Wouldn’t it be great to wake up without a worry about finances? This is a sheer blissful feeling. Your passive income allows you the opportunities to travel places, buy anything you need and do anything you want. If you want to fly to Paris and visit the Louvre, you simply can, because your finances are in precise order. When you have reached this level of financial peace, this is when you have achieved true financial freedom. Let’s find out how to get there.
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Put Your Money to Work
If you want to completely take control of your finances and have financial freedom, you must understand how to put your money to work. Do you know how hard your money is working for you? If it’s just sitting in a bank account, it’s not doing anything productive for you.
When you work for a living, you exchange your time for money. It’s pretty much the worst trade you could ever make, to be honest. Why? You can always make more money, but you can never make more time. Living this way, you must keep working or else you stop making money.
Learning to become an investor, rather than just a consumer, and starting to put your money to work is the way to financial freedom.
The Power of Compounding
Let’s construct a way to earn money that will eventually take your place and configure it in such a way, that it generates income even while you are sleeping. The greatest way to make your money work for you is to compound it. The power of compounding can increase even a small investment over a period of time. It simply means allowing your money to grow through interest over time. For instance, if you set aside $10,000 and make a 10% profit, you’ll have $11,000 by the end of the year. And the next year, you will end up with $12,100. You’ll continue to accumulate funds without ever touching them! So, what do you need to do in order to have your money working for you?
First, treat your investments like a second business. That’s right, this is your job now. A perk is that you have no employees, so there are no payroll or other costs. When you look at investments this way, you start to see that your investment is really a way to give you and your family more freedom. But what’s the first thing you need to do to get to this point?
Your Freedom Vault. Choose how much of your current income you will save each week to start building your money machine. But don’t even think of it as money saved! Think of this as your “Freedom Vault” – this will be your provider of financial freedom. Save a set amount of money every time you get paid, and then invest it wisely. Over time, your money will start to work for you instead of you having to work for it. So, what do you think is a good number? Whether it’s 10% or 20%, it’s up to you to decide.
The easiest way to do this is by setting up an automatic payment into your investment account, which can be your insert types of investment accounts. With automatic payments going into your investment account, you won’t ever see the money. The interest accrued will continue to build, no matter how much you allocate. For example, Robert Davenport began working for Coca Cola in 1923, he never earned more than $12,000 in any one year in his lifetime. Every paycheck he received, Davenport saved at least 20% of his check and twice a year he would buy General Electric stock. When he was 89 years old, his portfolio was worth more than $40M thanks to dividends and stock splits. This is a great example of how consistent savings, no matter the size, will lead to large returns over long periods of time.
6 Hidden Truths in Finance
When you decide to start investing, you can feel overwhelmed and not know where to begin. Since there are so many choices, should you hire a professional to help you? What if you put your money in the wrong place? Many new investors fall for investing falsehoods, so it’s time to bust those falsehoods so you can be sure you’re getting the most for your money. Knowing these 6 important truths can boost your performance by hundreds of thousands every year. So, follow closely.
- You can’t beat the market.
The truth is that very few talented individuals can continuously outperform the returns of the market. You and your financial advisor are probably not among them. 10% or fewer of actively managed funds outperform the market. This implies that your chances of succeeding are much, worse than the chances of tossing a coin. A passively managed index fund, which just tracks the entire market, is a much better choice.
There are a lot of hidden fees that add up, such as the expense ratio, transaction costs, payment for order flow (how exchanges give $0 commission trades), and taxes. This isn’t limited to stocks, and ETFs as the average cost of owning a mutual fund is 3.17% per year. Although it might not seem like much, each 1% increase in fees eats away 20% of the total value of the average retirement account. In the end, the majority of your savings goes into someone else’s pocket. Once more, investing in index funds with fees of roughly 1% or less, will significantly improve your financial reserves.
- Broker’s will not care for your money
The majority of brokers are good and trustworthy individuals. But the broker concept presents a serious conflict of interest. Simply put, Brokers work for a bank and are paid commissions based on the investments they recommend, so they aren’t looking out for your best interests. The best way to receive impartial guidance, is to find a Registered Investment Advisor (RIA) rather than a broker. Instead of receiving commissions from the mutual funds, these advisors are paid an annual fee by you.
- Your 401(k) Will NOT retire you.
