Financial freedom is the dream land of personal finance. It is the freedom to stop working anytime you want and still be able to live the lifestyle you desire.
To achieve it, the key is passive income, which is the income you earn without doing active work. For instance, the interest of your saving account is a kind of passive income. You do not need to work to earn it. You can sit and leave the account alone, and you will still earn the interest. To achieve financial freedom, your passive income should be greater than or equal to your expenses.
From what I learn, what we should do to achieve financial freedom can be boiled down to two rules:
- When you work, work to build a system
- When you buy, buy an asset
Pretty simple, aren’t they? They are simple but powerful. I might miss something (and feel free to let me know in the comments), but I think these two rules cover practically everything we need to do to build passive income and achieve financial freedom.
Let’s look at them in more detail:
1. When you work, work to build a system
This first rule deals with how you should spend your time. I first learned about this from StevePavlina.com podcast #006. Instead of spending your time working for money, you should spend your time building a system that will generate money for you. There is a big difference between them.
If you work directly for money, you always need to work to earn more money. There is no way you can earn money if you do not work. Here are some examples:
- A freelancer must work on a project to earn money.
- A doctor must work with the patients to earn money.
- An employee must work at the company to earn a salary.
When they stop working, their income will also stop. No matter how hard or how long they have worked before, when they stop working their income will also drop to practically zero.
Compare it with those who build a system. If you build a system, you can stop working anytime you want and the system will still generate money for you. Here are some examples:
- A business owner who has a system in place can leave the business to a manager and still earn income.
- A web site owner can stop working on the site and still earn income (e.g. from “automatic” advertisements like Google AdSense).
- A book writer can stop writing and still earn royalties from the books she has written.
When these people stop working, their income won’t just fall to zero. Instead, their system will continue to generate money for them. When they feel that the system they build is already strong enough, they can move on to create a new system and therefore a new income stream.
From these examples we can see in which category we currently fit. Are we now building a system or work directly for money?
Of course, if you find yourself working directly for money, it doesn’t mean that you should quit your job right away and start a business. There should be a transition period, or – if you love your job – you can work on both of them. The important thing is balancing your priorities. You should prevent yourself from being too absorbed in the job that you can no longer build a system, but you should also be sure that you have the financial resources to meet your needs.
2. When you buy, buy an asset
This second rule deals with how you should spend your money. I first learned about this from the book Rich Dad Poor Dad
So – in other words – this rule says that when you buy, buy something that generates money. Of course, it doesn’t mean that you may not buy a cup of coffee (which doesn’t generate money), but the idea is you should use your money as much as possible to buy assets.
Here are some examples of assets:
- Real estate (from which you earn rental income)
- Mutual fund
- Stock
- Business tools or equipment
- Education
Using this rule, you can see whether or not an expense is wise. If the expense allows you to generate more money in the future, then it is a wise one. Otherwise… well, you can guess.
One cause why many people never achieve financial freedom is they use their money mainly to buy liabilities and not assets. On the other hand, people who achieve financial freedom are those who are willing to postpone pleasures to first build their assets. It is the passive income from the assets that will eventually buy them luxuries.
***
From these two rules, there are two questions you should ask yourself:
- “Am I building a system?”
- “Do I buy something that generate money?”
The goal is to answer “yes” to these two questions as often as possible. Spend your time to build systems, and spend your money to buy assets.
Comment by Hunter Nuttall
#1 7. January 2008, 4:12 pm o'clock |
I was about to say that these rules are simple but powerful, until I saw that you already said that in the headline! I’ve listened to that podcast and read that book, and both were great. These are good things to always keep in mind to make the best use of our time and our money.
Comment by Luciano Passuello
#2 7. January 2008, 4:23 pm o'clock |
Hi, Donald. Thanks for the great post, as usual.
Regarding point #1, if you want a more entrepreneur-focused view of the concept, I highly recommend the classic The E-Myth Revisited (in case you haven’t read it yet, of course).
Cheers!
Comment by Adam Kamerer - JoyChaser.com
#3 7. January 2008, 5:45 pm o'clock |
Great post. I love reading about passive income, because it’s a system that just makes so much sense. Why would you lock yourself into a single income stream? If that stream goes kaput, you could be financially ruined, whereas with multiple passive streams that require little to no maintenance, even if people stop buying your book, for example, you can fall back on your rental properties while you set up a new system. And even better, over the course of a lifetime, you can set up tons of income streams. Even if they don’t individually make much, your net total can be huge.
Comment by David Legan
#4 7. January 2008, 7:28 pm o'clock |
Of the suggested alternatives, the only one that makes sense for the average individual is rental real estate. The others require too much capital. Real estate requires only a 20% or so down payment (and there are tricks around this) and good credit (no tricks around that one.) to buy the first property. After that, you can leverage the equity in the first to buy the second, the second to buy the third, and literally lift yourself by your bootstraps. The key is that your tenants are paying for the property for you. There is a little work and risk involved, but it is a rock cinch to work. I know, I have done it.
