Timmy and Rupert both make $5000/mo at their average jobs, but only one will become financially free.
Let’s fast forward 30 years — Rupert is able to retire as a millionaire. Whereas Timmy is still living paycheck to paycheck. He can’t even afford a $400 emergency, like 44% of America. And like the 80%, he plans to work through his old-age. What went wrong? It comes down to how they make their financial decisions. Timmy made decisions for the short-term. He wants the new iPhone, plus enjoys eating out every week. But Rupert thought for the long-term, he wanted financial security over cheap-gratification.
Why can’t more people be smart with money? We know credit-card debts are harmful but yet 47% of us are still in debt. Most people lack the ability to see the long-term impact of their current decisions.
People are unable to see how their seed-like small decisions can lead to tree-like rewards or punishments in future.
Spending more than you earn. Not saving. No Investment Plans. They all look like minute issues now. But they do have the capability to ruin your financial future.
In 2014, I was worse than where most people are. Broke, working as a janitor with no college degree. Somehow, I turned my financial life around. Now, I have a six-figure business. Equity in some of my client’s businesses. And I have secure investments that will generate passive income in future.
How did I make this change? Years of learning, daily-effort and time made that happen. The knowledge you seek is free on Google. That’s not why I am writing this. I am writing this to make you act. And stick to those actions. Here’s how to take charge of your money, and become financially free.
Think In Second & Third Order Sequences
How many types of monthly subscription do you own? This includes services like Netflix, Wifi or Spotify. According to a survey by WMG, an average American spends about $238 on monthly services. Yours may be a bit higher or lower. But let’s say you spend only $100 on your services. Let’s simulate two situations.
Situation 1: You keep spending $100/mo.
First-order consequences: Every month, you will have unlimited entertainment. You will stay on Dating apps. Unlimited Games, reading, music and whatever, you have subscribed to.
Second-order consequences: In one month, you would have wasted 60 hours. Plus, a deduction of $100. No harm, so far.
Third-order consequences: In a year, you have wasted 720 hours.The time that you could have spent starting that business that you always wanted. Plus, -$1200 from your savings. With an addiction to binge-watching that harms your health and productivity. Wrapped with daily stress and anxiety.
Situation 2: You cancel your subscriptions and invest the $100/mo in an Index Fund.
First-order consequences: You will lose entertainment. Every day you will have idle time. No gratification will cause you pain. Same deduction of $100 into an Index Fund.
Second-order consequences: In one month, you will find ways to fill that idle 2-hours/day. Exercise, side-hustle, hobbies will become natural. Plus, you will feel good about yourself after investing.
Third-order consequences: In one year, assuming a 10% return, your $1200 would become $1320. You will be a new person with new habits. Possibly a new income source or better health. You will be different.
Now multiply this with 30-years, you can imagine the difference. That’s what most people will do regardless of how much time passes. By changing one spending decision, your future life looks completely different.
Most people only calculate their loss and gains in first-order that is now. But, you can see that what appears as a loss can be a reward later on. This understanding is what separates the rich from the poor. Most of the self-caused poverty can be changed by using this thinking technique.
Think about the decisions you make in your life. Write down the first, second and third-order consequences. You will see your mistakes, and where you can cut back to begin your journey to becoming financially free.
Two Investments To Jumpstart Your Financial Freedom
I have made you aware of the power your decisions hold. Now, I want you to make better decisions. I will list out two ways to invest your money to start becoming financially free. These are beginner’s steps that I recommend to my clients.
Read more: 5 Thing to Know About Money to Gain True Financial Freedom
1. Apply a Wealth-Tax on Yourself:
To make money from investing, you don’t need to day trade or be an expert in stocks. You only need the basics. I read the book Unshakeable by Tony Robbins. He shares the story of a mail-man who never earned more than $14k/year. But retried as a millionaire. How? He applied a wealth tax on himself. Every month, he took 20% of salary and invested it in an Index Fund.