The 401(k) system was widely believed to be successfully preparing people for retirement. But the 2008 Financial Crisis made it clearer than ever that the system is broken. Your retirement portfolio’s growth is significantly constrained by the variables mentioned above with high fees and too many hands in the pot. In addition, the growth potential is further constrained by taxes on withdrawals. The better alternative would be to invest in a Roth or IRA, even though the contribution ceiling is substantially lower, and employers cannot match.
- Do NOT take BIG RISKS
One of the most crucial investment principles is to take a small risk in exchange for a big potential reward. Building a portfolio that you understand and is also simple and nimble will allow you to avoid large swings, but also provides access to the upside potential when the market is hot.
- You Control Your Destiny.
You and only you are in control of your financial freedom. In order to achieve this success, you must have faith in yourself and your abilities to become financially free. You must do your research in order to find the best plan that works for you. Simply put, money is a reflection of your inventiveness, your ability to stay focused, and your capability to bring value to other people.
Figuring Out What Your Real Numbers Are Will Make Them Achievable
The truth is no one actually wants money. Instead, we’re all after the things that money provides. Your specific desires will vary depending on your goals. You can begin by setting your goals based on what you wish to achieve, and what it will take to accomplish. Investing follows a similar formula to Maslow’s hierarchy of needs. If you aren’t familiar with this formula, the bottom tier is physiological needs, next safety, followed by love and belonging, then esteem (status), and finally self-actualization (being the most you can possibly be). So, imagine it as a 5-level pyramid, and your goal is to conquer each level and make it to the top. By knowing what your goals are, you’ll have much better clarity of how to get there. Starting from the bottom, let’s explore the various levels:
Level 1 – Financial Needs: This is the basis for financial security. You must have enough money to pay your mortgage/rent, electricity, food, necessary transportation, and insurance. Know what this number is and make it a goal to create excess in order to save and invest.
Level 2 – Financial Preservation: This is where you cover all your needs and begin satisfying some of your wants. Now that you know what your monthly expenses are, you should always have a secure investment of 6-12 months to cover your basic needs in case of an emergency. It’s unlikely that you’ll ever need it, but the psychology of knowing you have this ‘just in case,’ gives you additional comfort of safety. Since all your essentials are now covered, you also have the ability to start enjoying small indulgences. This may include clothing, and possibly a few luxuries.
Level 3 – Financial Independence: This is the point at which you no longer need to have a job because your investments provide enough money for you to live comfortably. You can quit your job if you decide and are free to engage in any activity that you desire. For some people, this may already exist because they have found the career that brings them joy and happiness – so in that case, they don’t view it as a job, but rather what they want to do. This is the ideal career because, it means you do what you want every day and are rewarded.
Level 4 – Financial Freedom: You have amassed sufficient wealth through investing to not only support your preferred standard of living, but also to indulge in such extravagant pursuits as substantial charitable contributions, expensive toys (cars, boats, planes), second houses, and wonderful vacations.
Level 5 – Total Freedom: Achieving total freedom permits you to do anything you want, whenever you want. Here, you and your loved ones can now focus on having a meaningful impact on the world.
To start working toward you desired achievement, you need to sit down and assign a monetary value to each of the previous achievements. The main issue is that when individuals see numbers, they automatically believe that the goals are too far away to be worth pursuing. However, once you have a strategy in place, the next stage is to figure out how to achieve your financial goals more quickly than you ever imagined. There are five ways to speed up your process, of course.
- Increase your savings and put it toward investments that allow for compound interest. Another option may be to put the additional savings toward your mortgage payment. By making early payments you will be reducing the interest you will be paying on your next payment. If you can manage this, then you can take that excess money and invest it.
- Learn new ways to increase your income and invest the extra money. Start investing in yourself. By becoming more equipped within your career you will become a better problem solver, and this will position you to earn more. All high earners and successful people I know are constantly learning.
- You can increase the amount of money you make from your investments by lowering the amount of money you pay in fees and taxes, and then reinvesting the difference. Over the course of 20 or 30 years, even a 2% fee reduction, can increase value by hundreds of thousands of dollars. Make smart investments, which have little-to-NO fees involved.
