I recently read a fantastic article by Michael Yardney, Australia leading property commentator, titled 4 steps to financial independence.
The article inspired me to formalise a concrete plan which will allow my family and I to achieve financial security within 2 years and financial freedom within 4 years.
The funny thing about sitting down and working through this process was that it allowed me to achieve complete clarity on the action steps my family and I need to undertake over the next 2 – 4 years to achieve our goal. I have outlined my personal action steps below.
The 5 levels of wealth:
Level 0 – Financial Instability
Unfortunately this is where the majority of Australians currently live. This is the place where you live from pay cheque to pay cheque.
Level 1 – Financial Stability
At this level you’ve saved enough money to cover your current living expenses for 6 months. You’ve also purchased life insurance and income protection insurance to cover your worst case scenarios.
Level 2 – Financial Security
As this level you’ve accumulated sufficient assets, such as a substantial property portfolio, to generate enough passive income to cover your most basic expenses (include things like your rent or home loan, insurances, car, food, phones, etc).
Level 3 – Financial Freedom
You’re financially free when you have accumulated sufficient assets to generate enough passive income to pay for the lifestyle you desire, not necessarily your current lifestyle, and all of your expenses, without ever having to work again.
Level 4 – Financial Abundance
You’re free from financial pressures and have so much surplus income that after paying for you’re lifestyle, all of you’re expenses and contributions to the community, you’re asset base continues to grow.
My personal action steps:
1. I asked myself – what does financial freedom mean to me right now?
- The answer for me was enough income to cover my total weekly living expenses, including an additional $1000 a week in additional passive income on top of these weekly living expenses.
2. I asked myself – how much money do my family and I need to achieve financial security?
- For me the answer was enough income to cover our total weekly living expenses of $873.
- To identify our total weekly living expenses I looked at exactly how much I need per week to cover (our mortgage, home insurance, water, rates and electricity, car insurance, registration, petrol and servicing, food, phones, gym and life insurance).
3. I identified how much income my family and I are currently earning
4. I identified how much income my family and I have the ability to earn right now
5. I identified how much passive income we are currently earning through our positively geared property investments
6. I asked myself – how long would it take to achieve our current financial security goal?
- For us the answer was to build a property portfolio of 5 investment properties over the next 2 years each paying us between $150 and $200 a week in passive income.
Walking through this exercise and asking the question above has motivated me beyond belief.
Based on the calculations above my family and I will have enough passive income from our property portfolio within two years to completely cover our current weekly out of pocket expenses.
I highly recommend you sit down for half an hour and work out exactly where you’re at, where you want to be and work out a plan to close the gap.
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