Explained in less than 900 words:
If you haven’t read Part 1, please click here.
Ok, so you ask yourself how do you become rich?
If you have asked yourself that question (maybe multiple times in your life), I want to tell you that you can actually do better:
Ask yourself how you can become financially independent.
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Because the real principle to financial independence is making sure your monthly income exceeds your monthly expenses.
This is the first step to create financial abundance, and it is a pretty straight forward step. If you focus on that statement, you will have your first action step to plan. If you focus on how you can become rich, chances are you are not thinking thoroughly about your spendings, risk management, and all important defensive mechanisms to keep your expenses below your income.
And here might be a key point for you: Nobody really wants wealth or being rich unless they’re seeking status. And then they’re really seeking status, not really seeking wealth.
By asking that question about financial independence, you automatically need to come up with two more questions:
How much do you spend each month and how much money comes in.
Spoiler:
Having that goal of financial independence is really nothing else than working on that principle of receiving more money each month that exceed your expenses – without you ( = your time) being involved, means, through passive income (either rent or dividends, or even monthly withdrawals of a portfolio).
Your mindset circles completely around that problem of creating enough cashflow each month to pay all bills on autopilot. And once your mindset is focused on that goal, gaining financial independence becomes a math problem.
On the other hand, if you (just) want to get rich, chances are, you are looking for a certain kind of lifestyle, where you need large amounts of money. There is nothing wrong with that. But being rich does not mean that you are automatically financially independent. You may be rich in a sense that you can afford your personal desired lifestyle, but still need to work and can not rely solely on your passive income – because it is not exceeding your expenses.
Do You Have What It Takes?
Warning: Financial independence is MOST LIKELY a marathon for you, not a sprint. Can you plan ahead for 5, 10, 20 or even 50 years? Do you have the stamina? Can you be immune to status and stick to your plan although you theoretically had the money to buy a new car but not buying it?
It is easier to have this stamina when you have solid numbers to work with. That’s why it is also so crucial to remember that financial independence is a math problem.
In my very first blog post, I talk about the three primary resources for building wealth: time, financial capital, human capital (your abilities, skills).
So in order to become financially independent, you define your financial resources. You define your personal abilities. And you define your time horizon by when you want to be financial independent.
This gap is defined by the distance between your financial independency goal and your current financial resources (which includes all numbers).
You close that gap either with your savings rate and/or raising your return on investment (ROI).
Your ROI is determined either by your salary (means you get money (return) in return of your time (investment)), or your (realistic) expectations of your investments (like rent or even annual stock growth).
However, the key point is to leverage those factors.
Then It’s Literally About Time
You must choose or focus on assets that can grow fast enough within your given time frame to fill the gap.
If you are young, you can leverage time. If you have a huge salary, you can leverage that financial capital and seek investments that accelerates the growth of your money. If you have special personal skills or products that could be interesting to people (a market), you can leverage these by sharing these to a wide audience.
So sorry, financial guru’s out there, but here is the truth:
Every plan is by definition complete individual. There is no one-solution-to-fix-all plan. If you have to claim one, you are lying.
Your personal (!) time frame, skills, and financial resources determine your plan!
This is the most important thing: EVERYONE has a certain time frame, certain skills and certain financial resources. The art is to outweigh (leverage) these resources in the best possible way to fill your gap.
Again, if you have small earnings, only few skills (so far) but are young, you can outweigh (leverage) time as your primary resource and use the magic of compounding with small saving rates.
If you have a small time-horizon because you are in your 50’s but have accumulated a lot of skills in your job, you can outweigh those skills to push your ROI while maybe offering those skills as an additional side hustle.
If you have a lot of capital, it may already be enough to find an investment where you can live off of your interest rates (and if this is the case and you are still reading this blog, thank you).
There you have it, the whole frame in less than 900 words. And it all starts by reframing this absolute common desire of How can I Become Rich!