- You can reorganize your investments, so you earn greater returns. This goes back to having a nimble portfolio to make changes when needed. Choose investments that have a high potential for upside and little to no risk to achieve this. Follow simple methods of rebalancing your portfolio so that your portfolio allocations are precisely the weight of your portfolio that you choose. This ultimately leads to selling high and buying low, without much work.
- Last but not least, you can make adjustments to your way of life so that you spend less money on your day-to-day living expenditures and put that extra money into investments. This might seem extreme, but huge savings can be made by this move; an enormous sum of money might be made available for investing by simply relocating from a state with high taxes to one with low taxes. Find a lovely place that is reasonably priced and invest the money you save in more investments.
How To Allocate Your Investments
You’re probably wondering, now that you have this “Freedom Vault,” what you should do with the funds. The moment has come to begin investing, and to do so wisely. One of the most crucial choices you can make is where to invest your money or into what assets – your “asset allocation.” Choosing how to allocate your assets is more crucial than any single investment you’ll ever make, whether it be in stocks, bonds, real estate, or anything else. Asset allocation is the key to preserving wealth; anyone can become wealthy, and anyone can learn how to create an asset allocation.
The best approach to get started is to think of asset allocation as dividing up your financial assets into 3 distinct buckets.
- Your security bucket is in the first bucket. These are the investments that give you security and peace of mind; although they won’t increase rapidly, the money will still be available when you need it.
- In the second bucket, referred to as your growth bucket, you make riskier investments that, if profitable, can yield high returns. It’s necessary to be ready to lose everything you’ve invested in this.
- Your dream bucket is the last one, into which you put some of the money you made from the other buckets. This bucket’s earnings may be used to support your ideal way of life.
Invest By Your Age
The amount you allocate to each bucket must be determined by you, and it will alter over the course of your lifetime. Many investors recommend investing according to the common rule of thumb of placing your age in your security bucket. In other words, when you reach the age of 40, you want to have invested 40% of your money in your security bucket, while the remaining 60% is split between your growth and dream buckets. At age 60, though, you should shift your focus to putting 60% of your money into the security bucket and 40% into the other two.
When deciding how to allocate your assets, you should ask yourself, “How much of a risk can I afford to accept at this point in my life?” As you become older, the response to this question will shift, and as a result, so too should the allocation of your investments. This can be reviewed on a yearly basis.
Create Your Own Diversified Portfolio
The road to financial freedom has been paved by countless others. A great way to get started with your portfolio allocation is to begin by modeling past successes. By learning from the experiences of other investors, you can greatly increase your chances of success – or at least develop a framework in which you can build your foundation from.
Let’s consider Ray Dalio. Dalio created the world’s largest hedge fund (he recently retired in Oct. 2022) with the goal maximizing profits while minimizing losses. Dalio’s approach, like the changing seasons, is called the “All Weather” portfolio since it is designed to generate returns in spite of market fluctuations.
The All-Weather Portfolio recommends putting 30% of your money into the stock market year-round, but especially during times of rapid economic expansion. Then, put 7.5% of your money into gold and 7.5% into commodities. Even during times of severe inflation, these tend to be wise investments. The remaining 55% should be invested in safe, secure US bonds.
One thing you should be mindful of, is that this fund is managing hundreds of billions of dollars. So, they must take a slightly different approach, than someone who can move nimbly even with tens of millions. They take risk management more seriously than anything. Meaning, they try to reduce the amount of risk in the portfolio in order to avoid any large draw downs. The idea of this portfolio is to have a forward outlook on various asset classes and build the portfolio to be able to maneuver in changing market conditions. When you have hundreds of billions under management, you cannot easily move from one asset to another, without causing massive swings in the market – there simply isn’t enough liquidity (buyers) in the market. Ray Dalio’s All Weather portfolio changes over the years, so don’t just mimic the allocation that I mentioned. Ray Dalio also mentions that the Holy Grail to investing is to have a portfolio of 14 uncorrelated assets.
Another exemplary investor is Warren Buffett. He has been one of the single best investors of the last 50 years with his company Berkshire Hathaway (BRK/A, BRK/B). You can own shares of his company, which could be viewed as owning a lost cost ETF. Buffett revealed in a letter to Berkshire Hathaway shareholders in 2013 that, after his death, the trustee of his estate will invest 90% of his wife’s inheritance in a low-cost index fund and 10% in short-term government bonds. As you can see, he recommends simply 90% stocks/10% short term bonds. This goes to show you, that great investors have vastly different views on what to invest in.
