After reading the two stories from Financial Independence 101 (here), which story do you believe represents the future that you envision? If you want to achieve financial independence, then you are in the right place. Being financially independent brings significant benefits to your life. You will have earned the most valuable resource available to anyone, time. How you choose to use your time is up to you- I plan on spending my time with family. Working for the man has taken too much time away from family, and I plan to rectify this as soon as possible. Financial independence also helps you build a portfolio of assets that you can leave to your heirs and family members. Also, you will be able to assist others on their journey to financial independence. Remember, the American education system does not provide students any guidance on financial education. This is what brings us here today. Before we jump into what financial independence is, and how to achieve it, we need to create a base of knowledge. I will define the most common terms in the financial independence database. These words will come up repeatedly, so the sooner that you understand them, the better. With that, let’s get into them.
Financial Independence: Being able to pay all your expenses from income received from assets. Once you achieve FI, you no longer have to work an earned income job. You are “work-optional”. Read: The 4-Hour Work Week.
Passive Income: The goal, or end-state, of your assets. Passive income is money that comes from your assets. After the asset is purchased or created, then passive income is received. You will not have to work for this money again. For example, you spend $1000 on a stock that pays a 6% dividend. Each year you will receive $60 of dividend income. Once you have enough passive income to pay all of your living expenses, you will be considered financially independent. Read: Rich Dad Poor Dad.
Assets: These are items that put money into your pocket. You purchase, or create, assets and receive a financial return on your investment. Some assets are rental property, stocks, bonds, royalties from songs and books, and businesses. Assets produce income in your income column. Read: Rich Dad’s Guide to Investing.
Liabilities: These items remove money from your pocket. You purchase these items and lose money. Some liabilities are your personal residence, cars, boats, clothes, and jewelry. Liabilities produce expenses in your expenses column. Read: I Will Teach You to be Rich.
Cash Flow: Cash flow is the difference between your income and your expenses. You want this number to be positive. For example, if your income is $10,000 and your expenses are $3,000, then your cash flow is $7,000. Having a large amount of cash flow will allow you to invest in assets, which will in turn produce more income. It is a good loop to be in. Read: Retire Young Retire Rich.
Dividend-paying stocks: Stocks that pay a portion of the companies profits. If you own shares of this stock, then you will receive a dividend. Many people become financially independent from dividend income. Read: The Intelligent Investor.
Bonds: Bonds are debt from the entity (company, city, government) that is paid back over time. Bonds usually do not return as much as stocks but are usually less risky. Bonds pay you back in interest payments. Read: Step by Step Bond Investing.
Rental Income: When you own rental property, this is the income they produce. Real estate is the most favorable tax asset there is. You can also receive rental income from renting out rooms or spaces in your personal residence. Read: Build A Rental Property Empire.
Royalties: Royalties pay income from works that you produce. Some of these works income videos, books, art, and music. Read: Before You Quit Your Job.
Real Estate Notes: Notes are documents that show that someone is beholden to you, financially. Basically, you do seller-financing for a property. The buyer then will pay you back over time. For example, if you buy a mobile home for $20,000. You find a buyer, and you do seller financing. They pay you back $500 a month for 8 years. You just created a note worth $48,000. You can keep the note, or sell it to another investor. You can also do notes with cars and other items. Read: Making Money With Mobile Homes.
Business: The businesses we want when financially independent are usually passive. You can create a business with the intent to make it passive. Or you can buy a passive business. The end state is that you want to collect passive income from a business. For example, instead of buying a coffee shop and working it yourself; you buy a coffee shop and hire a general manager to run it. Any profits left would go to you. You can also create a business with the intent of making it passive by hiring virtual assistants, etc. Read: Company of One.
F.I.R.E.: Financial Independence Retire Early. This is the movement to invest as much money, as soon as possible to become work optional or fully retired. There are many different ways to accomplish this, so your path is up to you. Read: It’s Rising Time.
That is surprisingly it. There is nothing complex about becoming financially independent. It mainly just takes discipline. Once you identify all your liabilities and expenses, then you go to work on lowering and reducing them. This will create more cash flow that you in turn invest into assets. Your assets will produce more income, which creates more cash flow, which allows you to invest in more assets. And you repeat that until you are financially independent. Kris and I have been doing this for the last 1.5 years and have amassed $55,000 in our investment portfolio. It really does work. I will share more of our story in Financial Independence 103: Our Story. Thanks for reading and please share this post with others!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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