The 3 secrets to financial freedom
Why You Don’t Have to Be Rich to Live Rich
The collective live paycheck to paycheck and put their everyday living expenses on credit cards. They believe that if they earn more income, they will become wealthier; however, earning higher income isn’t actually the problem. The problem is holding on to it. They end up spending more on things that don’t matter, like the latte they get every morning before work or their $20.00 lunches that could be prepared at home. Yes, on a day to day basis that may not seem like a lot, but if you add up your unnecessary purchases over the year, you will realize that you could be investing that money into yourself or put that income to work for itself. The key is working smart, not hard. In the book “The Latte Factor,” author John David Mann shares fundamental and realistic strategies through three secrets to financial freedom.
1. Pay Yourself First
The first secret to financial freedom is paying yourself first. Essentially, this means that you will be the first person who gets paid out each day’s income you bring in. This does not mean treating yourself to something that you want and don’t need. It means that the first hour of each day’s income is what you will keep for yourself. Think of it this way, you are trading a valuable commodity, your time, when you go to work. Why would you continue to put yourself in a position where you put everyone else before yourself? More likely than not, you won’t have anything left over after the government takes their portion, your expenses get paid and you mindlessly spend on things you don’t actually need. Fast forward 5, 10, 20, 50 years from now, you’ll realize you’ve been conditioned to take part of the human rat race, with nothing to show for.
Paying yourself first means taking a percentage of your daily earnings (pre-tax), let’s assume 10%, and investing it into a retirement account that will compound over time. Here is an example of the most energetic force in the universe, the miracle of compound interest. If you saved $125.00 a week (or $25.00 x 5 workdays) and earned 10% annual interest, you’d end up with:
1 Year = $6,798.00
2 Years = $14,308.00
5 Years = $41,893.00
10 Years = $110,821.00
15 Years = $224,228.00
30 Years = $1,222,924.00
40 Years = $3,421,327.00
2. Don’t Budget – Make It Automatic
The collective hate budgeting. They may do it for a short period of time because it is quite simple; however, it becomes more of a chore and will wear off in the long run. We are all so “busy” in our lives, that the last thing we want to think about or deal with is a financial budget and then tracking our expenses week after week. This is where automating your financials come into play. You are setting yourself up for success by implementing automated systems that run behind the scenes of your life. The first step in automating is having your paycheck directly deposited into your bank account. From there, you have the ability to choose which high-interest savings account you’d like to open up. For example, an RRSP Account (Registered Retirement Savings Plan) is a tax-deferred account, meaning your pre-tax money will grow a lot faster but you will pay taxes on it later when you choose to withdrawal the funds after a longer time horizon. It is advised that if you are bringing in less than $50,000.00 per year, you should invest in a TFSA (Tax-Free Savings Account), which you withdrawal your funds tax free. The appeal here is investing your money into accounts that compound and letting them work for themselves. You are the driver of your life, so understanding financial literacy is a step closer to the freedom and success you’ve always dreamed of.
3. Live Rich Now
The final secret resides with the dreams & desires you have now. What are some things you’ve always wanted to do but have always used the excuse of not being able to afford them?
After you begin to pay yourself first and invest in high-interest accounts, I recommend you open up a “Dream” account. This account will be strictly used to fund the dreams you have. From the pair of shoes you want, to the tropical vacation you want to go on, to a photography course you want to take. Whatever short-term or long-term type of dream it may be that you want to do in your life, build your additional funds in this account, where you wont have any regrets playing with your money as you please. If you don’t live your dreams and let life pass you by, which it does in a blink of an eye, your life will be suffocated. Make sure that you create an automated system for this account as well and keep in mind that you are able to adjust and add to it as your desires change and grow.
The first two secrets to financial freedom – pay yourself first and make it automatic are the how in the equation. Living rich now is the why. Look at what truly matters to you, what your values are and follow your dreams. Make the conscious decision to live rich today and not in some faraway future.