A lot of people believe that they first need to be a millionaire or more to be financially free.
You could be rich but work 80hrs/week or could make less in exchange for none of your time.
There are 4 steps that you need to take in order to be free, and then focus on being wealthy.
- Step 1: Manage your Money: Increase your income, decrease your expenses, invest the rest.
- Step 2: Buy Assets not Liabilities: Things that will give you an income or appreciate in value.
- Step 3: Increase your Asset Income: Once asset income is more than expenses, you are free.
- Step 4: Focus on Growing your Wealth: Keep buying more assets to increase your income.
In this article, I go through why it’s important to prioritise being free first over being wealthy.
I also go through these 4 steps in more detail, explaining the key aspects of each element.
Finally, I share my thoughts on whether its important to be rich after you have become free.
Step 1: Manage your Money
Before we start investing and buying assets, we need to start off with a rock-solid foundation.
This means tracking our cash flow (income & expenses) and net worth (assets & liabilities).
Let’s start with cash flow: Say you earn £3000/month from your job and £2500 in expenses.
That means that your cash flow is £500/month which is available to invest with every month.
Say you can increase your income to £3500/month or reduce your expenses to £2000/month.
This is your first step: to increase your income and reduce your expenses to increase that gap.
As part of this step, you need to track your net worth which means your assets and liabilities.
You may not have any asset to begin with and that’s fine; you will as you go through the steps.
You may have some liabilities such as mortgages, loans, etc. which you need to keep track of.
As you go through the steps, it’s crucial you know how to track your cash flow and net worth.
Step 2: Buy Assets, not Liabilities
This step is all about investing: using your cash flow (money left each month) to buy assets.
But first of all, before we do this, the question is: why do we want to spend money on assets?
Right now, your source of income involves exchanging time for money, which we don’t want.
That’s why you want to invest because assets make you money whether you work or not.
What are some examples of assets: businesses, properties, stocks/shares, commodities, etc.
Assets are things that either provide you with a regular income or go up in value over time.
If you’re just starting out and don’t have savings, there is not many assets you can invest in.
The only thing you could probably do right now is invest in stocks & shares using index funds.
You could also start a side hustle that has the potential of earning you money down the line.
As the months go on and you have more money saved, you could look into property investing.
Step 3: Asset Income > Expenses = Freedom
At the moment, your earned income is covering your expenses – which is normal at the start.
However you want your assets to pay your expenses because assets don’t take up your time.
Once your total asset income is greater than or equal to your expenses – you are then free!
However, you’d want your asset income to be a bit more to cover things other than just bills.
So let’s say your current expenses are £2,000/month which we track as mentioned in Step 1.
Therefore I’d say you’d want your asset income to be £3,000 to cover expenses and pleasures.
As mentioned in Step 2, at this point you’ve already started investing your cashflow in assets.
However, you might be making £100 or £200/month: no one said this was going to be easy.
Therefore this step will take a long time – a few years perhaps until you reach your target.
Once you hit your goal, you are free: you can now retire because your assets are paying you.
Step 4: Once Free, then Focus on being Rich
One of the questions I get asked is – why would you quit your job once you reach your target?
Surely it makes sense to keep your job as you now have more cash to invest per month right?
To which I then reply: the whole point of building up your assets is so that you can be free.
So once you have gotten there, why wouldn’t you retire if your assets can now support you?
Being free is the ultimate goal, getting your time back, being rich is just the icing on the cake.
As well as that, once you retire/quit your job, you now have more time to build your wealth.
Therefore step 4 is about doing what you’ve doing but now you have way more time to do it.
Instead of having a freedom goal of £3000/month your wealth goal might be £30,000/month.
This step is going to take time, certainly a few years until you get there, not going to be easy.
The difference is now you have an additional 40hrs/week instead of just evenings/weekends.
Why would you want to be Rich?
You might say to yourself: once I reach my freedom goal I’m done, no more investing for me.
I’ll live out my life with my freedom income for the rest of my days – life mission complete.
There’s just a problem: if you reach your goal with your assets, then you’re one hard worker.
That means that a year into early retirement you’ll get bored and want the next big challenge.
To reach £3000/month from your assets means that you’ve honed your wealth building skills.
Therefore you’ll want to see how far you can go: to 10x your freedom income to £30k/month.
However, it’s very tempting to fall into this trap – you need to know when enough is enough.
You might say £3,000 is ok but let’s get that to £10,000/month – try and have a stop point.
The whole point of freedom is not to be a slave for money – know when enough is enough.
Use your well-earned freedom to pursue your passions, unless your passion is making money!
To find out more about early retirement, check out our articles on retirement and investing.
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