The Formula for Financial Freedom That All Financial Books Repeat
The magic formula for financial freedom is not new.
Thousands of people finance books and a simple formula for achieving financial freedom. That’s the catchy title of a tweet that recently hit my timeline and hit the mark on how to build your inheritance.
The magic formula for financial freedom is not new. You’ve easily heard it on more than one occasion: spend less than you earn, invest the difference, and start young. It is so simple and 100% effective.
Are these three simple steps really enough? Yes, of course, although each has its own importance within the process.
Formula #1 — Spend Less Than You Earn
Investing is always sexier than saving, and it’s normal. Saving is something that more or less all of us can do. However, saving is the foundation on which you will build your financial freedom.
All the people who have a lot of financial freedom save a high percentage of their salary. Doing this has two definite advantages:
They generate a lot of capital that they can then invest.
Because they need less to live on, they achieve financial independence sooner.
The easiest way to get started is to practice the pre-saving method. Here you can see how to do it.
What if you are already saving and want to go further? Start by checking whether you are saving more or less than the average person of the same age or salary. But remember to always make up the difference.
If you want to save more, three specific tools will help you do this:
Make a budget, so you know how you are spending your money.
Embrace conscious spending.Reduce your expenses, starting with the ones that matter least to you and using the best saving tricks.
This way, you will adjust your budget and, at the same time, focus your money on what really matters to you and makes you happy.
Formula #2 — Invest the Difference
Investing is anabolic financial freedom. It is the formula for accelerating the path to financial independence and multiplying your money.
The basic rule simply says that you should spend less than you earn and invest the difference. From the beginning? When should you start investing? Ideally, as soon as possible, as you will see below.
However, before you start investing, it is advisable to have an emergency fund that covers at least three to six months of your fixed expenses.
After collecting this money, you should invest the rest to increase your money and avoid the effect of inflation.Formula #3 — Start as Soon as Possible
Time is your greatest ally in building your financial freedom. The reason is compound interest, which Albert Einstein described as the greatest force in the universe.
Compound interest is the effect of reinvesting your savings plus profits year after year.
Imagine you invest $10,000 with a 5% return. The first year you will earn $500 and have $10,500 in your account. And in the following year? With compound interest you will invest $10,500 and your profit will be $525. Does it seem little to you? Now think of the same effect over 20 years.
Compounding just takes time to generate a snowball effect that can be unstoppable.
For this reason, the earlier you start, the better.
Some Truths About Money That Few People Tell
Managing our money and, at the same time, saving money is certainly not an easy task.
However, we must know how to handle the money we receive. On the other hand, the realization of our dreams and projects is in danger of becoming an increasingly distant event.
Our relationship with money or our love for money gets complicated when we are not organized enough.
Financial organization is necessary at a time when debts can damage your life in the long run.
Therefore, we must face the problem head-on, recognizing our difficulties and organizing our finances.
To be successful in this process, you will need to identify the areas where you went wrong in order to discover your areas of improvement. Without this kind of attitude, It won’t take long for your budget to get out of control if it isn’t already.
Don’t be afraid to admit that your relationship with money or currency is not the best. The sooner you admit your financial mistakes, the faster you will get rid of your financial problems.
You Only Get the Money You Ask for
This first truth about money or currency tells us that the change we earn is the result of what we ask to earn.
This is the power of negotiation and argument to get the money or change we want.
So if you want a promotion at work, a reduction on that most expensive product or service in your budget, or participation in a profitable project, you must start by showing interest.
Don’t be afraid to show interest, and therefore abuse negotiation tactics. Proper use of these techniques will bring surprising results.
To Make a Lot of Money, You Need to Have Your Own Mindset
Of course, success does not depend only on you. Having the support of more experienced and knowledgeable people can be instrumental in your path.
However, never forget that the attitude has to come from you. With the determination that comes from within you, your path becomes much easier to follow. It is up to you to chart your own path and face the obstacles.
So count on people to help you, but always remember that it is you who makes the journey. Have peace of mind, and don’t be easily influenced by anyone who comes your way.
Many are those who, during your journey, will offer pessimistic opinions or promise to be on the same path. Don’t stop walking to listen to them. You have to move forward!
The Credit Card Is Not Money
We should never forget that the bank’s credit card is just a way of dividing up our expenses, not the money itself.
This means that if you have a cash limit on your credit card at the bank, this amount does not necessarily represent the cash or currency that you have available.
Credit card companies increase your limit based on how well you spend and how regularly you make payments. But make no mistake: your limit may go up, but not always your income. In some cases, your income may even decrease as your credit limit increases.
Knowing that the credit card is just another tool to spend our money, not a source of income, we can buy better with it.
On the other hand, if you understand that credit cards and cash or currency are the same things, the tendency is that you are spending more money than you would spend per month.The consequences of using a credit card without criteria are very serious. In addition to acquiring much more debt than you originally had, you run the risk of having your card canceled and your name written in the negative, which will significantly damage your credit history and make new purchases difficult.
Your Retirement Depends a Lot on You
The number of people choosing other retirement solutions is increasing. Alternatives that don’t always go through government agencies or banks.
A private pension plan like the bank has been an alternative sought by many people. However, it is still a habit considered unconventional since most people still invest in public pensions.
It is up to you to decide which retirement model best meets your needs. Whatever model you choose, it is important to think about your long-term future as early as possible.
Investments Are Boring But Necessary
Have you ever gotten tired of hearing people tell you that you should make multiple investments? Tired of hearing the different types of investments you need to make in order to have a healthier financial life? If you’re tired of hearing this kind of advice, it’s another sign that you need to invest your money or switch as soon as possible.
While investing is not one of the most fun things to do, it is a necessary thing to do. It is the means you can use to make your change or money grow and have a good emergency or future reserve.
Final Thoughts
Indeed, positive thinking is fundamental to our success. However, it should not be a one-way street.
Positive thinking must be combined with actions to achieve the desired effect. Few people manage to get financially organized and have the life they desire.
What is different about these people? In most cases, it is their relationship with money that makes all the difference.