The Oxford Dictionary describes financial freedom as the point at which your assets (share, cash, real estate, business profit etc) produce enough income to cover your baseline expenses.
In simple terms, I describe financial freedom as when your money is working for you, it’s not you working for money. It’s when the financial assets you own produce enough income to fund your lifestyle without you having to exchange your time or effort for money.
There are 3 Financial Assets you can invest in to achieve Financial Freedom.
Let’s have a look at each of these.
As small business owners and entrepreneurs, being financially free doesn’t necessarily mean you will be able to or want to just go and sit on a beach, put your feet up and chill out for the rest of your life. It simply means that you will have choices about how you spend your time, about what you do with your day and about who you spend your day with.
Why wouldn’t you want this kind of freedom?
But if financial freedom is so appealing, why is it that so few people achieve it?
And why isn’t every entrepreneur striving for it?
I believe it is in two parts. Firstly, as business owners we are so busy in our day to day operations that we don’t spend the time to create a plan to create wealth and financial freedom outside of our business.
And secondly, if we do start to create a plan for financial freedom, we don’t know the where or how to invest or how much we need (more on that in future articles).
Before we set a target or amount of money we need to be financially free, we need to fully understand what assets that can create income and allow you to be financially free.
Let’s look at the 3 assets you can invest in to build your wealth and create Financial Freedom.
- Your Business
As a small business owner and entrepreneur, a major asset that you own is your business. It could be one business or many businesses.
The income I am talking about here that you earn from your business is your share of the profit your business generates and that you take as a profit distribution or dividend.
When your business is making a profit, it is how you use this profit to grow your assets that will help you create financial freedom.
Most Australians know and love property. A property investment can be residential property (a house, apartment, unit and so on), a commercial property (office, factory and so on), or it could be a listed property fund (where you buy units in a fund with other people and pool your money to buy a property).
Whatever you invest in, the property is expected to grow in capital value, and when it’s rented out it will also pay you an income. Over time, as the property increasing in value, so will the rent you charge.
You can then use the growth in value of the property to purchase other properties and use the rent to fund your lifestyle expenses.
The concept of shares is quite simple. You exchange your money for a ‘share’ in a public company (one that anyone in the public can invest in). That company is given a ‘value’ on the share market each day. If the value increases so does your share value.
If the company makes a profit, they will often pay a part of this profit out to you as a shareholder. This is called a dividend – just like in your business.
Over time, if you invest in companies that grow in value and make profits, your share value will increase and you will receive dividends that you can use to fund your lifestyle expenses.
Now that you know the assets you can invest in to grow your net wealth, we need to explore how you can work out how much you need ($ or wealth we are talking about) to produce the income you need to be financially free.
We need to start with the end in mind.
We will cover this in our next article.