An investment in knowledge pays the best interest. — Ben Franklin
Editor’s note: This post was written by Jim Hudson of AccelerateMe.net
If you’ve been following Street Smart Finance for any length of time, you’ll know that wealth building is not about get-rich-quick schemes, or scammy business opportunities. It’s about personal financial education, developing long-term thinking, consistency, the principle of compounding, along with a little hard work. I say ‘a little’ because you really don’t have to work harder than anyone else to build wealth, but you do have to be playing the right game. And reading this blog is a great place to learn the rules of the money game.
This article is about how you can attain financial freedom by building what I call, ‘an Automated Wealth Machine.’
Wealth vs. Financial Freedom
Wealth is simply the ownership of instruments of value. Financial freedom, on the other hand, is the ability to live as you wish, without any financial constraint. So, a low-income family on a small patch of land that are self-sufficient can live financially free as they fit that definition.
Everyone should strive for financial freedom. It must come long before wealth. It begins with financial education and it begins in the mind.
Let me tell you the story of the wealthy lawyer. Here’s a man who makes just over a million dollars a year, has the luxury car, mansion, and all the toys of the rich. He’s certainly ‘income rich.’ But he’s mortgaged up to the hilt, has ever-increasing debt, and is suffering trying to maintain the illusion of being a ‘wealthy lawyer.’ All his income is spent before he earns it. He has zero financial freedom.
His secretary, on the other hand, makes just $30,000 a year. A tiny income to be sure, but she is much closer to financial freedom. Let’s look at how she’s doing it.
She’s done a little research on the financial freedom mindset, and planned her expenses a lot better than her boss. The day she gets paid, she divides up her income into different accounts:
- basic needs
- and play
If she were in business, she would have an 8th account: tax.
Structure of the Automated Wealth Machine
Her basic needs are bare-bones necessities such as food, clothing, rent and utilities. Nothing more. She learned the hard way that having a credit card will cripple her efforts to become financially free, so she made eliminating her debt her top priority. So, she allocates a large portion of her income to the debt-destruction account. Once it’s paid off, she will ditch that account, and reallocate that money to the others. If you have bad debt, I suggest you do the same.
Next is her investments account. She knows the power of compounding interest and builds her small investment portfolio every month with dollar cost averaging. She is diversified across different asset classes (not just different investments within the same class), and is learning about macro-economic wealth cycles. She invests for both the long-term, and is learning about trading.
She has an emergency account which she is building up to have enough to cover 6 months living expenses if she should ever need it.
Her education account is for her continued financial and personal development education. The single best investment one can make is in themselves. How do you think she set up her own Wealth Machine?
The generosity account is for any cause she wants to contribute to, and become involved with. Notice she doesn’t label this ‘charity,’ as charity doesn’t involve any exchange and growth of value. And through her education, she knows that value exchange is paramount to wealth building. Charity is included in this, but it isn’t the be-all and end-all.
And finally she has the play account, which is for anything and everything she wants to blow her money on. It’s completely guilt-free spending from this account, because she knows that for every dollar she’s put in here, she’s put 3 in her investment account.
Our heroine worked out the proportion of her income that she contributes to each account, and sticks with it religiously. The proportion you choose will be based on your own goals.
The ‘Wealth Machine’ is a very simple concept that has many benefits. First, it allows you to be aware of, at a glance, of your financial health at any given moment. Second, it conditions your financial discipline and makes it very easy to stick to your long-term plans for realizing your goals. And the more you add to your financial education, the more the Wealth Machine will help you go from broke, to financially free, to truly wealthy.
Lastly, don’t let the simplicity of the ‘machine’ put you off from implementing it. I’ve been using it for a number of years now, and I can tell you that I wouldn’t be where I am today without it.
(Photo courtesy: Tonyolm)
To learn more about this and other achievement strategies, you can access free articles at AccelerateMe.net. Jim Hudson is a business owner, and developer of success tools such as the Accelerated Meditation.