Financial Freedom is different for each and every individual. That’s why it’s important for you to really dissect and understand what it means for you. It’s almost like soul searching but having concrete numbers to back it up. Having said that it’s often more important to look at the big picture instead about worrying the details and that’s what I want to focus on. This page will give you the blueprint of what you need to know in order to reach financial freedom that is customized to your personal needs.
To repeat myself over and over to hit the message home, financial freedom is when your passive income exceeds all of your expenses. Meaning you don’t have to work and yet all of your living expenses are taken care of. Wouldn’t that be wonderful?
Before you think that it’s impossible, let me tell you that you actually don’t need to be a millionaire to make this possible. More money isn’t the key even though it helps. The key is to balance minimizing your expenses and investing intelligently to reach financial freedom comfortably.
The 5 Steps to the Financial Freedom Blueprint at Freedom Nova are as follows:
Step 1: Analyze Your Current Financial Situation
Step 2: Map your Future and Plan Accordingly
Step 3: Increase Your Income Potential
Step 4: Learn to Invest your Money
Step 5: Stay Positive and Consistent
Get a pen and paper and possibly an excel spreadsheet ready!
We’re going on a journey that could change your financial life.
It’s going to take some work. I never said it was going to be easy!
This blueprint will be updated regularly so be sure to bookmark it and share it with your friends and family that could use some of this advice!
Step 1: Analyze Your Current Financial Situation
Some questions to ask yourself:
How much are you spending every month? Do you spend more than you earn?
The big question is do you keep track of all the money you spend? I personally keep every single receipt and check my visa statement on a regular basis and punch every single purchase (even without a receipt) into an Excel spreadsheet so that I know how much I am spending.
What is your current net worth?
Your net worth is all of your assets minus all of your liabilities. Absolutely everything even that coin collection that you might think is worth a million dollars when it’s only worth $47. Knowing your net worth is essential as it is the foundation to creating this blueprint. Your goal is to always be growing your net worth. Many people have a negative net worth as they are in heaps of debt. What is your current net worth?
Do you have a budget?
Let me guess, you think you have a budget but you never stick to it. In the spreadsheet I mentioned above I have a stated monthly budget, which I do my best to abide to every month. Sure some months I go over and it’s inevitable because there are extra costs that pop up that you just have to pay for. But even then, I have red ink that tells me that I’ve gone over my budget so that I feel guilty and hopefully won’t repeat it again.
What is your lifestyle like? Are you willing to change your lifestyle?
How important is keeping up with trends to you?
We all live a different lifestyle. Spend some time analyzing how you live in every aspect. Your eating habits, your exercise habits, amount of time you spend at work, your stress level, and of course how you spend your money. While a lot of this doesn’t have to do with money, I truly believe that to be happy and financially free you have to incorporate all aspects of life.
How much debt do you have?
Another huge factor in determining what it takes to reach financial freedom. You need to grasp how much debt you have whether if it’s credit card debt, car or personal loans, mortgage, and other debt write it all down and dig up the interest rates for each debt while you’re at. Tally up the total of all the debt that you have outstanding and the monthly payments that you are paying for all debt including principal payments.
Do you have an emergency (aka Rainy Day) fund?
I’ve read all over the place that it’s ideal to have 3-6 months of monthly expenses in a savings account. While I don’t agree completely with that, having access to that much saved up in a savings account is a must. Do you access to emergency cash if something were to go wrong?
How much of your income are you saving every month?
The general rule of thumb is to be stashing away 10% a month. How much are you saving up every month?
Do you have short, mid, long-term financial goals?
Goals are vital to achieving financial freedom. Having a budget is like a goal as you are setting a monthly goal (read: budget) to limit your spending. In this article we’ll talk about some of the goals that you should have short, mid, and long-term to help you achieve financial freedom.
