Financial Freedom Framework
A Summary
This framework is the driving force behind my thoughts, plans and goals to achieve Financial Freedom. I recently conceptualized this in my head and am now sharing it digitally for the first time. This ideology will surely transform over time. I welcome all to read, digest, analyze and comment. I am open to feedback and would love you to poke holes so I can improve the framework.
The definition of Financial Freedom to me is the point where I am no longer dependent on one single stream of income, have ample savings, a strong retirement fund, and little to no debt. There are four themes that make up this framework. I liken them to building a square house. Each acts as a foundation wall meant to be built upon and made stronger with time.
Savings
Retirement
Multiple income Streams
Debt Management
Savings
An emergency savings is important regardless of whether you are trying to achieve Financial Freedom or just living your life. I think it is essential when it comes to being able to claim Financial Freedom and even begin thinking about quitting a 9 to 5 job. Having at least 6 months worth of income saved up to rely on in times of hardship is important. Furthermore, having an emergency savings for each income property or stream is also important. In these cases you won’t eat into your profit, you will rely on the money you saved up over time.
Some would argue having an emergency savings will limit your ability to invest in more property, that money is being left on the table. To that I say Financial Freedom is flexible. You can craft it however you would like, in a way that you are most comfortable.
Debt Management
Most real estate investors learn to build their portfolios through leveraging debt. This is one strategy I have used as well. I have never purchased a property with my own cash, I have always used a mortgage lender. The key, I think, to Financial Freedom is ensuring that you have the funds available to cover your expenses or pay off the debt prior to “retirement.”
Again, you have to decide what you are most comfortable with. Do you start paying down debt with money you’ve earned from your investments or do you use that money to purchase more investments? My personal preference and plan is to leverage debt but put a plan in place to get rid of that debt (more on that in another post). Paying down debt will allow me to net more income and sleep better knowing I can afford my expenses at the end of the day.
Multiple Income Streams
My original plan to achieve financial freedom was to invest in real estate and real estate alone. I have learned so much over the past year from the meetups I attended and the investors that I have met. One of the things I learned is the importance of diversifying income streams beyond real estate so that if one area fails I have others to rely on.
I relate having multiple income streams to having a diversified portfolio in the stock market. The first thing you learn about investing in stocks is the importance of having a well diversified portfolio. Diversify, diversify, diversify. Why? If you have only have stocks in one company and that company folds then you lose all of your money. However, if you own stock in multiple companies, when one company fails you have other companies to fall back on and you don’t lose all of your money.
The same thing is true of income. If you work for one company and that company fails well their goes your salary, your ability to pay mortgage or rent and buy groceries. If you invest in various areas then losing your job won’t hurt as much. You can rely on your other streams of income until you find another job. This is the reason I got into real estate investing in the first place, I didn’t want to be 100% reliant on my w2 job.
Retirement
This category means two things to me. One is retiring from my 9 to 5 and the second is actually having funds to support myself when I am older in age. A lot of people in the FIRE (Financial Independence Retire Early) movement aspire for retirement. Now, I want to “retire” from my 9 to 5 job too but that is not actually what I mean here. Once I quit my 9 to 5 job I’m not actually going to stop working and sit on my bum all day. I am going to have a lot of work to do related to my other ventures. However, I will have the time freedom to chose what I do. For instance, if I want to arrange my week so I can take a 4 day weekend then I am going to do that.
I also view this theme as a means of supporting myself in the future. Financial Freedom to me also means being able to support myself when I am older and maybe can’t work and don’t want to work. For instance, if I grow sick and need to go into a nursing home, I would rather be able to go to my retirement fund and use the money to hire a full time nurse. Or perhaps support a loved one in need. My plan is to contribute as much as I can pre-tax to my retirement fund with my monthly income. I plan to still contribute to a 401K or IRA after I retire via contributions from the funds from my various income streams.
I plan to develop each of these categories further and spell out how I plan to achieve each one over time. Look out for future posts about this topic.
Please ask question, poke holes, and let me know what you think in the comments.