Name: The Four-Step Routine to Financial Freedom. My advice
Uploaded: 2024-08-03T15:03:38.000Z
Duration: 10 min 1 s
Description: Thousands of YouTube videos with English-Chinese subtitles! Now you can learn to understand native speakers, expand your vocabulary, and improve your pronunciation...

We often think of financial freedom as some distant concept, something that is reserved for a fortunate few or those who are part of this exclusive circle.

But the reality of achieving financial freedom is not on the far side of some crazy, complex set of instructions that you need to figure out on your own.

And so in this video, I wanted to walk you through the four-step payday routine that I believe, if you can get right, will help you master your financial life with less stress and more confidence than you've ever had before.

Before I get into it, what does financial freedom mean to you?

I asked you guys this question on my newsletter some time ago, and I wanted to read out some of the snippets from the answers that I got.

Financial freedom means to me being able to choose where I want to sit on an aeroplane and not having to worry about the additional cost.

Being able to eat good food whenever I want and enjoy a fresh haircut every three months.

Taking up a new hobby, trying a new experience, just doing something for the first time and not feeling bad about spending money on it.

Being able to try a new business venture without worrying about how I'll take away from being able to pay for my day-to-day expenses.

Financial freedom is more than just a number.

It's the idea of feeling so confident and in control of your finances that you're able to spend freely on the things that you love today, knowing that it's not taking away from your other priorities and your bigger life goals.

By the way, if you're someone who wants to go away and implement everything from a video step-by-step, I have a downloadable cheat sheet that gives you the summary of each of these points and details on exactly what you need to do.

It's completely free and you can download it in the description below.

There is a famous quote that is, the first step towards getting somewhere is to decide you're not going to stay where you are.

And then I would say the second step towards getting somewhere is to know where you currently are.

I always hear people say, I'm trying to save more this year or I'm trying to spend less this month.

And my first question is always, how much did you spend last year?

But if you don't know where you currently stand, how can you get better?

You want to categorize your spending into three buckets.

Your fundamental expenses, your fun expenses, and then the amount you're putting towards the future you.

Fundamental costs are your essential living costs.

So this includes your mortgage, your rent, utilities, car or transportation, groceries, and minimum debt payments.

You want to try and aim for all of these to total up to less than 50 to 60% of your take-home pay.

If you are thinking there is no way that these costs can total less than 60% of my take-home pay, then the two you want to start with focusing on are your car and your home.

Because these tend to take up the biggest chunk of our income.

And we don't need to be able to afford to pay for the entire purchase.

We just need to be able to afford the monthly payments.

And so because of this, we end up buying a bigger home or a nicer car than our debt to income ratio allows.

So other than the 50 to 60% guideline for your fundamental costs, another way to see if you are on track is to add up all of your monthly debt payments.

So your mortgage, your car payments, and any other loans or debt payments that you have and divide it by your monthly gross income.

And you want to try and keep this between 35 to 50%. 35% is on the good side. 50% is on the higher side.

If you want to balance enjoying the things you love today with long-term investing and short-term saving, then it's going to be hard when you have a huge car payment or a mortgage payment that takes up all of your income.

It may be that you have to make some uncomfortable changes in the meantime, but they will be temporary and it will make a big difference.

Once you're past step one, we move on to step two, which is to save and repay.

A third of adults in the UK have no savings or less than £1,000 in their bank account.

And 78% of Americans don't even have one month of their income saved up.

If you are able to save just one month of your living costs, then you are in a better place than most people.

And this is purely for the psychological comfort.

When something goes wrong, you already have the financial stress of worrying about how you're going to pay for it.

You don't want the mental stress to go with it as well.

Once you've saved one month, then you want to pay off your high interest rate debt.

Now, this goes against a lot of the advice which you probably see or hear online, which is that you should save up a six-month emergency fund first.

So I want to explain why I say it in this order.

Let's say you had saved up £5,000 earning 5% interest annually, and it pays you £250 each year.

Let's say you also have £5,000 on your credit cards with a high interest rate of 22%, costing you £1,100 every year.

When we compare the interest you earn with the interest you pay, you're actually losing £850 every year.

To take this one step further, let's analyse what would happen in two different scenarios if you decided to pay off your credit card debt with your savings versus if you decided to keep both your savings and your debt.

Situation A, assuming no emergency happens.

If you don't use your savings to pay off your debt, you continue to lose £850 a year.

Or if you choose to pay off your credit card debt with your savings, you'll neither earn nor pay any interest.

Your roof caves in and you need to spend £5,000 to fix it.

In option one, if you didn't pay off your debt, you can now use your savings for your emergency, leaving you with no savings and you still owe £5,000 on your credit card.

You'll continue paying 22% interest on that debt.

Option two, if you had already paid off your debt using your savings, you won't have the savings for the emergency anymore.

So you need to use your credit card again.

So paying off the debt will save you money in interest payments, putting you in a better financial position unless an emergency forces you to borrow again.

Then you'd be in no different of a situation than you were in originally.

That is the reason why I talk about doing it in this order.

Once you pay off your high interest rate debt, then you can also build out your emergency fund to three months, six months while simultaneously doing the next step as well, which is number three, to invest.

This is really important because this is where real long-term wealth is created.

This is where 10% of your income should be going at a minimum.

And the way in which you invest really depends on what path to financial freedom you want to take.

So this comes down to investing in your knowledge, investing in your skills, whether it's entrepreneurial skills, sales, marketing, business, or skills that increase your value as an employee.

So for instance, leadership training, skills that help you get to where you want and build wealth faster by increasing your personal value.

Then there's a passive route, which is investing in assets that compound.

If you can dedicate 10% to this, 10% of your income every month, this money will grow and compound.

And there will be a point where you make more from your investments than you do from your income.

If you started investing at 35 years old and you invest 500 a month for 10 years, then by the time you're 50, you would have 190,634.

And of that, only 90,000 is your own money.

The remaining 100,000 is free money that you made in interest.

Whereas if you started investing at 40, you could still end up with a similar portfolio by the time you're 50, 191,249.

But you would have to put in 1,000 a month.

So in total, 120,000 of it would be your own money.

And then the remaining would be through interest.

This is the power of compounding and why the earlier you start, the better.

You may already be doing this through your employer, through a retirement contribution.

And then you also want to use tax-free accounts that are available first and then look into taxable accounts as well.

There's a famous quote by Benjamin Franklin that is, beware of little expenses.

It's normal for your spending to rise as your income rises.

If it continues to rise at the same pace, or even worse, at a faster pace than your earnings, then you're never going to break out of a cycle and feel financially in control.

Yes, you absolutely deserve to enjoy the finer things in life, the beautiful holidays, the high quality items, the experiences that bring you joy.