Here is the sequel to Day 1: What to Do with My Money. Remember, financial freedom is personal freedom. How big of a money machine do you need to give you the freedom you want? That part is up to you.
How will your money build your money machine? It’s about:
What to do with the money you’ve saved
How much of it to use in 1 of 3 parts of the money machine (aka asset allocation).
Let’s get something straight before we start.
The only reason to invest: Have Income for Live Without Working. Have the life you want without needing to work.
Steps to Build your Money Machine:
Pick a minimum payout goal. How much income will your money machine need to pay you every month, every year, for you to live the lifestyle you want? Can’t keep changing or raising the target. You’ll never get there. The less you need to be financially free, the faster you’ll get there. Obviously. The faster you’ll win at life. The income your money machine generates from then on is on the house. You’re free to really enjoy life.
Figure out a specific amount of money you’re going to invest every month, every year, no matter what. Pick a specific percentage of your income to invest periodically no matter what. This amount should only increase as you have more and more to reinvest.
Pay investments and bills, then pay yourself. You’d be surprised how little your life would change. You may not even know the difference, except for the bigger and bigger money machine you have every month.
Don’t get distracted. It’s simple. It’s easy. Do the same thing every month, like it’s on autopilot. In fact, you can have your set amount transferred from your paycheck directly to your investment account or broker. It’ll save you from you, spending it on what you want now instead of what you want the most.
3 Parts of Your Money Machine
1st Part: Security Component
Your first investments MUST be for security, and you must continue to hoard most of your monthly and yearly investments to build this up. You know what’s interesting though? Everyone wants to do the opposite: put security last, not first. This is a major reason why most aren’t retired at age 30, 40, or 50. So the answer is staring you in the face. What do you want to do about it? If you go into a gunfight without any protection and the other people have full armor, don’t be surprised if it doesn’t end well for you!
What do you use for financial security? Examples are:
Cash for at least 6 months of living expenses. This gives you financial security. It’s security from being out of work for 6 months. Security from emergencies and unexpected events. Security to build your money machine. If you don’t know how you’re going to get through the month, forget financial freedom. So get security first.
Your home. Starting out, your home is for security. A home you can afford is a long term investment you can live in. And when you pay your mortgage, that payment is going towards fully owning this investment, not just going out as rent into the universe.
Retirement investment accounts: IRA, 401K, pensions. Like I said before, automatically investing your earnings before you your hands on it protects you from yourself.
Insurance. Again, safety first! Don’t let health problems or accidents get in the way of your financial freedom.
Fixed-Income investments. This is where you’ll get a slow and steady compounding income. Just like the name says. Investments that gives you the same amount, or fixed amount, of income. The notorious ones are CDs, bonds, government treasuries, and rental income if you own real estate. After the beginning lessons in this series, we’ll also show you how to get consistent income with dividends and options.
Like a tributary flowing into a river, the income streams from security investments start smaller than the growth investments, overtime this is a large consistent stream of income.
Yes, there’s risk in any investment. No risk, no reward. Just going about your day has risks, but that doesn’t stop you from going to school, going to work, and going on a vacation. If you don’t give yourself a chance, you’ve already lost. You’ll never have a money machine and never be financially free.
2nd Part: Growth Component
How do you give your money machine a turbo boost? With growth investments, which helps you get financial freedom faster. You make a larger percentage of money if it works out. But, unlike the security investments, these have no guaranteed value. If you screw up with your growth investments, whether if it’s your own business or someone else’s, you’ve got nothing.
That’s why most of your money goes into the security components! If you “lose it all” with growth investments, it won’t affect your lifestyle one bit.
This is what scares most people isn’t it? That you lose it all? But how do other successful people manage to not lose it all? Using just a small portion of money that you can afford to lose is most important. Wisely having some insurance on investments is another (that’s what hedging, stops, and options are for with stocks). Later in this series, we’ll go over just how simple it is to make your risky growth investments safe.
The two ways of getting growth:
Own a business. AKA Investing. It’s what buy & hold means. If you own your own business, large or small, you’re doing buy and hold. If you invest in a business, you’re owning a small part of it, whether a directly or with stocks, so you’re also doing buy and hold. That’s because, as any business owner knows (which you are also if you’re an investor), is businesses take a long time to build and grow. This is not money you’ll be cashing out any time soon, and likely lose it all.
Have a Job. AKA Trading. Did you realize you and everyone you know is a financial trader? Surprise! Most of you are trading time for money when you go to work. If you have your own shop or online store, you trade your products for money. In the markets, you trade money for money. In the markets, though, you can take advantage of the compounding magic. At your job, you’re limited to how much time you can trade for money. At most you can work 24 hrs and that won’t last long. But in the markets, each time you make money you’ll have more money to trade for money. Trading stocks, options, and other financial assets is a part-time or full-time career well within everyone’s abilities. WARNING: Don’t forget the safety and insurance we talked about. Without safety and insurance, it’s not a career anymore, it’s gambling.
3rd Part: Motivation Component
Reward yourself for your hard work and keep yourself going. The fun, the wants, not the needs. Work hard, play hard. These are the things the money machine is built to give you, beyond just covering your living expenses so you don’t have to work. In the beginning, though, the more of your income you put into the fun stuff, the longer it’ll take to build the money machine.
Another reason why most people don’t get financial freedom: they spend money on fun first instead of on their money machine. And you know what’s interesting? Spend money on the money machine and the money machine pays you back. Spend money on fun and that’s it. Value of just about everything leisure and luxury depreciates and disappears.
Examples of the Motivation Compontent
The smaller the money machine you need, the faster you’ll get to financial freedom. You’ve won. Beyond that, you’re playing with the house’s money. Living your dream with all expenses paid for.
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