Rule #1 Finance Blog

With Investor Phil Town

Financial Freedom 101: The Complete Guide to Passive Income and Generating Wealth

Being financially free sounds nice to all of us, doesn’t it? It sounds like a whole lot of stress is gone for good, and having plenty of money in the bank each month. For many of us though, it also sounds too good to be true—But, it isn’t.

Anyone can achieve financial freedom. Yes, this includes you.

Let me tell you a story… for those of you who don’t know, more than 40 years ago, I was a young guy working as a river guide in the Grand Canyon, going where the wind carried me, and making $4,000 a year.

I was a VERY unlikely prospect for financial freedom. And then, a guy who jumped in my riverboat (and who I nearly killed in the rapids) told me about investing.

When I think back to that time, I am so glad that younger me was willing to listen to what he had to say and further willing to learn everything I could about investing.

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Today, I am financially free and have plenty of passive income to live off of all because someone told me about the principles of value investing, on which I built the Rule #1 investing strategy, and made a commitment to myself to see what it was all about.

And you can too. I’ve made it really simple.

Below, I share 5 steps to financial freedom that you, or anyone, can take. You don’t have to start with much, either (I sure didn’t!). With just a small amount of money and the right mindset, you can begin your journey to financial freedom.

By the end of this, you’ll know how to invest the Rule #1 way and how to use these skills to create a life that is financially free. Yes, really.

What is Financial Freedom

“Financial Freedom” is a phrase thrown around a lot, but if you have found yourself wondering what people mean when they use this phrase, you’re not alone.

When you can fully grasp what financial freedom means and what it could look like in your life, it can be extremely motivating.

So, what is financial freedom and what does it mean for you?

It means having enough money in savings and investments that you can go about your life without being worried about finances because you’re prepared for anything—emergencies, a potential job loss or inability to work, or retirement (whatever that may look like for you).

what is financial freedom

Now, financial freedom isn’t the same thing as financial independence.

The main difference to note when comparing financial freedom vs financial independence is that financial independence typically refers to being able to leave your typical day job and live off of the income from your investments.

This often also involves drastically reducing your expenses. This is also much more difficult to achieve than financial freedom.

For most of us who want to work in some way, shape, or form, and increase our standard of living, pursuing financial freedom makes more sense, and is much more attainable.

5 Steps to Financial Freedom

Before you begin this journey, you need to envision what the end game—financial freedom—looks like for you.

retirement age

Is it a certain amount of money in your savings account and investment portfolio? Is it being completely debt-free?

The point at which financial woes and worries are dramatically reduced is different for everyone, so figure out what that point is. Then, keep reading to learn how to achieve the financial freedom you envisioned.

Step 1: Evaluate Your Current Financial Standing and Spending Habits

You can’t know where you’re going if you don’t know where you’re starting. So, the first step to achieving financial freedom is to evaluate your current financial standing. Do you know how much money you have coming in and, more importantly, how much you have going out?

Where is the money you have going exactly? Modern banking apps make it extremely easy to see your transactions at any given time.

So, sit down and go through all of your credit cards and checking and saving accounts, and analyze the areas where you are spending your money regularly.

If you already have a budget, this should be easy, but that doesn’t mean this step doesn’t apply to you. Where in your budget is there room for improvement? Is there anything you can eliminate to get closer to financial freedom sooner?

Whether this is the first time you’ve looked at your transaction history, or you’re budget-savvy, ask yourself if you are spending your money wisely.

Are you saving a portion of your income each month?

Do you transfer funds to your retirement account?

Or, are you racking up debt on your credit card and just making minimum payments?

In order to become financially free, you have to gain knowledge of where you’re financially at first in order to set attainable goals and take control of your finances for good.

Step 2: Set Goals for Your Financial Future

Now that you know where you’re at, you can set goals that will pave the way to financial freedom. This is the fun part.

You get to envision your financially free life—think about where you want to be 10 years from now. What about in 5 years?

Now, what do you need to do to get there? Do you need to allocate more money to pay off debt? Are you trying to save for a down payment on a house? Or do you need to invest more of your cash so it has the chance to grow?

Not sure where to start? Read these tips to set financial goals. They will likely spark an idea of a milestone you want to reach and help you create a path to get there.

While your 10-year goal may be big, it’s important to create smaller goals that are stepping stones to reach that goal. Achieving these smaller milestones will help you see progress and stay the course.

Step 3: Research Your Investment Options

Investing can be an incredibly powerful tool to meet your financial goals. There are many different types of investments, but nothing else has the power to grow your money by as much or as quickly as investing in wonderful companies.

A critical component of being able to actually grow your money, though, is thoroughly researching your investment options—NOT just picking stocks to see what happens.

When it comes to investing in individual companies, Rule #1 investors live by a set of qualifications I like to call the 4 Ms. These are the boxes a company has to check in order to be worthy of investment by you or me.

They are Meaning, Moat, Management, and Margin of Safety.

the 4ms

As you go about your research, you can determine if a company is worth investing in by asking yourself the following questions to determine if it checks off all of the 4 Ms:

Meaning: Do I understand what this company does, how it makes money, and its place within the larger industry?

Moat: Does this company have a moat that sufficiently protects it from competitors i.e. price control, patented technology, or impenetrable brand loyalty?