Index funds are a group of 500-top US companies. Some of them are Apple, Facebook, Alphabet and Amazon. Let’s say you invest $100 in index funds. Portions of $100 will proportionally get invested in all the listed 500 companies. It’s supposed to balance everything out, if one company goes down, others in the list may cover the losses.
I invest in S&P 500 Index Funds. They have given me a return of 10–12% every year. With the power of compound interest, once I have enough money in there, I will be able to live off my dividends.
What is compound interest?
If you save $1000/mo for 25 years, you will have $300,000. But if you invest $1000/mo at a 10% compound return for 25 years, you will end up with more than $1,244,159. It’s how the rich get richer. Crazy, right?
Now, if you do the same for 5 years more, you will have $2,080,292.
The more early you start the more you will earn. You can’t beat investing early even with more money in the future. Now, you may think, it’s too good to be true. But it’s basic maths you can calculate it here. And this not only my advice but of the greatest investor himself;
“A low-cost index fund is the most sensible equity investment for the great majority of investors. By periodically investing in an index fund, the know-nothing investor can actually out-perform most investment professionals” — Warren Buffett.
Why aren’t people investing then, despite seeing how it can make then financially free? Unawareness and Fear. I have taken care of the first. You must take care of the latter. I am not saying to invest right now. Or ever. Keep your fear. But I urge you to research. Read books and understand the basics of this (For Index Funds, I recommend Unshakeable).
And start small. When you invest your first-order consequences may be of doubt and risk. There is a learning curve. You have to stick with it for the long-term. But third-order consequences include, never worrying about money ever again. Don’t trust me, start researching.
2. Invest Money In Your Skills
There is another investment that makes money, and can help you become financially free. This investment is of time, effort and money not on the outside but yourself. It’s a method to increase your earning potential. For most people, increasing their income is a dream. That’s why they fall prey to get-rich-quick schemes because they see no other option. But that’s not how money works.
Money grows but really slowly. As slow as a seed would turn into a forest. When you start, the progress isn’t visible. That’s why people assume it doesn’t exist. When I started on Youtube in 2014, I made 0$ for six-months. But in the next six months, I made my first $10,000. Behind this was me, uploading a daily video. Later, I improved my coaching and business skills and it helped me make six-digits. Job or Business, in the initial phase, be prepared to put in work for no upfront reward.
How can you work on yourself? It comes down to how you earn money. If it’s a job-look at what top-paid professionals in that field do. Where do they learn? Who do they ask? Go there. If it’s business, look at successful businesses. How do they market? What do they sell? How do they improve their products and services?
To improve, you can spend money, this can act as a fertilizer and speed up your process. If I didn’t invest in learning more about Youtube, then it would have taken me 2-years to earn my first income. Spending money cuts back your learning curve. Buy that $100 Facebook ads course. Buy that finance book. Hire that coach.
I get paid what I paid in the market because I have learned from the best. I invested in high-end coaches to improve my skill-set. Which helps me grow my client’s businesses. Sometimes, if the coach is right, you can get a 527% ROI on the money you spend. Don’t work with me, but find someone who’s the right fit for you.
Investing money in your education can be tricky. And sometimes scarier. Because unlike Index Funds, you can’t track and calculate your returns. You can’t know the ROI of the $1000 you spent on a business mentor or digital agency. You have to take a blind leap of faith and use your best judgement. In this, the second and third-order sequence can give you clarity.
Only 3% of Americans are millionaires. You can be a part of that statistic. But not by being inactive, afraid and unaware. You have to put a real-time effort in your future. You have to make it your financial goal. If it wasn’t for the time and money I spent on myself, I would still be a broke Janitor who hated his life.
Majority of people reading this won’t act. They will never increase their income because they couldn’t even read till the end. But if you did, I urge you to go a step further. Act towards your financial life.
If you want to earn like the 1%, and become financially free, you have to act like the 1%.