As someone who is aiming to reach financial independence within the next five years it is important to think about holding assets which provide multiple streams of income. Remember in the words of Robert Kiyosaki an asset is something which puts money in your pocket!
Finding and Maintaining Financial Independence
The game we are all trying to play is to build up our wealth (ie. assets) such that the cashflows produced from our wealth exceed our living expenses plus a bit for having fun! If this is achieved we are financially free. However, it is also important to structure our assets such that should things go wrong we will still be financially free and don’t need to resort to returning to the rat race! How do we go about doing this?…well we need to diversify our asset holdings.
As a example consider the following situation: I find that I need to hold £1m of assets in order to cover by £40k of annual living expenses. If using my assets I purchased a large and expensive property in central London and rented this out to a family which turned over £40k per annum in positive cashflow I would classify myself financially free but I would still be only one rental void away from returning to the rat race. Alternatively, I could hold a series of flats and properties all around the country which aggregated up to a £40k per annum positive cashflow. In this latter case I would have more security in terms of rental voids, geographical economic differences and regional price variations. Effectively, my portfolio would be better diversified…you get the picture!
A Cashflow Pyramid
So we know that diversification is good, but if we want to build a “cashflow pyramid” with a solid base we need to derive cashflow from multiple asset classes too. The following list gives you some ideas for ways of deriving cashflow:
- Rental Income from property
- Dividends from shares
- Advertising and sales commissions from a website
- Owning a profitable business
- Interest from bank savings
- Spread betting on the financial markets
As always though, the less involvement in deriving the income stream the closer we can say we are to true financial independence. This is why it is important as a business owner to have a hands of approach so you can leave the management of the business to your employees and focus on enjoying the profits!