Management: Does this company’s management (mainly the CEO) have a good track record of making decisions that move the company in the right direction and benefit its shareholders?

Margin of Safety: Can I purchase this company at a price that is 50% lower than the price it is valued at to ensure I have a margin of safety that keeps me from losing money?

To learn more about the 4 Ms and how to research a company based on these qualifications, check out my guide to investing in stocks.

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Once you know how to find wonderful companies, you can be a successful, long-term investor and grow your money substantially. This is a path to financial freedom, no doubt.

Step 4: Create a Strategy

Now, research is only one part of successful investing. You also need to have a strategy in place that aligns with your unique situation in order to make the most of your investments.

We all have unique goals (refer back to the ones you made in step two), risk tolerances, and budgets that make everyone’s investing strategy unique.

You may only have a small amount of money to invest, and that’s OK. In fact, I suggest starting small so you can learn from your wins and losses without putting a lot on the line.

Remember, the goal here is to diminish your money woes and worries and get to a place of financial freedom, not to decrease your net worth and increase your stress.

The key is to invest as much as you are comfortable, invest consistently, and invest for the long term. Here are smart investment practices that will help you grow your wealth and not lose money.

So, don’t be afraid to start small, and more importantly, don’t be too afraid that you don’t start at all.

When you have an investing strategy in place and thoroughly research your investment options, you can greatly reduce the risk of investing.

Here are 5 steps you can take to make an investment plan based on your unique perspective.

Step 5: Create Passive Income Streams

The final step to financial freedom is to use your investments to create passive income streams. Passive income is money that flows in regularly without a considerable amount of time, energy, or additional money.

I like to think of passive income as making money while you sleep.

You can really only get so many raises, give so much effort, and spend so much time working to make money.

At some point, your resources: your time, talent, and energy cap out, so you NEED to create passive income streams to experience true financial freedom.

Passive income is the only effective way to increase your assets without correspondingly increasing your workload.

When you can make more money with less labor, you can reach financial freedom—and financial independence too if that is one of your goals.

But, it doesn’t just benefit you.

Having passive income streams is critical to creating generational wealth.

This means you’re building wealth that lasts longer than your own life as it extends to the lives of your children, and your children’s children, and so on.

generating passive income

The best way to achieve passive income streams is through investing. Here’s how.

Compound Interest

Compound interest has been called the 8th wonder of the world because the way it works is almost unbelievable. To make you believe it, let’s take an example.

You know that your money in a savings account earns interest, right? Say you get 1% interest on your savings annually, and you have $100,000 in the account.

After year one, you would have $101,000, solely from interest. The next year, you get 1% not on the original amount of money, but on the original amount + the interest it earned, and this continues, year after year.

After 5 years, without adding any more of your own money to the account, you would have $105,101.

That’s the power of compound interest.

Now, imagine your money isn’t in a savings account—which, we Rulers don’t typically use anyways— but it’s in an investment that earns, on average, 10% each year.

After one year, your $100,000 would be $110,000. After 7 years, your money would have doubled to $200,000. This is without any additional money invested by you!

Compound interest is, by far, the most effortless way to gain passive income. This is why it’s so important to ensure that the investments you choose can generate great consistent returns, because if they do, you won’t have to do anything, and your money will grow.

what is passive income

When you can rely on your investments to consistently produce great returns, you can have the financial freedom to retire or enhance your lifestyle however you choose.

Real Estate Investing

Another way to generate passive income is by investing in real estate. Many people like investing in real estate because it feels familiar and because a property is a tangible asset they can see and feel.

There are multiple ways real estate can provide a passive income stream.

For one, most properties increase in value over a long period of time, without any work on your part. When you sell the property, you can then benefit from the difference in value at the time of sale vs the time of purchase.

Secondly, you can create more consistent passive income by collecting rent from tenants.

Keep in mind, not everyone is cut out to be a landlord, and there are plenty of expenses that come along with owning property, but there are opportunities where it can be incredibly fruitful.

Investing in Stocks

Investing in wonderful companies is the best way to generate passive income. While not as effortless as compound interest and not as tangible as real estate, investing in stocks is much more lucrative.

Just take my example above comparing how compound interest works when your money is in a savings account only yielding 1% in return (if you’re lucky) vs in an investment yielding 10%.

Investments that generate 10% returns year after year are attainable. In fact, my benchmark for any investment is a 15% return, on average, year after year.

When you invest in wonderful companies, you can expect this, or better.

When you invest in stocks, you have to do the research on the front end, but after that, you can spend just 15 minutes each week monitoring and adjusting your investments.

Once you find a great business and buy it at a great price, you don’t always have to be actively involved. Your money will grow, compound year after year, and you won’t even have to think about it.

Your investments can then provide you with the cushion you need for the unknown events of life, the income you need for retirement, and the security you need to be financially free.

Financial Freedom is Right Around the Corner

There you have it. If you follow these 5 steps, you can experience financial freedom, and reach it sooner rather than later.

If you know where you are, where you want to go, and invest the Rule #1 way, you’ll arrive in no time.

financial freedom is right around the corner

Hopefully, this inspired you to start your journey, but I want to do everything I can to help you reach financial freedom.

So I created a guide that outlines each step and will allow you to track your progress: Map Out Your Investing Journey. Use it to create excellent habits, build your future, and watch your money grow.