Risk Management Advice. Paul Tudor Jones, another great American fund manager gives some advice in terms of risk management. He says, “The whole trick to investing is: ‘How do I keep from losing everything?’ Get out of anything that falls below its 200-day moving average.” This is taking risk management very seriously, and for some investors, this might feel like the safest thing to do.
How the Millennials Are Investing. A survey of Millennial investors has a much different portfolio allocation than both Buffett and Dalio. Many have taken on a larger allocation of growth type baskets with the inclusion of crypto currencies, innovative tech companies, and other alternative assets. In addition, many have opted for individual stock picking or options rather than ETFs. Every person’s allocation will be different depending on their financial goals, risks their willing to take, and lifestyle needs. A simple example of a millennial type of growth allocation may look like this:
- 50% Stock
- 25% Crypto
- 10% Alternatives (collectables)
- 10% Treasuries/Short Term Bonds (cash)
- 5% Commodities (Gold, Silver, Oil, Fertilizers)
Alternative Assets: In the aspect of alternative assets, look at this as an asset class as something that you should be actively participating in, and have in-depth knowledge and understanding of what it is.
Start Investing Today
A great way to begin your investing journey is by emulating what the most successful investors have already achieved. You can follow some common philosophy that exists among many of the greatest investors. Here are 4 examples that are repeated over and over by some of the smartest and greatest investors and business minded people.
- Risk management – Concentrate generating extraordinary profits while minimizing losses and working toward spectacular returns. You don’t need to take risks to generate good money, so don’t think that taking a large risk will pay off.
- Understand risk/reward – When it comes to taking risk, look for “home runs.” You should expect to earn at least 5:1 on your risk – meaning you risk $50K to earn $250K.
- Do your homework – The smartest investors always do their homework. Constantly being alert of market conditions and finding asymmetric value propositions. Most of these will only be found by those that are aware of the market conditions and won’t be so obvious to a casual investor.
- Educate yourself – Every smart and successful investor is constantly learning – including the ones that have more wealth than they could ever spend. There is always something new and interesting to learn. Continue to grow and never lose the hunger to stay ahead and succeed.
Get Started and Enjoy the Future – It’s Going to Be A Great Place
The years to come will be fruitful. Think about how far the world has come in the previous few decades, and then consider what it might be like in the decades to come. The new technologies that are finally materializing are paving the way to a golden age of limitless opportunities that would have been unimaginable even a decade ago. The world’s problems will be solved by the advances in technology that lie ahead. The impending wave of technological advancement will render many issues irrelevant including: the wave of debt, the environmental and climate change, the future of work/unemployment, scarcity of goods, among other things.
What would your dream of financial independence look like in this prosperous future? You have the ability to leave a personal legacy that will continue to develop even when you are no longer here, thanks to the limitless possibilities. Gaining financial freedom is within your reach if you put in the effort to learn and understand the truths of money. Happiness, however, is not merely based on material possessions; it requires a well-rounded lifestyle that includes positive interpersonal connections and physical well-being. Keeping this in mind, consider the following questions:
- What should I be spending my current time and energy on?
Put more of your attention on what you already possess rather than dwelling on what you don’t have. Not only will you be happier, but you’ll also accomplish more. Focus on what you control, not what you can’t. - What can I do today to start moving toward my goals?
Knowledge is not as important as action. If you want to change your future, you must first make a commitment to the direction you want to take. - What can I do right now to help others?
Consider your area of passion and consider how you may make a lasting contribution there. Nothing else can compare to the delight that comes from helping and investing in others.
Conclusion
No matter where you are in life, financial freedom is achievable. Investing can be intimidating, especially for beginners who don’t know where to start. The most crucial thing is to simply start. You must begin somewhere, so start small and gradually. If you never start working toward financial freedom, you’ll never get anywhere. It is important to have the advice of people you trust, to be strategic about how you distribute your assets, and to plan for the various financial stages you may encounter throughout your life. You’ll achieve financial independence and become a master of your finances if you stay committed and keep working towards your goals. You have the ability to live the life you have always dreamed of while also leaving a financial legacy for the people you care about.