Did you know there are four basic rules of financial freedom?
Most people think achieving financial freedom is some mystery skill or something only rich people can achieve.
Doesn’t quite make sense though does it?
Recent data of some of the world’s wealthiest people showed that more than 70% of those on the list are first generation wealth creators…
What that means is that they made their wealth rather than inherited it.
Now that is a telling statistic, and one that should give you great encouragement… YOU can achieve financial freedom in your lifetime if you choose to.
Imagine for a moment what that means for you and your family… the legacy you can build, its life changing.
So let’s have a look at the four basic rules of financial freedom, and how you can apply them to your circumstances.
The Four Basic Rules of Financial Freedom
Now I may describe these rules as basic, but don’t let that fool you…
These are extremely powerful rules that if used diligently will have you on the path to financial freedom faster than you thought imaginable.
These rules will not only set you up for financial freedom, but they will dramatically reduce money stress from your life…
…and that is what everybody wants, right?
1. Pay Yourself First
You most likely have heard this one before…
Unfortunately, 96% of the population don’t do it.
The typical household will receive their wage each week, fortnight or month, and the first thing they do is spend it on bills, entertainment, mortgages and any and every other thing they can think of…
But there is rarely anything left or set aside for YOU.
You spend a large number of hours each day and week working for a wage and the last person you think of paying with that money is yourself, crazy heh.
The 4% of the population that are financially free ensure that they pay themselves first, before any other payments are made…
This money is sent to a separate bank account, one that doesn’t have easy access and is dedicated to building wealth.
2. Live Within Your Means
Of course you have heard this one before, I get that…
But are you doing it?
Living within your means simply refers to spending less than you earn.
It’s about prioritising where your money goes so there is a surplus at the end of each month.
One of the dangers of modern society is the trap of credit cards.
You likely spend money you haven’t yet earned on things you don’t really need because of how easy it is to just use credit.
The problem being that paying by credit doesn’t induce the link with your brain that you get when using cash.
If you were forced to use cash for everything you purchased you would benefit from the emotional trigger that comes when you physically exchange the cash for your purchase…
This trigger generates a type of pain that helps prevent you from overspending, it’s like a squeamish feeling in your stomach.
If you experience this feeling often enough, eventually you will stop…
Despite what you might think, we humans don’t like feeling bad, especially when it is self-inflicted.
So the key to living within your means is to review your spending over a period of a month, and make sure that it is less than what you earn.
Make it your action for the week to review your spending for a month.
3. Protect Yourself
Of the four basic rules of financial freedom, this is my personal favourite.
The concept of protecting yourself is often overlooked when it comes to financial freedom.
Most people I talk to want to jump from managing their cash flow straight into how they should invest to become rich.
But there is a crucial step they are missing…
…and this step is the one that will completely remove money stress from your life.
Once you remove money stress, you are free to live life the way you want to, it gives you choice.
So what is this step?
It is actually made up of three components:
- Your Emergency Cash Buffer
- Debt termination
- Personal Insurances
Each of these components is designed to create a safety net for when something goes wrong in your life, such as a major health issue.
First is the emergency cash buffer…
Simply, the emergency cash buffer is where you save, in a separate bank account, a minimum of three months of your living expenses.
This way, if for any reason you are unable to earn an income for a period of time, you have this emergency buffer to draw on…
It’s a money stress reliever!
The second component is debt termination…
Before you think about building up investment assets, you need to ensure that you have eliminated consumer debt from your life.
This is things like credit card debt, store card debt, home mortgages and personal loans.
To eliminate these debts you use part of your monthly cash surplus that you identified from rule two.
And the final component of this rule is personal insurances…
It is crucial, especially if you have a family, to have adequate personal insurances in place.
The types of insurance that I am referring to here include income protection insurance, life insurance and trauma insurance.
Each of these type of policies can provide you with an element of protection in the event of emergency circumstances.
I highly recommend you speak with an insurance broker to discuss your personal circumstances. If you don’t know of one, let me know and I can refer you to someone who has been assisting me for the last 20 years.
Having these crucial components as part of your financial freedom aspirations will provide great relief in times when money stress can be at its worst…
4. Make Money Work for You
The fourth basic rule of financial freedom is to make your money work for you.
This is where you start to use some of your monthly surplus to build a wealth generator, that is, your investing activity.
True financial freedom comes when you have streams of passive income that can meet and exceed your monthly living expenses.
How you can invest your money is beyond the scope of this post, but the key to understand is that you need to have a portion of your monthly surplus allocated to building assets that can pay you cash flow over time.
A secondary, but important consideration, is that your wealth generator fund should also be invested in assets that will grow over time.
This is the fund that you build to take advantage of compound returns.
By now you know the power of compounding, and how the big results become over time.
So the sooner you start putting money into your wealth generator, the sooner you can start the process of compounding and be on your way to generating streams of passive income.
The beauty of this process is that you can be making money in your sleep, and let me tell you, nothing is better than waking up each morning knowing that you have made more money overnight.
So there you have it, the four basic rules of financial freedom.
Leave me a comment below and let me know how you are going to use these rules to change your circumstances.
If you are interested in me helping you establish these rules as part of your financial freedom goals, click on the link below for a FREE Financial Freedom Strategy session.