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Any Simple Rules to Reach Financial Freedom?

Any Simple Rules to Reach Financial Freedom?

March 12, 2021
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Perhaps.  Let me give you my perspective.

Rule #1: Live below your means.

Rule #2, see rule #1.

Rule #3, pay yourself first.

Rule #4, keep a minimum reserve for emergencies.

Rule #5:  After that, take whatever you have saved and look to invest it so it will 
                       1  earn more than inflation,  
                       2  be accessible,  
                       3  be liquid,
                       4  be under your personal control, and  
                       5  create or be capable of creating collateral.

Ultimately, you want your cash and investments to grow and to provide leverage so they can grow faster.

For example, you have saved $35,000 which you use to buy a small house at a tax auction for $24,000. You spend $7,500 to fix it up and then rent it out for $350/month. (Purely hypothetical numbers). Result: an asset worth ca. $35,000+ returning a net +/- $3,800/year, which should be able to be increased annually at, say, 3–5% per year. It’s also quite possible that a bank or private lender would put up the $7,500 after you bought the house. Gross return: 10.8 - 12% in year one. Once established as a rental, it may be eligible (collateral) for a mortgage (leverage) to repeat the process.

Rule #6, always accept “free” money. By that, I mean the matching component of your 401(k) or 403(b) plan. Add to that, gifts and inheritances.  Nothing else comes to mind (unless you count tax breaks from Uncle Sam).

Rule #7, do not “fall in love” with your investments. They need to be reviewed periodically and, in the back of your mind, they must always be for sale. When 20 rental units become a burden, cut back or sell. When a stock fails to meet your expectations, sell and move on. When a bad investment shows no signs of improving, sell. No one went broke taking a profit.

Rule #8, do not try to do it all yourself.  Be willing to seek and hear advice, but make your own decisions, own them and be decisive. If the advice was bad, so what?  You accepted it.  

As your wealth grows, remember Rule #4 – Reserves. Increase them to a significant “safe” amount ready to meet not only emergencies but also to fund opportunities, always to be repaid to that account.

Long-term, you want your investments to be diversified so that no one market’s decline (real estate, stock, bond, cattle, oil, etc.) will cripple your portfolio. Eventually, you will want your income to be derived mostly from your investments. Therefore, you will want to protect that future income against other hazards, as well: Inflation, Taxes, Mismanagement, your Death or Disability. 

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