If there’s one goal that can serve as a catalyst for an abundance of positive life changes, that goal is financial freedom. Building wealth allows you to pursue the things that truly matter. Not to mention, it can alter your family tree for generations to come. While financial freedom may already be a goal, it can be difficult to narrow down exactly where to start on this journey. With this in mind, VP of strategic content Jay Papasan and Nashville-based KW mega agent Tiffany Fykes sat down for an energetic discussion on their own experiences with planning and achieving financial freedom.
For the purposes of this conversation, the pair defines financial freedom as Gary Keller does: The unearned income to finance your life mission without having to work.
To this, Fykes adds, “The key to that is the life mission. It’s not just whether you can pay bills, but can you do what God created you to do on earth with unearned income? In The Psychology of Money, by Morgan Housel, financial freedom is defined as the ability to do what you want, when you want, with who you want, for as long as you want.”
“It’s hard to say it better than Morgan did,” offers Papasan. “Financial freedom is defined in the opening pages of The Millionaire Real Estate Investor and it had a real impact on me because it iterated that passive income is hard to come by. It’s not easy to get unearned income – that takes time and work.”
Assess Your Circumstances
Before you begin the journey, it’s important to assess where you are. Once you know where you are in relation to where you want to be, you can set your GPS in the right direction. Here, Papasan and Fykes reflect on the steps they took to meet their goals, and outline a clear path that you can use to map your way to your own financially free future.
1. Set Your Goals
What does financial freedom mean to you? Whatever your answer, it should be in harmony with your big why, the purpose or mission that gives you focus. Is it the freedom to choose the life you want, or freedom from the hassles and stress that lack of money may cause?
Fykes suggests, “Get a piece of paper out right now and write it down. It may mean that you don’t have to struggle with money. Let that be your definition.” Fykes’ initial goal was to retire at 45, but now she does not see herself completely stopping work. “I want to be able to say yes to things that I wouldn’t normally say yes to when there are dollars attached. So it may be different for me than it is for you. Whatever’s true to you, just get it on paper and get it written down.”
Papasan adds, “My wife and I used a goal sheet. We wanted a go-to-heck fund. I just never wanted to have to work for anyone who didn’t match my values or go to a job I hated. We wanted the ultimate choice. What do you want your income to be so that you can live your life exactly how you want it?”
Think big and then double or triple it to accommodate for speed bumps and probable detours along the route.
2. Know Your Net Worth
Your net worth is like the trip meter. It informs how far you have to go to get to your destination.
What’s the net worth that you need to target to achieve your freedom number? Net worth is what you own minus what you owe. In business language, that’s your assets minus your liabilities. Fykes encourages, “The very first activity that I want you to do is go and figure out what those numbers are.” Papasan agrees, “Net worth is the ultimate number that you measure for wealth. If you look at the Forbes list of the wealthiest people in the world, they don’t even mention their salary. They mentioned their net worth because that is the ultimate measure. Starting with knowing this number and then tracking it is one of the best habits you can ever build.”
As part of your net worth calculations, understand the 4% rule. You’ve got your number of your plan for the future and understand what that translates to in terms of net worth. The 4% rule presumes that you can take out 4% of your net worth every year without changing the principal amount. You can live on 4% without affecting your bottom line, or net worth amount. Fykes says the math can get technical, but offers this: “The easiest math is to take your number per year that you need to live on and multiply it times 25. That will get you to your net worth freedom.”
According to Papasan, that becomes your target. “There’s a lot of research to show that if you’re only drawing down 4%, you have virtually a 100% chance of not running out of money over 50 years. So it gives you 50 years of runway, which for most of us is enough to get everywhere we need to go in this life.”
3. Know Your Monthly Burn Rate
What does your life cost you on a monthly basis? You’ll need to know what your burn rate is, or how much cash you’re going to cycle through every four weeks. To determine your burn rate, gather three months of bank and credit card statements and total up everything that you’ve spent during this time frame. Divide by three and you’ll get your monthly average burn rate.
4. Know How Much Time You Have to Get Where You Want to Go
Time is your friend. How long do you have to get to your financial freedom number? For some just starting their careers, you may have 35 years, while others may be jumping on the journey later and only have 15 years. For this reason, it’s important to understand how time, money, and interest rates interact with each other. By going to Investor.gov, you can interact with their calculators to see how you can make your money grow at the rate you need to get to your goals faster.
Papasan also employs the Rule of 72. “It tells you how fast your money will double. If you have a 10% interest rate, you divide 10 into 72. That’s 7.2 years. That’s about how long it will take for your money to double. Gary teaches us in the MREA that wealthy money starts at about 13% and 18% plus. That means that your money is doubling every five and a half years or so.” If you do the math and start playing that out and you give yourself more time, doubling at that rate can help you achieve your goals quickly and make you very wealthy. Choose certain investment vehicles based on the time and money.
“I sincerely hope your plan involves investment real estate, because we have all of the advantages and it is a wonderfully democratic way to make your wealth grow,” he adds.
5. Set Up Banking Accounts
Set up multiple banking accounts so you can partition your money. You’ll want a checking account for monthly spending, a savings account for reserves and emergencies, an account for quarterly taxes, and an investment account for future down payments on property or other investments.
Fykes says, “One of my pro tips is to take that investment account and put it in another bank where all of your accounts don’t live. When you need some money or you want something, make it harder on yourself to get to your investment account. We have ours in a small local bank that does not have amazing online banking. We have to physically drive across town and go into the bank if we’re going to withdraw money out of that account, which deters us from actually taking from our future.”
6. Be Accountable to a Budget
Make a nonemotional decision to create a budget for yourself, and be intentional about honoring it. A budget is a tool to tell yourself ahead of time where your money is going to go. Papasan warns, “If you can’t learn to live within your budget, it doesn’t matter how much income you make. Choose to live on and be accountable to your budget because that’s how you will set money aside to invest in your future.”
Are you ready for financial freedom?
What is the big why that you are working toward? What steps will you be taking today toward your financial freedom? Let us know in the comments section.