Friday, March 4, 2016

10 Quick Rules to Become Financially Free Fast

What is financial freedom? How to become financially free? How to attain financial freedom? How to break free from financial worries? What are the ways to achieve financial freedom? What are the steps to reach financial freedom?

These are some of the questions that often get asked by someone who is looking to quit the rat race.

Being in a position to be able to quit the rat race without impacting the standard of living you are used to is a strong reason why you (and in fact most people) would want to become financially free.

Financial freedom, in addition, is also thought to lead the way to a better quality of life, more time at your disposal, ability to choose whether or not to work and a full stop to living in the constant fear of loosing your monthly paycheck.

About paycheck Nassim Nicholas Taleb so rightly said, “The three most harmful addictions are heroin, carbohydrates, and a monthly salary.”

While it is certainly important to become financially free, it is, however, many times more important to become financially free fast.

What's the point in becoming financially free when you become 80 or 90 years old. Ideally, the goal should be reach financial freedom by the age of 40 to 45.

Here are 10 quick rules not just to become financially free but also to become financially free fast.

Rule 10. Adopt minimalism and cut down needs

From this very moment onward in your life, stop buying anything. And anything means anything. If you only want it, you can actually live without it and hence do not need to buy it. You should actually need it before you buy it.

So buy something only if you really need it. Also see if you can cut down your needs too. The lesser needs you have the better placed you are to become financially free fast.

Rule 9. Cut expenses on needs to bare minimum

This is slightly different from the above as it refers to buying what you need but at the lowest cost you are able to get it. However ensure whatever you buy is usable.

Throwing away something that is not of good enough quality would eventually lead to loosing money.

Rule 8. Protect the accumulated capital

Guard your capital from losses and erosion. Making less profit is always better than loosing capital in the quest for higher returns. Diversification can help in this matter greatly.

It is useful to remember that a bird in the hand is worth more than two birds in the bush. Slow and steady wins the race is as true today as it ever was.

Rule 7. Remain physically and mentally fit

Physical and mental health would allow you to not only cut down unnecessary expenses on doctors and medicines but also the time saved can be used to increase your earnings.

The opportunity cost of physical and mental health can make a huge difference to your net worth over several years time-frame. In addition, it is always better to enjoy the wealth you accumulate for as long as you can and good health will allow you to do that.

Rule 6. Spend only the returns from your investment

Never  spend the money you earned first time. Invest it to earn some returns and spend only the returns. For example, if you buy a stock and get some dividend, spend only the dividend and not the invested capital.

You should let the capital grow gradually to give increasingly higher returns. However, do keep in mind Rule 8 always.

Rule 5. Save part of the returns from your investment

While Rule 6 says spend only the returns, Rule 5 says don't spend all the return, save some. The retained earnings should be invested to augment the invested capital.

This also ensures the gap between what you earn and what you spend keeps on widening over time and hence in case of a situation  where your earning from some sources stops, you would continue to be financially free and would never be forced to return to rejoin the rat race.

Rule 4. Become philosophical about money 

You should reduce your craving for more and more money and adopt a philosophical outlook about money. It is true that "the more money you have the less it seems" which means there is no end to how rich any person can become.

The purpose of money is to make sure you can spend it on things you need to. Money by itself cannot be consumed directly.

Rule 3. Stop comparing with others

Focus only on your needs and never get swayed by how much money others have and what their needs are. What is a need and want for one person may be different from what is a need and want for another person.

So stop comparing and focus on what your needs are and how much money you need to fulfill those needs. 

Rule 2. Live as simple a life as possible

If you live a simple life you would anyway need less money. No expensive holidays, no costly hotels, no fancy dresses, no swanky cars is just a beginning of how you can start living a simple life.

Remember, however, if you want to splurge and spoil yourself at times (though not too frequently) the money has to come from what you get from Rule 6.

Rule 1. Track where your money comes from and goes out

Maintain detailed records of where money comes from and goes out. You should know how much money would come to you every month minus your job earnings.

Your monthly expenses, accumulated capital, remaining life (in number of months) and likely interest rate can be easily used to derive whether you are financially free or not.

You should track this number very closely to calculate how many more months you need to suffer before you can quit the rat race, hopefully forever.

Rule 0. Build the seed capital fast and start early

And, last but not the least, there is this hidden rule, Rule 0, that should never be forgotten.

Money begets money so you should focus on building the seed capital first. You aim would be to build a big corpus gradually and eventually but the starting point is the seed capital.

In addition, time and interest rates are the two biggest friends of any investor as both drive the compounding effect.

Interest rates are driven by market but you can choose to drive the time factor by starting early the game of investing so as to be able to play it over a really long-term which will certainly provide you an edge and undoubtedly work to your advantage in the end.

And as you do this never forget Rule 8!

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