In order to escape your 9 to 5 life you have to make changes in your life. The changes are the basics of financial freedom. This is not a short-term change; they are life long. The basics start with the mind-set and some key principles.
Be Flexible in Mindset and be Determined
Keep an open mind, read and learn. Take action. If you don’t make changes in your life today then you will be like every other person and will work till retirement and pay mortgage interest on your home loan for 30 years.
Understand the Difference between an Asset and a Liability
An asset will bring income to the owner of the asset. A liability requires some kind of expense each month with no income. Your home may not be an asset. An investment property is an asset. Your car loan and car are liabilities. Now don’t stop reading because you don’t agree with me. I am not an expert but Robert Kiyosaki is. He has taught millions around the world some simple yet powerful concepts that challenge your mind-set. He is the father of financial freedom in fact you could say he is my rich dad.
Understand the Difference between Good Debt and Bad Debt
Car loan, personal loan & credit card debt are bad debt. Mortgage on an investment property is a good debt. Good debt is tax-deductible. Pay down bad personal debt as quickly as possible. You want to be ultimately debt free, that is bad personal debt. Again this is not going to happen overnight and will take some time. Pay down bite sized chunks at a time and keep going. Have a simple plan on how to achieve this.
Two Biggest Expenses for an Average Individual and how to Minimize them
Taxes and interest paid on home mortgage.
Taxes: Starting a business can lower taxes if done correctly. You can also consider how you earn your income; you may be able to change from an employee to a consultant/business owner. Why not start an online business? Investing in real estate can also lower taxes. Employees have to pay taxes first from their earned income whereas business pays expenses first and then taxes last.
Interest paid on home mortgage: This is a bad debt by the way. Buy an investment property first before buying your home if possible. If you have already bought your own home don’t worry. You can see if there is equity that you could pull out to invest. This is a good debt and is tax-deductible.
Have a Written Plan
Financial Plan: This is where you have to learn how to budget your money and how to budget a household. This isn’t as daunting as it sounds and you can get help online. List income and expenses in a spreadsheet (you can find a template on the internet) or use mint.com for your budget and money management. Calculate savings per month or fortnight. See how much you can save over a year. See what your major expenses are and how you could lower them. Focus on savings percentage and try to improve it over time. A good starting point is 30% of savings from your income. Include at estimated amount for things like vacation. You will learn overtime on how to plan and budget for vacations. Remember we are looking for ball park estimates at this stage. It is important to have some contingency funds or buffer money.
Investment Strategy: Plan what your investments are going to be with your savings. Plan how often you are going to invest and how much you are going to invest. Have a bigger picture view for 2 years to 5 years.
A strategy could be as simple as buy 1 investment property per year for the next 5 years. A written plan is more powerful than any thought.
Your strategy is not fixed and can evolve over time.
Saving Money is just a Starting Point. Start Investing…
Savings need to be invested for your money to work for you. Savings gets taxed where as properly chosen and structured investments can provide tax benefits. Find Investments that have multiple benefits. Cash flow positive properties can give tax advantage, monthly cash flow and appreciation or why not start an online business on a topic that you are passionate about?
Let’s look at an example – say you have $100,000 in savings and you have it in a bank account that provides 5% interest. This will give you $5,000 of interest income for a year. This income will be taxed at your income tax rate, lets say 20% for argument sake, that is $1,000 in tax. So you end up with $4,000 in net income from the savings.
Now lets assume you invest the same $100,000 in real estate. You can probably buy something for $300,000 with a $100,000 deposit. This is a conservative loan to value ratio of 66%. Lets assume after one year the property goes up in value by the same bank interest rate of 5%. You have made a gain of $15,000 even before taking tax advantage, loan pay-down and any cash-flow into consideration. Now you don’t have to sell the property to access the gain you could simply refinance. Can you see the difference between saving and investing?
Educate Yourself and Your Partner
Invest in educating yourself. Read books about financial freedom and independence. Robert Kiyosaki’s: the rich dad book series is a good start. You should also educate yourself on a chosen investment vehicle. You also need a supportive and understanding partner if you want to be financially free. If your partner is a big spender then it might be difficult for you to achieve your dream. Try and make your dream a common goal otherwise this will put stress in your relationship.
Invest with the Help of a Team
Find good advisers. You need a good accountant, lawyer and banker. You may also need a real estate agent or a broker depending on your chosen investment vehicle. Focus in building relationships with good advisers and don’t just look at it as a transaction or just saving adviser fees.
Protect your Investments with the Right Structure
This is where your lawyer and accountant can help. Do you buy investments on your name or do you need a company setup to limit liability and for asset protection.
The above items will give you something to think about. For now this is a good starting point.
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