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!
Look around you, look at the number of people who are completely reliant on their jobs for financial security. What if they were made redundant tomorrow, for the majority of the UK population they wouldn’t even have the financial resources to support themselves for 3 months.
The reality is even if you work for a large multinational you could lose your job tomorrow. I’m not trying to say this in a bad way I just want to encourage people to think about the bigger picture. A “secure” job does not mean you have no risks as we saw with Lehman Brothers when it collapsed in 2008. A lot of the workers at that large US bank probably thought they had a “secure” job.
In this day and age, jobs for life are harder to come by partly because of the current economic outlook and partly to do with technology. The internet means that jobs can be farmed off to countries like India, China and the Phillipines where jobs can be done for a fraction of the cost of Western Countries. This means that it is more important than ever to have something to fall back on. At the very least everyone should have 6 months worth of living expenses sitting in liquid assets- lets call this a financial security fund.
The other reason why people need to start thinking about their financial arrangements is because gone are the days when individuals worked for a company their whole lives and then got a pension until they died. These days people are living longer, much longer, for children born in this decade it will not be unreasonable to assume they will live to beyond 100. Governments in the Western world, on the other hand, are bankrupt, they cannot really afford to look after their citizens in retirement, what we will therefore likely see is that the value of government pensions will fall and fall in real value pushing hard working pensioners back to work or into poverty.
It is therefore so important that people get financially educated. They need to understand the importance of buying up assets and businesses which will be able to provide a source of income whether they can work or not. To reach that level of financial education will be a long hard struggle, it will require significant effort and a change of mindset but if you do not start on that path you will be risking having a very poor retirement. As a start have a look at some of the suggested reading on this website. As this portal develops I will eventually have a whole program of assistance that can be offered to help you reach financial independence. It doesn’t matter if you are 20 or 65 years old the most important thing is start taking some action! Good luck.
The world is in a state of economic deterioration. I think it is inevitable that over the next few years we will see a higher inflation, weakening currencies and further real estate market crashes.
I am the experimental investor, I am seeking out investment opportunities in these tough times which I can use to build up my investment portfolio. Everything I talk about I am investing in myself.
This site will provide you with education, economic and investment news, and access to powerful material to help you realise your investment dreams, just like me!