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Investing for Personal Freedom

There is no universal definition of personal freedom. Personal freedom is going to mean different things to different people. For some, this may be the freedom to choose your career, to travel whenever you want, to purchase anything you desire, or to live without having to work anymore.

Ultimately, personal freedom comes down to having the ability to make your own decisions about your own life.

This goal is going to look different for everyone, but for most of us, the means of achieving personal freedom are not possible without first achieving financial freedom.

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Achieving financial freedom means having enough savings or investments to afford a desirable lifestyle without needing to work anymore. Just like personal freedom goals will be different for everyone, the dollar amount needed to have saved or the amount of passive income needed from investments to achieve financial freedom will look different for different people.

No matter how big or small your personal freedom goals are, they are achievable if you are first able to achieve financial freedom. Without having control of your own finances, it will be nearly impossible to make independent decisions about your life.

Understanding Your Finances

Investing for personal freedom starts with financial freedom and the first step in achieving financial freedom is to understand your financial situation and create a plan to attain your goals.

For many people, this involves creating and following a budget to track your spending, saving, and investing. As income levels and expenses change over time, you will need to adjust your budget to stay on track with your goals.

Incorporated in your budget should be money set aside or invested towards that end goal of financial freedom. At any time you realize you are not on track to reach your financial freedom goals with your current budget, you may need to adjust the budget or your spending habits to accommodate the shortfall.

Without a plan in place to reach financial freedom, you will never get there in time. It is amazing how fast money can disappear out of your bank account when you don’t keep track of it and incorporating a budget into your plan can be an important tool to help you reach your financial and personal freedom goals faster.

Get Rid of Bad Debt

The next step in getting control of your finances and achieving personal freedom is to get rid of all the bad debt that is taking away your ability to save and invest.

Not to be confused with most business loans or using debt to purchase investment real estate, examples of bad debt may include credit cards, car loans, student loans, or personal loans that burden your wallet and slow down your journey to financial freedom.

Some of these examples, like credit cards, may have variable or high interest rates that make carrying these debts very expensive. If possible, try to pay off the high-interest rate debts first and seek help through debt consolidation or a debt management service if you are overwhelmed with your debt levels.

The sooner you can pay off these debts, the sooner you will be able to allocate more of your income to your financial future.

Investments that Pay You

Once you have paid off all your bad debt, it’s time to start investing in assets that will pay you to own them. The two most popular assets in this category are cash-flowing real estate and dividend-paying stocks.

The goal when owning these assets is to earn enough passive income to cover your desired expenses and lifestyle choices so that you do not have to work unless you choose to.

One of the simplest and most affordable ways to invest in real estate is to invest in single or multi-family rental properties. Investing in rental properties provides monthly income and the potential for price appreciation on the property.

One of the major benefits of real estate investing is the opportunity to use a mortgage to purchase the property by only paying a small percentage of the total cost upfront in a down payment. You then use the tenant’s monthly rental payments to pay down the loan, build equity and hopefully earn a little cash after all the other expenses.

Some downsides to consider with rental property investing are you will either have to actively manage the property yourself or pay someone to do it for you, tenants may damage your property, and you are responsible for paying the mortgage down if the rental is vacant.

Another way to gain exposure to real estate and bring in consistent income without the hassle of owning physical property is to invest in Real Estate Investment Trusts or REITs, which are exchange-traded corporations that own and operate income properties. As an investor in these companies, you receive a portion of the company’s income in the form of a dividend.

Speaking of dividends, another popular way to invest in income-producing assets is to buy dividend-paying stocks. Like REITs, dividend-paying stocks regularly pay you a percentage of their earnings. These companies are typically older or well-established with a long history of profitability and distributing earnings back to shareholders.

Since 1970, 84% of the total return of the S&P 500 came from dividends. While many cast aside dividend stocks for more flashy and risky growth stocks, their consistency cannot be understated, especially when relying on them for income.

A couple of figures to consider when investing in dividend stocks are the dividend yield and dividend payout ratio.

The dividend yield is the ratio of how much money a company pays out in an annual dividend compared to its stock price. You will want to look for a company with an attractive dividend yield and a history of dividend growth.

Higher dividend yields are more appealing at face value, but sometimes you may be sacrificing future growth for current yield. You will want to make sure the company is still investing some of its earnings to take full advantage of compounding future returns.

This is why the dividend payout ratio is also important to look at. The dividend payout ratio is the percentage of earnings that a company pays out to its shareholders through dividends. Look for a company with a consistent dividend payout ratio and earnings growth so that you can participate in the growth of that company and the growth of its dividend payouts.

Financial Freedom is Personal Freedom

Personal freedom is not possible without first achieving financial freedom. Financial freedom allows you to make choices without having to worry about the financial implications of relying on someone else for support.

Investing in assets that pay you to own them is a proven way to achieve this. But to get there, you will need to create a financial plan and stick to it.

As governments, central banks, and corporations increasingly intrude in our lives, it will become ever more important to take control of our own finances in hopes of achieving our own definitions of personal freedom.