Philosophy John on 27 May 2008 07:17 am
It is my belief that anyone wishing to achieve financial freedom needs to address four key areas of their personal finance.
- Getting out of debt;
- Minimising monthly outgoings;
- Making regular savings and investments;
- Making money.
These are what I refer to as the four pillars of financial freedom. The first two pillars are about minimising your monthly outgoings and the second are focused on maximising your passive income.
You’ve achieved financial freedom when your passive income exceeds your monthly outgoings. Which means that the route to financial freedom is to minimise your outgoings and maximise you passive income.
So what does each pillar mean?
Getting out of debt
I believe there are two types of debt, wasteful and enabling. Wasteful debts should be avoided. Enabling debts are acceptable but in an ideal world we would avoid them too.
To achieve financial freedom you need to get rid of all wasteful debt as soon as possible.
Minimising monthly outgoings
The less you spend each month, the less you need to earn to cover your expenses, therefore it makes sense to minimise your outgoings. You can then use any spare income to make savings and investments or to start a business and make money.
Making regular savings and investments
Nearly 50% of UK households have savings that are less than or equivalent to one months income. If anything happens that stops these households from earning they’ll be in financial difficulties almost immediately. To achieve financial freedom you need to start saving money, the more the better. Savings and investments should however only be considered AFTER wasteful debt has been repaid.
The more money you make, the more you have to repay wasteful debts and to invest. Making is therefore key to financial freedom. There are to aspects to this 1) maximise your earnings from your current employment - or switch employment to a better paid job and 2) starting a business, ideally one that has the potential to create passive income.
In future posts we’ll be expanding on the strategies and tactics you can use to build each of the four pillars required for you to achieve financial freedom.