spend on needs only, how much is left over to build a better life for yourself? One day, when you are FI, you will have plenty to spend on wants. How much can you put aside today, to reach FI? Build some cushion in for wants along the way, so you can stay on track.
Building wealth with your cash flow
Building wealth with your cash flow requires more awareness than action, and that’s why you start here. Awareness naturally leads to change. This method requires you to be conscious of where you are spending, and only spend on things you need.
Where you spend your dollars reflects what you value. Take time to think about if where you spend brings you closer to, or further from, the life you want.
Don’t let anyone tell you what you need. Only YOU know where you are going. Reaching your dreams requires discipline in a world where everyone, every business, and every company, wants your money.
You have to want your life more. When you spend a dollar it’s gone forever. But when you put a dollar in your assets, they grow. Over time, they multiply.
The cash flow method to create wealth means that you reallocate dollars you are currently spending in categories such as housing, food, transportation, personal, and entertainment on things you don’t need, to personal assets such as savings, retirement accounts, investments, and additional income streams.
Learn how to set up your assets in my FREE mini-course 5 Days to FI. Get it here.
Build Wealth with Income
Building wealth with your income means that as your income grows, your Impact Factor grows proportionally. Lifestyle creep is a common term for what happens to most people when they get more money over time. They buy things such as a bigger house, a car, a camper, new clothes, or more vacations. Not to say any of these are bad! They are “bad” however, when bought or financed before personal assets are built.
As long as every time you get a raise and/or additional income, you apply it to your Impact Factor, your personal assets will grow.
The Rules
There are two platinum rules of money. Follow these and you’ll be golden.
- Spend less than you earn
- Every dollar has a purpose
Spend less than you earn
It’s easy to ignore the first platinum rule “spend less that you earn” when the average person has two-three credit cards in their wallet.
To ensure you don’t overspend, leave your credit cards at home except for one, and pay off its balance in full each month.
I also recommend using a spend tracker to see where your money is going every month. Some of my favorites are WellWallet, EveryDollar, and ClarityMoney.
Every dollar has a purpose
Before you even get a dollar, know what you will use it for. There are three reasons people fail when it comes to their personal finances. They don’t have a plan, they don’t have a strategy, and they don’t have a coach. By having one of the three, you are ahead of the game. Having two or more means you will get to FI even faster and with more to play with and the ability to make a bigger impact.
Having a plan for your dollars means that when you get paid, you already know how much is going to which “bucket.” Set up auto payments and auto transfers to any debt you’re eliminating and your personal assets so it happens every month no matter what. This means you are paying yourself first, before any spending.
Build Wealth with Assets
Once you have set up your personal assets, you’re ready to level up even more.
For example, if you started by opening a savings account and you’ve been putting $100/month in it for 10 months, you can open a retirement account with a seed amount of $1000. Now you have an asset with tax sheltered and/or tax deferred advantages. Continue to fund it with a portion of your Impact Factor each month. You can evaluate and open retirement accounts at Bankrate.
With adequate money in savings, you can now buy a home using the savings for a down payment. Property ownership allows you to harness the power of leverage to build even more wealth.
In addition, you’re buying an asset using OPM, or other people’s money. Finally, because mortgages’ interest rates are relatively low, and real estate generally appreciates over time, it’s possible that eventually you can tap into equity to further increase your property’s value, or purchase another property. Do you see the domino effect?
You can also use savings to invest in more assets such as the market (stocks, bonds, mutual funds, ETF’s, index funds, commodities, etc.), a business, or yourself.
There are infinite, unlimited ways to create assets in today’s economy. Focus on building the personal assets first; debt elimination, savings, retirement, property, investments, an “asset-rich” job (one with benefits) and you will be well on your way to FI.
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