The closer you get to Financial Freedom, the more options you have in life. Work becomes a choice, something you do for fulfilment rather than to pay the bills. It’s a journey and doesn’t happen overnight, so before we get into the roadmap it helps to know what we’re aiming for.
Financial health moves through four stages, from relying entirely on your effort income at one end, to your investment engine generating more income than you’ll ever need at the other. That top stage is Financial Freedom.
The four stages of financial health
Financial Dependency
You rely entirely on your effort income to pay the bills. If that income disappeared, you’d struggle to cover your outgoings beyond the next 6 to 12 months.
Financial Strength
You could last 1 to 3 years on the cash and investments you’ve built up. Leveraged or passive income may extend that, but either way it takes the short term pressure off if your effort income were to stop.
Financial Independence
Your investment engine covers the lifestyle you want, for good. Earning effort income is a choice. If it disappeared tomorrow, you’d be fine for the long term.
Financial Freedom
Your investment engine covers your lifestyle expenses two, three, even four times over. This is where you’re truly financially free.
Wherever you are on your journey, the path forward is the same. You need to build an investment engine by maximising your income, optimising your lifestyle expenses, and investing the difference. This forms the basis of the Roadmap. I call it MOB: Maximise Income Streams, Optimise Lifestyle Expenses, Build Investment Engine.
The Financial Freedom Roadmap
Maximise Income Streams
Optimise Lifestyle Expenses
Build Investment Engine
Maximise Income Streams
There are three ways to generate income.
Effort Income
This will typically be in the form of a job. You trade your hours for money, so your income is capped by the time you have.
Leveraged Income
This is income that isn’t tied one-to-one to your hours. Think of a side hustle, business or product that can keep paying you after the initial work is done. It usually takes more effort to get going, but it’s often something you enjoy, and unlike a job it can scale beyond the hours in your day.
Passive Income
This requires little effort on a yearly basis. It’s a set-and-forget system that pays you over time, like investing in assets such as index funds or dividend stocks.
While it’s likely that when you are young most of your income will come from effort, the aim of the game over time is to grow your leveraged and passive income. You move into these income streams by investing in yourself (the biggest asset you will ever own) and investing in assets that pay you back over time.
But growing your income is only part of the equation. You also need to free up money to invest it, and that brings us to step two.
Optimise Lifestyle Expenses
Many people spend everything they earn, and some spend even more. This is not the path to financial freedom. Optimising lifestyle expenses is not about never having a Starbucks or driving a dilapidated car your whole life. It’s about spending money on things you value and not mindlessly spending on things you don’t.
Do this well and a gap opens between what you earn and what you spend. That gap is the fuel that feeds step three.
Build Investment Engine
You take the gap between your combined income streams and your lifestyle expenses, and you invest it. This is how you build your investment engine.
Your investment engine is your own mind and the assets you own. An asset is anything that generates a return to you. Every pound you put in buys more of these assets, and they pay you back over time.
Do this long enough and your leveraged and passive income grow to cover your lifestyle expenses. Effort income becomes voluntary and you can spend your life on work and leisure you enjoy. This is what it means to be financially independent. Then if you keep fuelling your investment engine you become truly financially free.
Building your investment engine is easier than you might think. If you want a hand, sign up for my free UK Investing Starter Sheet, a simple guide to getting started with investing.
Next, check out the calculator below to see how changes to your income and expenses impact how much you can invest.
The MOB Calculator
See how maximising income streams and optimising lifestyle expenses impact how you can build your investment engine. Drag the sliders to explore.
Run your own numbers through my Calculators and see what your own path looks like.