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**The Three Components of Financial Freedom – by Graham White **

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 What few people realize when working with money is that it actually has three completely separate components.  Mastering one will have little affect on one's prospects of becoming financially free unless they master the other two.  What's more, the last two components have more to do with financial freedom than the first and yet it tends to be the first one that the majority of people focus on.

 

What are the three components of working with money and how is it that they're not related?  Here they are:

  1. MAKING MONEY
  2. MANAGING MONEY
  3. INVESTING MONEY

The reason it is critical to understand the latter two better than the first one is that compounded over time, even someone who makes relatively little money can become a millionaire if they manage what they make wisely and invest it with a high level of expertise.  I have seen examples of blue collar workers who retire in style while many of their peers who were making six figures and better are still tied to the vehicle they use to earn a living because they found it easy to pay for their lifestyle with what they earned and neglected to focus on managing or investing it until it was too late.

 

1.  MAKING MONEY

The first component is the one everyone is familiar with:  Making Money.  This is generally determined by one'sEarning Potential; how much you are worth in the marketplace.  A simple way to determine this is to look back and see what the highest tax return is that you filed.  

There are a few ways you can increase your Earning Potential:

  • Work more hours, work overtime, take a second/third job.

  • Learn to do the same amount of work in less time or more work in the same amount of time.

  • Develop higher value skills, go back to school, learn another trade, update your training.

  • Move to an area that will pay more for the skills you already have or take a job that includes a bonus for an uncomfortable or dangerous lifestyle (oil rig workers for example).

(The categories of business, self-employment and Network Marketing will be covered in the third category as they are actually investing, investment in your self).

 

2.  MANAGING MONEY

The second component, Managing Money, is affected by the amount of money you make.  In order to manage money, you must make enough to cover your living expenses and still have some left over.  The more you have left over after you have paid your bills, the greater your opportunity to invest.  If you're using credit cards to maintain your current lifestyle, you need a wake-up call!

You've heard it said, "It's not what you make, it's what you keep."  While that may be true, if you maintain the same lifestyle, but make more money, you will have the opportunity to save more as well.  I won't get into a detailed list of all the areas you can "find money" to invest, but here are some of the major ones I see:

  • Credit debt at high rates of interest - Pay off the highest one first.  Stop funding credit institutions and start paying into your financial freedom.

  • Purchasing things on credit - Get rid of your credit cards and STOP buying on credit!

  • Cigarettes, alcohol, and all types of gambling, bingo lottery etc. - Quit.  Get professional help if necessary, but quit.

  • Soft drinks, bottled water, coffee & a muffin, junk food, magazines - Don't nickel and dime yourself broke.  Drink tap water (get a Brita if need be), eat at home, pack a lunch and your snacks.

  • Eating out - If you're too busy to cook, you're too busy.  If nothing else, go to Costco and purchase frozen meals or hire a meal service.  It's still cheaper than eating out.  For every fast-food meal you eat out calculate $4.00 extra you just spent.  For every sit down meal add on $8.00 - $20.00 depending on where you go.  That adds up to hundreds of dollars over the course of the month!

  • High car payments - Good for you.  You're driving a new car that the bank owns.  If you're leasing, you really own nothing.  Here's a guideline to help: Put down enough cash so that your monthly payments are only 5% of your monthly take-home pay.  Jim Rohn, one of my favorite personal and financial development teachers says to purchase your second car after you purchase your second house.  We bought four houses before we bought a second car for our household.

  • Movies, sporting events, expensive vacations, fashionable haircuts and expensive clothes - Cut back for a few years and build your investment nest egg rather than pursuing immediate gratification.

  • Household furnishings and electronics - You've survived this long without the new model.  Wait and wait and wait.  Again, 5% of your take-home per month.

  • Pets - Sure we love them, but you take a look at the averaged long-term expense of fluffy or fido and you'll see they're a big time and financial commitment.

  • Children - Just because you want the best for them doesn't mean you can afford every program, private school and luxury.  Better to forgo a few things and demonstrate the principles of financial freedom, than try to buy a wonderful life now.

 

The more you make, the less critical it is to follow every penny and minimize the cost of your lifestyle, but the principles must still be maintained.  There are specific levels of Earning Potential at which you have different abilities to set money aside for investment.  Here are some rough guidelines you can use to determine the effects of your Earning Potential on your eventual investment opportunities:

 

Less than $40,000/yr household gross:  You will need to be extremely fiscally responsible.  If you have significant student loans, vehicle loans, credit card debt, etc. you will have to develop a very Spartan lifestyle in order to overcome the effect your debts have on your disposable income.  

You will need to avoid purchasing anything on credit that does not increase in value over time.  You will also need to develop strict guidelines that determine when it is critical for you to purchase new household items and when it is still a luxury for you.  You must be particularly vigilant that you don't "nickel and dime yourself broke".

