The Inner Workings of Your Financial Freedom

Imagine if you woke up tomorrow, and knew that some magical force in the universe would take care of all your bills – every month.

How would that make you feel? How would your life be different?

Most people doesn’t realize, that it is completely within the reach of the average person to set up a system, that will virtually do this. It is by no means easy to set up such a system, and I am not even done yet myself. But I have done the research and the calculations, figured out how to make it work, and can now see that I am on the right track to getting there. It is something (almost) everyone can do, if they possess the perseverance necessary.

The goal of this post is to explain in succinct terms, how such a money machine works, and how you can build it for yourself.

Hopefully, it will allow you to start setting up your own version of what I am building today.

The automatic income machine

Below you see a sketch that describes the basic mechanism of an automatic money machine. I will go over each part, piece by piece, and explain them and how they work in relationship to each other.

We will begin in the bottom right corner, and work upwards from there:

 

Getting to finanical freedom

Expenses

The main purpose of your money machine is to take care of all your regular expenses. It is when your expenses are automatically covered, that you will begin feeling financially free, and even independent of a job. This is why the expenses are represented by the end wheel of the machinery. As soon as this aspect is handled completely, the mission has been accomplished. Therefore, the fewer expenses you have, the less “horse power” is required of your machine.

Shown with the arrows pointing inwards, is the importance of reducing regular expenses. That is, if you find it more important to be financially free, than to drink 10 café lattes a month.

So step 1, reduce regular expenses, as much as you can.

 

Investments

Now we get into the meat of this concept – your investments, that will allow you to earn enough automatic income, to cover your basic expenses.

Your investments are what makes the whole machinery work. It is the best controllable mechanism we can manipulate, by making the investment pool bigger and bigger.

The way it works, is you make diverse investments in stocks, preferably index funds, to ensure a steady return on your investments year by year. The logic is, historically, the S&P500 index has generated a return on investments of 12% a year. That is the approximated average over the last 100 years – financial crises included too.

Assuming that this is indicative of what the future will look like, you can easily expect to be able to cash out about 4% of your total investment every single year, and still feel certain, that your investment fund keeps its size and strength, even after inflation.

Since we are operating with this 4% concept, we can easily calculate how much we need in investments to have the machine fully functional. You just need to multiply your expenses with 25 (since 100/4=25).

Let’s say your regular expenses are 1,000$ dollars a month or 12,000$ a year, you would then need a total investment pool of 12,000*25 = 300,000$ to have your expenses on complete autopilot.

Now, before you freak out about how high that number seems, let me explain why it might be easier to get there than you think.

Step 2. Start a diversified investment portfolio

 

Regular Work

The simplest way to get your investment fund to grow is to do regular work, take out a part of your paycheck and invest it in stocks or index funds. This may sound tedious and really hard to do, but if you have brought down your expenses to an absolute minimum, it should be really easy to get started.

Currently, I work a completely regular job, but I am still able to put away half of my paycheck for investments every month.

As time goes by, you will begin to see some momentum growing in this process.

The more you reduce expenses, the better you get at it.

The longer you stay in your job position, the more you will earn, the more you will be able to put money aside.

And as time goes by, your investments grows and grows, and as they begin to pay off dividends, you will have even more to invest.

The momentum you get from just working and investing starts to become exponential.

Step 3. Start investing part of your paycheck every month

 

Creating automatic income on the side

The automatic income I will describe here, is going to work like a secondary helper-engine, which will allow you to turbo-charge the whole process.

In our day in age, it has gotten ridiculously easy to earn a few extra dollars on the internet, doing stuff that you are passionate about. I like writing, so I write a lot on the side, and I try to make it generate a few extra bucks here and there. The beautiful thing about internet income is that it is almost always fully automatic, once it has been established, and it can come from any creative field you like.

Let’s say you decide to follow my model, and you start a small web business on the side, which only generates 1,000$ a year in profits. This should be pretty obtainable for most people.

What this will do to the requirements of your investments, is lowering them by 25,000$(!), since you now need your investments to generate 25,000/25 = 1,000$ less every year.

What is even more beautiful, is that you will begin by generating small amounts every month and grow from there. But as you are still not at the point of financial freedom, you will keep putting these small earnings into your investment fund along the way, which will allow that to grow even faster again – and that is how to turbo charge the process!

Step 4. Start generating passive income on the internet

I recommend checking out the blog Smart Passive Income, if you know nothing about the subject.

 

And that’s the way the cookie crumbles! I would guess that most people – if they work hard at it – should be able to retire and be financially free within 10 years, or even less.

What do you think? Would you consider doing this?

 

Further reading recommendation:

–        Early Retirement Extreme

–        Your money or your life

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Max Micheelsen

I'm a simplifier, Love efficiency in all forms, Beleive in a slow lifestyle, enabled via smart solutions

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