A funny thing happened to me a while ago. I found out that talking about wanting to be or being wealthy, and money generally, is apparently a taboo subject.
I have been providing a weekly post on the topic of money and becoming wealthy or wealthy related matters oblivious to the fact that people don’t like, or find it difficult, to talk about money.
And strangely, I was told by some friends recently that money is not important.
It kind of stopped me in my tracks.
It appears we have two lines of thought when it comes to money and being wealthy.
On the one hand, society spurns those with an overdeveloped thirst for being wealthy…
Anyone who pursues money is accused of greed and a hatred of people, the planet, and almost everything in between.
Yet, on the other hand, the vast majority of people in the western world don’t actually have that much wealth and struggle to make ends meet.
There are constant battles about minimum wages, the level of support for retirees, taxation, and first home buyer incentives.
All of which leads to the summation that people, and maybe you, want more money. I get that, and in fact, I think it is healthy. But heh, that’s me!
Defining Wealthy: The 5 Steps to Financial Freedom
So this week I want to define wealth and give you a 5 step cycle to financial freedom.
This cycle will show you where you are on the path, and also help demystify what it means to be wealthy…
…and importantly, help you identify why money is important to your life, and hopefully, I’ve got my fingers crossed, make the subject of money and being wealthy less difficult to discuss.
You are probably familiar with the term ‘the corporate ladder’ and how people seek to climb the ladder to higher and higher positions.
Just the thought of climbing a ladder sounds like hard work to me…
As someone who loves to ride a bike, I want to describe this 5 Step Cycle as similar to riding a bike.
When you first start the initial peddle strokes are quite hard until you gather some momentum.
Once you get momentum, the peddle stroke gets easier, the bike gathers speed and everything starts to feel easier… just stay away from the hills for now!
Well, this is exactly how this 5 step cycle works… Initially, the early steps are hard and appear slow, but as you progress, things become easier and the results gather momentum, making it easier to jump from one step to the next.
This has a lot to do with compounding. The eighth wonder of the world 🙂
So let’s get into the 5 step cycle to financial freedom.
Step 1: Protection
This is the absolute starting point where you need to create a safety mechanism for the possibility that something might go wrong, like losing your job.
For those people living paycheck-to-paycheck, this is crucial. You need to build an emergency buffer of a minimum of three months living expenses, preferably more. It is totally ok to start small and build it up, just get started!
Closely related to the emergency buffer is getting rid of debt. Start with the goal of getting rid of credit card debt and work your way through all consumer debt.
The faster you eliminate debt, the faster you can build your emergency buffer with the additional cash flow that will be at your disposal.
The final layer of protection is insurance…
Being financially protected means having not just essential health insurance, but also life and disability insurances.
This is particularly important if your household relies on one income earner. Having the protection of life insurance and income protection insurance allows you to sleep well at night, and to pursue your investing strategy, knowing you have protection if you need it.
Step 2: Security
Financial security relates to being able to cover your living expenses with income from your investments.
This step can take some time to achieve, so patience, resilience, and consistent action are required.
However, there are things you can do to make it a faster process.
A close review of your living expenses to keep them as low as possible, without restricting your life too far, of course, is a way to increase money directed to your investments.
Step 2 is where you are an active investor…
Each month the money you have available after your living expenses are met is poured into income-producing assets, such as property, stocks, and bonds.
Step 3: Contentment
Being able to cover your minimum living expenses with your investment income is an incredible feeling.
It’s the safety of security—you could lose your job tomorrow and never work again and survive indefinitely!
But not comfortably.
After all, the beauty of life is made up not of eating noodles every night, but of being able to travel, to have a nice meal, and to enjoy it with a glass of wine.
It gets easier from here. The momentum is building now…
After reaching financial security, you now have substantial income from your investments.
If you can avoid lifestyle inflation, you will have a greater portion of your income that can go toward even more investments.
Don’t give in to the temptation to go out and buy a ski chalet in Aspen or the latest Mercedes!
You’ll slip back into a harder gear on the bike if you do, peddling will become difficult again.
Instead, keep building passive income from investments, so that it can cover increasingly more of your total lifestyle expenses.
As more of your discretionary expenses can be covered by your investment income, you’ll reach financial contentment…
Which is only a short spin (see what I did there 🙂 ) from financial independence.
Step 4: Financial Independence
When your investment income can cover all of your monthly expenses, you are no longer dependent on a job.
Not just the living expenses, but the fun stuff too…
Travel, entertainment, special occasions, toys (heh we all want some toys, they just get bigger as we get older) and some luxuries.
When your investment income can cover all these expenses then BINGO, you are financially independent…
You can stop working at any time if you want.
For most people, and maybe this is you, this is the ultimate desire. To be able to stop working and know that your lifestyle expenses are covered and there is some leftover for fun.
For others, there is one more step…
Step 5: Financial Freedom
The final step of the cycle is where the money is no longer an issue…
Up until this point you have maintained a reasonable degree of discretion when it comes to your lifestyle expenses.
Sure you have had some extra fun, splashed out on some luxuries, and done some travel.
At financial freedom, you have enough income from your investments that you can basically buy whatever you want when you want it, including the Mercedes if that is what turns you on…
For most, this is how you probably define being truly wealthy…
The good news, however, is that you are wealthy today, no matter where you are in the cycle.
The crucial part of this cycle is to identify where you are now, and where you ‘really’ want your goal to be…
Once you know these steps, the rest is up to YOU.
How long and how easily you move through the steps is entirely YOUR choice…
While you decide where you want to be, spend some time, with your eyes closed, and think about what that outcome will look like for you…
What will you be doing when you get there?
How will it feel? What will change in your life?
And most importantly, whose life or lives will you be changing when you get there.
Leave me a comment below, let me know what step you are up to, and where you want to get to. Let’s build some momentum together by sharing.