"Nickel and dime yourself broke," refers to spending a few dollars here, a few dollars there and not understanding why you have no money at the end of the month, or are behind.  Coffee, fast food, magazines, etc. will slowly eat away into the little disposable income you might have if you were more attentive to what you spend.

You must avoid "extras" like cable, cell phones, pets, car payments, paid entertainment and unnecessary travel until your debt isn't consuming you every month.  The harder you work at this, the more quickly you will get to the point where your debt isn't funning your life and you have enough put aside that emergencies don't completely stress you out.

 

$40,000 - $80,000/yr household gross:  This is typically what we consider middle class.  If this is a two-income household, the most critical component is the consideration of how to manage your finances so that you can still live comfortably if you lose one income.

Losing an income can come any number of ways; one partner laid-off, fired, injured or quitting a job.  You may choose to have one partner at home in order to parent or look after an ailing or older family relative.  

If you are considering making a change where one of you is quitting work, you MUST practice living on one income for a minimum of 6 months!  That second paycheck needs to be set aside into savings or investment in order to prove to yourselves that you truly can exist on the one income that you soon anticipate will be your only means of support.  Rather than simply believing the one income will be enough, you need to prove to yourselves this is the case.

Losing an income can also come through more dramatic means; divorce or death.  Not preparing for either of these eventualities is not only costly, it is something that will significantly affect any dependants you have.

Having a current will, adequate life insurance and specific knowledge of your liabilities and assets and whose name they are in is the foundation for making it through these difficult events.  Deciding that it's not important because it won't happen to you or assuming that your partner has it all looked after won't help after the fact and you find out you assumed incorrectly. 

"Nickel and diming yourself broke" looks a little different with this demographic.  Because it's easy to get credit and there is always another decent payday right around the corner and it seems so much more convenient to pay others for chores like cooking, cleaning, entertainment and social activities - the amount of disposable income that goes into these activities is extremely high!  

If you are in this category, you need to watch how you handle your money closely.  Keep all your bills and sit down once a month to see where your money is really going.  Is your entertainment and dinners out costing you hundreds of extra dollars a month?  Do you know what $300.00/mo would do for you over 20 years if invested at 10%?  $227810.00!  I see people in this category spending double, even triple this amount on things they could cut back on.

 

$100,000 - $250,000: This is typically what we consider upper- middle class.  As long as you maintain a reasonable lifestyle, you should have a fairly easy time putting money aside for investments and building a strong investment portfolio that will lead to almost certain financial freedom.  If you live like a millionaire, even though you can afford the monthly payment, you will never become a millionaire.  Better to maintain a modest lifestyle and actually become a millionaire than try to keep up with the neighbors (more likely you try to outdo them).

 

3.  INVESTING MONEY

There are three main types of investments:

  1. Savings, Bonds, Stocks
  2. Real Estate
  3. Business

The lowest returns are generally found in savings, bonds and stocks: from 1 - 12% over time.  Real estate brings higher returns: from 12 - 100% over time.  Business has the potential to have the highest return of all.  Returns on business can be in the hundreds to thousands of percent return.  This is where self-employment and network marketing come in.  PLEASE NOTE!  If you pursue opportunities simply for the financial return, you will likely not be successful. 

 

Whatever you get involved with for self-employment, network marketing, business or sales must connect with THREE THINGS

  1. What you love.
  2. What you have a high degree of expertise in.
  3. What the marketplace wants (notice I didn't say needs).

The higher the potential return, the higher the risk.  Bottom line is, never invest more in any one venture than you can afford to lose.  

The key to getting good returns on your investments is to develop a high degree of expertise in an area that you have some personal interest in.  Just like the other ways you make money, the higher the degree of expertise and talent you bring to what you are doing, the more you will be rewarded.  Take your time to research each of these vehicles and find the opportunities that you understand and will enjoy working with.  

If you choose investments that you understand and enjoy, you will experience much higher returns and fewer losses than if you simply attempt to find opportunities that present the highest rates of return.  The reason is, as the potential rate of return goes up, so does the risk.  In order to minimize the risk, you need to increase your expertise.  If you're not actually interested in the opportunity outside of the return, the likelihood that you will engage in all of the research and due-diligence necessary is low.

 

So, do you know what your Financial IQ is?  

  • How well have you leveraged your earning capability?  

  • Are you managing your money well, or mortgaging your future on the lifestyle of today?  

  • Have you taken the time to find your niche for investments or are you looking for a quick buck or to others to handle what you've worked hard to set aside?

 

Where ever you're at, the thing to do is start today and increase your ability in each of the three areas.  There are no short-cuts.  You must become more educated about what you're doing, develop better habits and direct more effort in the direction of finances now so that you have the opportunity for more freedom in the future. 

Graham White