Dear daughter,
Today I want to tell you about signs that show you are on the right path to financial freedom. If you cannot see these signs in your life, try to make them show up, it is worth it!
Table of Contents
- You live with less money than you make.
- You pay yourself first.
- You have an emergency fund.
- You have the insurance you need.
- You are debt-free.
- You invest every month.
- You have several income sources.
- You have passive income sources.
You live with less money than you make.
All the signs I want to tell you about today are equally important, except this one. This one is the most important one. Or like shown in some memes on the internet, “All are important, but this one is importanter” 😂.
As I’m sure you are aware, we human beings believe in society, probably in part because we need it.
We humans are social beings, and because of that, sometimes we behave according to social standards, which are not always in our best interest.
You probably heard about keeping up with the Joneses, a lot of people do it. However, it is not good for them.
But, let me get to my point.
Today society contributes to unnecessary spending, but even worse, it promotes instant gratification.
Because of this, people don’t think most of the time about the implications of their actions. They just want to get instant gratification.
This means you walk somewhere, you see nice shoes, and you don’t need them, but you buy them, to get instant gratification. You feel good for a few hours, but after a couple of days, you only wear them once a month. Worth it?
Here is another one, this blouse style is today’s fashion. Let me buy it, it will impress a lot of people. And you don’t like most of these people that will be “impressed.
Dummy decision? Sure!
That behavior, and another one known as herd mentality, will take you to a financial place that you don’t want to be.
This I know for sure, and if you think about it, you will see that is the only logical way, if you don’t live under your means, you will always be in financial trouble.
Think about it this way.
If you spend less than you make, you will always have money.
If you spend more than you make, you will always be in trouble, and you will always owe money to someone, either the credit card issuer, the bank, or someone else. Which is not good.
This is a verse from the Bible that applies to all our lives: “The borrower is a slave to the lender”. Do you want to be a slave?
If you feel that what you make is not enough, then you are living above your means.
First, see where you can cut costs, I mean, a company worth billions of dollars does it regularly. Why don’t we do it? 🤷♂️
Secondly, see how you can expand your means. Meaning, find out how you can earn more money.
So, make sure that you live with less money than you make.
That should be your first sign you are on the right track to your financial independence.
You pay yourself first.
If you live under your means, this one is quite easy.
But be aware of the trap.
“Pay yourself first” is like a national anthem for people who want to live in “the Financial Free Nation”. However, some of them get confused.
Pay yourself first, means that before you pay your bills, you need to pay yourself, using your salary, investment income, or the income from all your income sources.
But that money that you are paying yourself first, is not for you to spend it, burn it, or get instant gratification.
Because you read my letters, I’m 100% sure you know where I’m going with this.
That money is for you to invest, not (never) to spend.
Why to invest?
Because investing is the way to create more income streams, most of them should be passive (please), and in my opinion, it is the only way (combined with living under your means) that you can guarantee that you won’t run out of money in the future.
In other words, when you get paid, the first thing you do is not to go and buy those awesome sneakers everyone is using, or the ones you’ve been looking at for a while. It is to invest, and then do everything else. Of course, to be able to do that, you first need to have a budget that fits your income.
You have an emergency fund.
This one is a classic and it is actually obvious. I still cannot understand why is so difficult for people to have an emergency fund.
It is just simple logic.
Our lives are full of problems. Like my uncle used to tell me, “if you run out of money, and suddenly you have a problem, you now have two problems: the original one and the second one is that you don’t have money to solve the first problem”.
Logic? 100%, why people don’t do it? 🤷♂️
My guess is that they prefer to have instant gratification instead of taking responsibility.
Yes, my daughter, everything in life is about taking responsibility. Not only to take responsibility for ourselves and the people who depend on us but to take responsibility for our actions.
I do believe that responsibility is one of the reasons why people get so much in trouble these days.
Going back to instant gratification.
You buy whatever you think is going to give you instant gratification, and a while later you realize you don’t have enough money to buy food or to pay the rent.
Is this a social problem?
No, it is your problem, because you were irresponsible.
It is not a societal problem because they give social recognition to people according to their spending, or their unresponsible behavior.
You have the insurance you need.
There are some unexpected situations that you won’t be able to cover with your emergency funds.
Some of them are car accidents, natural disasters, medical emergencies, among others.
Bad things happen all the time and we need to be as prepared as we can be to curb them.
For these events that we cannot know if they are going to happen, we need insurance.
Just be aware that insurance sellers will want you to pay for all types of insurance.
So, you need to be clear on what insurance you need.
If you have a car, you need at least one type of insurance. It can be comprehensive insurance that covers damages to the car’s body and covers you in the case of a write-off because of an accident, or you can have the third-party damage only that can cover a third party if you are guilty when an accident happens.
If you own a house, you need insurance on the building in the case of an accident. These insurance policies sometimes give you extra benefits, like pet insurance, etc. But they will also try to sell you house contents insurance. Just read everything in the contract so you understand what is covered and under what conditions.
Should you get all the insurance you can get? No! Only the one you need.
If you live in a secure place, with no electricity problems and you can replace your household items without problems, you don’t need house content insurance, for instance.
You are debt-free.
Pay all your debt, if you have any.
You will find gurus of all types that will tell you debt is good and also; they will tell you a lot of nonsense.
