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 by Robert Kiyosaki. The definition of asset here is something that generates money. Based on this definition Kiyosaki said that house is a liability and not an asset because a house incurs costs (such as electricity, water, and maintenance) without generating income (unless you rent it).
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
- Business tools or equipment
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.