What are you earning? Active vs. Passive Income
On the flipside, what is your take home pay? Ignore taxes for now as taxes will always be unavoidable. How many hours a week do you work and are you getting paid fairly? Yes, the grass is always greener on the other side, but that’s not what I mean. I’m asking if you are getting paid fairly for the amount considering the amount time your committing and the amount of stress the job is causing you. Sure another similar job might be paying more, but who knows that job might be like in reality.
What life stage are you in?
The main life stages are: Student, Early Career, Married, Family, and Retirement to be super general. Of course, most of us will be somewhere in-between as we might be starting a career but also married or be later in our careers and looking to start a family with the firstborn on the way. This is why it’s important to understand the life stages and what they entail and how you should plan your finances around each stage.
Are you currently happy with yourself?
Sure this isn’t financial, but I think our mental state is more important than money. To be successful in life, success being a very relevant term, you need to be happy. You’ve heard it before and I’ll say it again, all the money in the world won’t buy you happiness.
Step 2: Map your Future and Plan Accordingly
What is your ideal retirement?
Regardless of your current age, I want you to think about when and how you want to retire. Realistically, how old do you want to be when you retire? You might want to retire in 10 years or for some they might want to work until they’re in their 80s. Do you want to travel 3 times a year? Have a vacation home? Write this down on paper.
Retirement and Financial Freedom isn’t the same
Although I asked you about retirement, remember that retirement and financial freedom isn’t the same. This is because while all your passive income may be paying for your expenses, you can still work. The great thing about this status is that you can do anything you like for a job. You could work part time, make your life long passion a dream, absolutely anything.
Can you be a minimalist?
How much do you really need to live comfortably every month?
After going through your current situation, think about what parts of your spending and lifestyle you can cut back on. If you’re eating out for lunch and dinner often, can you cut back on some of this? How about those excessive coffee breaks? What do you think you can save money on?
Check out my monster list of money savings tips to see if any are applicable to you.
The purpose of this exercise is to get you thinking about the bare bones that you need to survive. If you can bare down and focus only on the necessities, financial freedom might be a lot closer.
Should you rent or buy a home?
This is another question that you’ll have to ask yourself and it’ll entirely depend on what lifestyle you’ll want to enjoy once you reach financial freedom. Renting means you’ll be paying rent forever but gives you the flexibility to move when you want and could be cheaper depending on where in the world you live. However, if you buy a home you’ll eventually pay off your mortgage unless you dig into your home equity by borrowing through a line of credit or look to buy a bigger home. Then there’s also the maintenance of having a condo or a house.
How much is enough? What is your “magic” number?
This is the big question and probably one the most important in the Financial Planning section of Freedom Nova. Let’s figure out what the magic number is that you need to reach to call yourself financially free! Isn’t that exciting?
Step 3: Increase Your Income Potential
One of the main sections of Freedom Nova is on Income Generation. We find this to be an integral pillar or “Nova,” if you will, to reaching financial freedom. Regardless of how much you earn now, if you can find sources of side income to supplement this, you’ll accelerate the pace of achieving financial freedom.
The key is to increase passive income sources as much as you can by either creating new passive income streams or adding to investments, such as a stock portfolio for dividend income, on a regular basis.
What is Passive Income?
We first need to understand what passive income is and the different types of passive income that exist. You can then choose the passive income sources that you will want to focus on that suit you. Not every passive income source will be for you, and you can always switch as you go along but it’s important to know what you will be primarily be focusing on as these income sources is what will you bring you financial freedom.
Online or Offline? Or both?
We’ll be going through both online and offline income sources for you to consider as there are countless ways for you to earn an income.
Why you shouldn’t quit your day job just yet
Yes, I know this isn’t what you want to hear but we’ll go through some reasons as to why you shouldn’t quit your day job, besides the obvious. This might be the case even if you are very close to financial freedom.
Can you get a raise or work overtime at your current job?
If you don’t mind your job and doing well, why not ask for a raise? By making more with your current job, it’s one of the easiest ways of making more money. Be sure to do this with caution as you don’t want to bug your boss everyday, but it makes sense to give it a try.