Comment by Kristin
#5 7. January 2008, 7:33 pm o'clock |
I think that is about as simple as it comes. Like the post.
Comment by Donald Latumahina
#6 7. January 2008, 9:14 pm o'clock |
Hunter,
What a coincidence :) Yes, they are both great resources. StevePavlina.com Podcast #006 is one of my favorite podcast episodes ever.
Luciano,
I have heard about the book but I haven’t read it. Thanks for the useful recommendation!
Adam,
I agree with you. Having multiple passive streams is something we should all achieve. It offers both freedom and security unmatched by conventional job.
David,
I’m glad you shared your experience. That is a very good way to earn passive income. I wish I could move to that direction in the future.
Kristin,
Thanks for the compliment!
Comment by Living Off Dividends
#7 8. January 2008, 4:16 am o'clock |
Great post.
I’ve done a great job buying assets. now I need to work on my systems.
I already have a website thats generating income, but i need to *optimize* properly.
Comment by Tomaz from Financial Freedom Ideas
#8 8. January 2008, 4:40 am o'clock |
Great work of simplifying the journey to financial freedom in only 2 steps!
Yes, passive income is the key and with the power of the internet everyone can do it.
It may take a few years but the effort to learn how to build a successful website(s) is definitely worth it.
Comment by NDK Creative Artist
#9 8. January 2008, 7:34 pm o'clock |
A good friend and colleague forwarded this article to me and it reminded me of ‘Rich Dad, Poor Dad’ and how instrumental it has been for me in developing my own assets and system, I can certainly say I have had to sacrifice a lot to make that happen. But it is now happening. That’s the main thing. So yes, good advice and sound principles.
Comment by Shamelle @ Enhance Life
#10 9. January 2008, 12:59 am o'clock |
Just a few days ago I finished listening to the audio book- Rich dad, poor dad. Its a really nice book and I have learned a lot of things I didn’t know before about money!
Comment by Donald Latumahina
#11 9. January 2008, 6:10 am o'clock |
Living Off and Tomaz,
I agree that developing web sites is a good way to build systems. I’m now learning it as well.
NDK,
I think the sacrifice part is something we should all learn about. Congratulations for having a working system!
Sham,
Yes, though controversial, it’s a good book for our financial education.
Comment by Jessica
#12 11. January 2008, 6:41 am o'clock |
Great post which summed up a lot of important points. Thank you.
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Comment by Donald Latumahina
#13 11. January 2008, 8:53 pm o'clock |
Thanks for the information, Jessica!
Comment by Investor Trip
#14 20. June 2008, 8:31 am o'clock |
Great post. The key is really patience and discipline. Build your assets so they can buy as many luxuries as you want.
Plus, you may discover you don’t need those extra luxuries when you can easily afford them. A lot of people get caught in the “Joneses Trap”, instead of focusing on their personal goals.
Think about your future, set some goals, then model your life around them. All that Joneses crap sounds silly now, doesn’t it?
Comment by Tips4pc
#15 16. July 2009, 6:59 am o'clock |
Fantastic post. This is exactly how I run my life. I am buildings systems by building websites in my spare time. I also have a coffee van I run only on weekends. I have been doing all this for over 2 years.. People just look at me like I am an idiot when I say I have to go to work…”Work???” they say “you don’t work for anyone, why do you have to work now?” But I have treated my websites like a job, even though I did not make money for the first year. It didn’t stop me because I knew I would be rewarded in the end.
Comment by Sandra Park
#16 25. August 2009, 10:58 pm o'clock |
it is everyones dream to have Financial Freedom but it takes hard work to achieve it. i am blogging and making websites in the hopes that it could lead me to financial freedom someday.
Comment by | Melatonin effects
#17 28. September 2009, 8:44 am o'clock |
my goal in life is to achieve Financial Freedom through making money online. I monetize my websites and blogs using Adsense and Adbrite. Hopefully, with more work and time i might just achieve financial freedom.
Comment by Aimee
#18 13. October 2009, 9:51 am o'clock |
Financial Freedom is the goal of most people. i also work so hard and look for oppurtunities like make money online to attain my own personal financial freedom.
Comment by Caramoan
#19 2. November 2009, 10:39 am o'clock |
every person wants some degree of Financial Freedom. you can easily achieve financial freedom if you work hard and work smart.
Comment by Carlene
#20 22. November 2009, 3:30 am o'clock |
My ultimate goal in life is to have Financial Freedom where i also have lots of extra time for leisure. Financial freedom does not come easily without lots of hard work and positive thinking.
Comment by Lady Jhen
#21 7. December 2009, 2:16 am o'clock |
we can have Financial Freedom as long as we work very hard and become focused on making money. nowadays we can also make money online and it is a good deal to earn money.
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# 17. March 2008, 2:40 am o'clock |
[...] without earning it, is naive at best and apathetic at worst. We find freedom when we are willing to sacrifice ourselves, our lives, our own freedom even for the greater good. Remember freedom is never [...]
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#1 25. September 2008, 2:56 pm o'clock |
[...] Two Simple But Powerful Rules to Achieve Financial Freedom [...]