The 4 Steps to Financial Independence

April 23, 2014 by Michael Yardney Leave a Comment

 About Michael Yardney
Michael is a director of Metropole Property Strategists who create wealth for their clients through independent, unbiased property advice and advocacy. He has been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au

With our property markets booming in many parts of Australia and the media reminding us that some properties are increasing in value by over $1,000 a week a whole new generation of Australians are choosing to invest in property to develop a degree of financial freedom and get themselves out of the rat race. 
Some will make it; but many won’t.
So let’s look at what financial independence really means and then I’ll explain what I think it takes to get there.

The 5 Levels of Wealth

I’ve found that as we take our investment journey we work our way through the following 5 Levels of Wealth.
We all start at on the bottom rung and we all hope to make it to the top of the ladder. But as I said, few do, so let’s first discover where you sit:

Level 0 – Financial instability

Since most Australians live from pay cheque to pay cheque, they’re what I’d call Financially Unstable.
If they lose their job or have an emergency such as an illness or their car breaks down, they have no money reserves to cope.
How can they handle the unexpected burdens that life dishes out if they have no spare financial capacity?
Often their only way out is to borrow more and get further into debt, but this only creates more financial hardship.

Level 1 – Financial Stability

This is the next rung up the ladder and to achieve this most basic level of wealth:

1. You’ve accumulated sufficient liquid assets (savings or money in a line of credit) to cover your current living expenses for a minimum of 6 months.
2. You have private medical insurance and some life insurance to protect you and your family’s lifestyle should you become ill, disabled, unable to work or if worst comes to worst – suddenly die.
When you attain financial stability, you have the comfort of knowing that should any unexpected challenges come your way, your family’s lifestyle will not be unduly compromised. You’ll have adequate time to look for new sources of income to put you back on track.

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. These would include;

• Your home mortgage and all home related expenses.
• All your tax payments and the interest payments on your loans and debts.
• Your car expenses.
• Your grocery bills and minimal living expenses.
• Insurance premiums including medical, life, disability and your house.

When you reach this level you can stop working and maintain a simple, basic lifestyle.
But you want more than this don’t you?

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.
You’re now a successful investor, which doesn’t mean you won’t go to work again, but you can make the choice whether you keep working or not, or how much you work or what you do with your life.

Level 4 – Financial Abundance

A small group of sophisticated investors achieve Financial Abundance. That’s when their portfolio works overtime.
They’re free of financial pressures and have so much surplus income that after paying for their lifestyle, all of their expenses and contributions to the community (often through charity work or donations), their asset base continues to grow.
They’ve achieved this by owning a well-balanced, diversified share portfolio or a sound substantial property portfolio that grows in value and “spits out cash.”

Climbing to the top of the investment ladder

So how do you climb the rungs to the top of the property investment ladder and achieve financial abundance?
Here are 4 steps you can take:

1. Decide you want to become wealthy.

Most Australians dream of financial independence and want to be wealthy, but they never really make a firm commitment.
The problem is, if you don’t truly commit, life seems to get in the way and you get sidetracked.
So choose the date you’re going to be financially free, then put it in writing, make a firm commitment to yourself and tell others so you have no excuses.

2. Invest in your financial education.

If you’re a beginning investor focus on increasing your financial education – you’ll need to become financially fluent.
To fast track your success keep reading books, going to seminars, watching DVD’s and learning from people who’ve already achieved what you want to achieve.
If you’re a more experienced investor, your priority should be to actively grow your asset base sufficiently to allow you to become financially free. To do this it’s likely you’re going to need to do different things than you did to get to the level you are.
You’ll not only need to learn new more sophisticated investment strategies, but it’s likely you’ll need to surround yourselves with a different level of advisors and consultants.

3. Don’t wait until you know it all to get started, because if you do, you’ll never take the first step.

One of the things I learned early in the piece is the paradox of knowledge: The more you learn, the more you realise you don’t know.
Many people say: “If only I knew it all, I’d be safe.” But it doesn’t work that way.
As you learn new information you’ll uncover a whole lot of things you didn’t even know that you didn’t know. There will always be more to learn.
So how do you know when you know enough to start investing?
It’s when you have the courage and conviction to take action, knowing that you’ll never know it all, but that you’ll learn more along the way – educating yourself as you move up the investment ladder.

4. Surround yourself with like-minded people.

Despite what you read about in magazines, there’s really no such thing as a “self made millionaire”.
What I’ve found is that the small group of investors who become financially independent have done so in part by surrounding themselves with a smart team of advisors and professionals as well as other like-minded individuals.
They get a mentor to see their blind spots and guide them and at the same time they associate with others who have similar aims and aspirations.
If found that when you stop associating with people who are negative and point out all the things that can go wrong, and instead surround yourself with people who are positive this will spur you forward and you’ll reach your financial goals much quicker.

The lovely thing about money and wealth is that it really doesn’t discriminate.

Money doesn’t care who you are or even who you think you are, what your parents did or where you come from.
Each day starts with a clean slate, so you have the same rights and opportunities as everyone else to become wealthy.
So start making your way up the investment ladder towards financial freedom today.