Step 4: Learn to Invest your Money
Another major “Nova” of Freedom Nova is the Investment Management section. The purpose of this section is to help you get a better understanding of how to construct an investment portfolio that meets your needs and risk tolerance.
If you create an investment portfolio that you not only add to on a regular basis but grows at a decent rate, this alone will help you reach financial freedom years quicker than simply putting everything in a savings account or low yielding investments.
What is your risk tolerance?
We all have different risk tolerances and this isn’t only for investments. Just because you take risks in life doesn’t necessarily mean that you’ll be willing to take more risks with your investments. I’ve had many clients that were extremely risk averse initially only wanting to put their money in extremely secure investments that had no risk like Guaranteed Investment Certificates (GICs), savings accounts, or money market funds. Unfortunately, with today’s low interest rates these “investments” would yield anywhere from 0.1%-1.0%. Now if we start thinking about taxes and inflation, these investments are actually losing money.
I’ve found that clients that were initially extremely risk averse would be more willing to take risk as they increase their financial knowledge. You hear many people saying buying stocks is like gambling, and that it’s a 50/50 chance. Well for one, with gambling it’s not a 50/50 chance since the odds are always in favor of the house or casino. But with stocks, if you know what you’re doing then while you might not know where the stock will go tomorrow or even a month from now, you will have a decent idea that a stock will be paying dividends for the foreseeable future and likely stay in business for the long run.
What kind of investor are you?
To determine the type of investor that you are, you need to think about a variety of factors. You age (life stage), income, timeframe, and risk tolerance.
We’ve already talked about life stage, income and risk tolerance. Timeframe is the length of time that you will leave your money in an investment. If you’re buying a mutual fund for example the rule of thumb is that you’ll keep your money in the investment for at least 5 years. This is because mutual funds, regardless of composition, generally have stocks in the investment mix and therefore have higher risk. Holding stocks for the short term is generally seen as risky and therefore at financial institutions they likely won’t sell you mutual funds or stocks if you have a short-term time frame.
Yes there will always be exceptions. For example, when you buy a stock through a broker they’ll sell the stock to you but they’ll mark the trade as “unsolicited” meaning that they had absolutely nothing to do with the investment decision to cover their butt, just in case you lose money on the trade. But I digress.
What is the ideal asset allocation for you?
We’ve already talked about the different types of passive income, you’ll now need to figure out what the ideal asset allocation is to suit your personal needs. When you go to the bank and they talk about asset allocation, they’re usually referring to asset allocation in terms of what the bank can sell. This is usually limited to secure investments from savings accounts, GICs, etc. to extremely risk stocks such as health-care or technology stocks. And of course there’s everything in-between from government bonds, corporate bonds, blue-chip stocks (stable companies paying solid dividends) and such. The reason they do this at banks is because the risk of these investments is much easier to offset with one another.
But when I say asset allocation, I’m thinking in the grander scheme of things. Real estate for example, should definitely be a part of this mix as well as other sources of income. Having a business that produces passive income is another asset that can change your asset allocation mix. As you plan for your financial freedom, it’s important to think about your investment portfolio not only focused on financial instruments (what they sell at the bank) but on a much larger scale.
Understanding the power of stock dividends
I think dividends that stocks pay are amazing and should be a part of any investment portfolio. I’ll talk in depth of owning stocks at Freedom Nova, but if you’re scared of buying stocks I want you to keep an open mind and be willing to learn. As I’ve mentioned in the risk tolerance portion, I have had plenty of clients that went from secure and completely risk averse to willing to invest a fair portion of their investment portfolio in the stock market.
Stock dividends are great because most stable companies will increase their dividends over time. Even during the financial crisis, stable companies don’t stop paying dividends even during the toughest times even though their share price may be suffering. The beauty of stocks is that say a share price of one company is $50 and is yielding 4%, as you hold that stock for years the company will gradually increase the dividend payout which will increase your dividend yield relative to your purchase price.