There are only two types of debt: good debt and bad debt.
Bad debt is the one you pay with your income, that one is bad, you don’t want it and you don’t need it.
Any time you buy something using debt, and you have to pay with your salary, you are living above your means.
It means you need someone, to borrow you money, for you to be able to buy what you want to buy.
This is a no-no.
Good debt is when you buy an asset using debt, but the money (income) you get from that asset pays the monthly premium, and you still can put some cash (not necessarily a lot) in your pocket.
Some people say that the beauty of real estate is that you buy a house, you are liable for the mortgage, but you have a tenant, the rental payment from the tenant pays the mortgage and you get to pocket a bit of money (it does not need to be a lot).
As long as you can always put a bit of money in your pocket, everything is fine. This is called good debt.
So, start being debt-free, so later, maybe, you can learn how to use good debt.
I’m writing this letter in a public place.
Just now, a guy that I don’t passed by and told me, make a million there, make a million. Stupid? I don’t know.
Making a million by writing this letter to you is not in my mind, neither is my goal.
But people are like that. They don’t know what you are doing, but they feel they need to tell you what they think. Weird.
Good or bad, I don’t know. I will take the good part, his good wishes, and move on. I suggest you do the same with people around you.
You invest every month.
You cannot have an excuse for not to invest every month.
It is just something you need to do, for your own good.
I told you already several choices you have to invest, here and there. If those are not for you, keep looking and you will find one that makes you feel comfortable.
There are investment options for everyone out there.
The law here is “Consistency is the key”. That’s why you need to do it every month.
If you pay yourself first, you will be able to do it without any issues.
The issue you will have will be how/where to allocate the money you paid yourself first. Do you understand now why paying yourself first is the most important one?
Investing is a great tool to build wealth, but it needs time.
The sooner you start the better, and the more regular you do it, the better.
This will create a habit, a great one by the way. If you are investing every month and you don’t have debt, you are well ahead of the race!
Sure to be soon financially free!
By the way, just to be clear, by financially free I don’t mean what our parents tell us, study, get a job so you can be independent and have your own life. That is just changing who you depend on. You change your parents for a company. If the company fires you, you are in trouble, so you are not free.
By financially free I mean you have enough passive income, income that you get while spelling, that you don’t need to work to pay for your expenses. If you work for someone, is because you want to, not because you have to.
You have several income sources.
Having only one income source is not a good thing. If that income source disappears or get into trouble, you suffer.
It is better to have several, unrelated, income sources. If one suffers, you still have several others.
One simple way to think about this is in this example. You have a nice job, but suddenly your company goes bankrupt, or there is a reduction of employees. I mean, problems happen in real life, there are several examples of great companies that filed for bankruptcy.
What if it is the one you are working for?
Also, many companies closed or “got rid” of several employees during tough times. Think about the COVID pandemic or the 2008 financial crisis.
You don’t want your future to depend on one company or one income source. You need as many as you can get to be comfortable.
Some books I’ve read state that the average millionaire has 7 (unrelated) income sources.
The important thing here is not the millionaire word, I mean, to be one of them. But it might be true, logically, that they know how to handle money. So, we can learn from them in that aspect.
If someone made a fortune a while ago, and it had gone through a pandemic and world financial crisis, I want to know how that person made it, so I can also do it.
Do you also want to know? I guess you do.
So, long story short, we cannot depend on only one source of income, we need several. Take note that most of them should be passive because our time is limited.
Wealthy people don’t have 7 jobs, they have income sources that do not depend on them working or spending time, and yet they get paid.
In other words, they get paid for their capital (money invested) instead of their time.
If you are an employee, you get paid for your time, you are literally selling your time.
What you want, is that you put your capital to work for you, not your time. Then you can do with your time whatever you want.
You have passive income sources.
This one is related to the previous one. You want to have multiple sources of income, but most of them must be passive, or at least take you just an insignificant amount of time.
Here is why.
When your income depends on your time, it is considered active. Active income has a limit, as it depends on your time, and your time is limited.
We only have 24 hours a day. If you get paid per working hour, the limit is 24 times what you get paid per hour (assuming you will only work, not sleep, not anything else). That’s it, you cannot get paid more than that.
Passive income is another story.
Have you heard about “making money while you sleep”?
Imagine that you go to sleep today, and tomorrow morning you have a cheque on your door, or a payment is reflected in your account. Sounds great, doesn’t it?
There are many ways you can achieve that, one of them is investing.
Imagine you like a company like Apple. Yes, I said Apple because I like it.
They sell their products all over the world.
Imagine, when you are sleeping, someone is buying an Apple product somewhere. Or doing a recurring payment for Apple Music, iCloud+, or any other.
If you own Apple, you are making money while you sleep because of that.
Yes, I know, it is not easy to choose a company, sometimes you choose, and the company can go bankrupt and many other things can happen.
Ok, I agree.
But in everything we do there is a risk, we just need to minimize the risk and move on.
Nothing in life is risk-free.
If you think about it, being alive is not risk-free, anything can happen to you at any time, yet we choose to live the best way we can.
It is the same in our financial lives.
We need to choose to live because the alternative is worse.
So tell me, how many of the previous signs can you see in your life?
Love you, Dad.