To clarify, if a stock pays 4% or $2 ($0.50 per quarter) and increase that to $2.40 ($0.60 per quarter) in a few years, then compared to your initial purchase price of $50, you now have a yield of 4.8% ($2.40/$50=4.8%). That dividend amount will likely grow over time and sure inflation will be there while all this is happening, but there’s no question you’ll be doing better than your friend who’s invested in the GIC paying 0.45% interest.
Don’t get me wrong, I have nothing against GICs as they can be an integral part of any investment portfolio. But I do have an issue with having your entire investment portfolio in GICs, that’s not an investment portfolio. That’s basically an illiquid savings account losing to inflation.
Why taking more risk will actually lead to less risk overall
Thomas Jefferson once said, “With great risk comes great reward.” With the stock market, this can ring true if you have a portfolio that is diversified to take advantage of big gains while shielding you from bad losers.
What I’m trying to get at here is that a 1% increase in your overall portfolio return can help you reach financial freedom years earlier. This is why I want you to keep an open and mind and be willing to learn.
Step 5: Stay Positive and Consistent
That’s a lot of information and that’s just the bare bones of what is necessary. I’ve equipped you with the tools to understand what situation you’re in now, what needs to be worked on, how to come up with the magic number that defines your financial freedom, earning more income, and how to construct your customized investment portfolio. Now is the time to put things in motion! Procrastination is a killer and we’re all guilty of it, but there’s absolutely no reason to wait.
As you put your plan into motion, it’s important to review and adjust according to what is going well and what isn’t. Life will throw curve balls at you and you need to be able to take this head on not only financially but mentally as well. By giving yourself financial breathing room, I truly believe that you’ll have more time to take care of the more important things in life.
My goal with Freedom Nova is to help you reach financial freedom not just for monetary purposes but to give you more freedom in life so that we can all enjoy what life is meant for. Don’t you think it’s a waste if we spend all of our lives working a job we don’t really want to work? That should be motivation in itself!
How often should you rebalance your portfolio?
When you set your asset allocation you’ll likely have a ballpark figure for each investment class. So let’s say your stock portfolio is to be 30-40% of your overall portfolio or you’ve set a rule that any one stock is not to be more than 10% of your stock portfolio. Then when either your stock portfolio goes above the 40% threshold or one stock grows beyond the 10%, you could sell off a portion of that stock and buy a cheaper stock that you have determined worthy of your investment portfolio.
It can be tough selling a winner to buy what seems to be a lagging stock, but remember to think long term. A strong stock may be strong now (and for the foreseeable future) but it also might fall back giving up some of the gains, which you could have put into another stock. We’ll never know, we don’t have a crystal ball but the prudent thing to do is stick to your plan and not to stray from it too much.
Having said that no plan is perfect, so if you have a logical reason to stray from it, trust your gut feeling. Given that you know what you’re doing!
How to stay positive and consistent
Reaching financial freedom won’t happen immediately unless you win the lottery or get an inheritance. It may take years and depending on your goals and life stage, could take tens of years. So how do you stay positive and consistent when all this takes so long and isn’t very rewarding, at least immediately? My answer is reward yourself along the way. As you set goals, you should have mini-goals or milestones along the way. For each milestone that you hit, treat yourself to dinner or go on a vacation. Yes this might sound detrimental to the whole idea of saving money and stashing it away. But we’re all human, we can’t simply live frugally and save money like robots for extended periods. If you can, that’s amazing but if you can’t at least this way you’re sticking to the plan.
Just make sure that you’re saving up beforehand for these rewards instead of tapping into your investments for the mini splurges.
This financial freedom blueprint is by no means complete. And every individual will have different areas they’ll need to focus on more compared to others. However, I do feel that this will give you a solid idea as to the direction you need to take and equip you with the tools that you need to be well on your way. This blueprint will be updated regularly with more articles. My ask of you is to share this with anyone that you care about that wants to achieve financial freedom.
Please be sure to consult a financial professional before making any decisions. All information on Freedom Nova is for informational purposes only and is not be confused with financial advice.