It’s not how much you make; it’s how much you keep!

It’s not how much you make; it’s how much you keep!

Nigel Romano

Before we begin let me make it clear that nothing I will be sharing with you is original or rocket science. It has all been written about before. Also, there is no quick fix. Achieving financial freedom will take discipline and focus. You also must do the hard part first. You must know your numbers, make wise choices and put structures in place to help you to execute. I also want to note that money does not define who we are or what we are worth.

 

I would like to focus on one idea. IT’S NOT HOW MUCH YOU MAKE, IT’S HOW MUCH YOU KEEP. I will focus on simple ideas, simple, but not easily implemented, to help you to start getting control of your life.

 

Passive Income 

I believe that the goal of financial planning is to achieve financial freedom. Nik Halik and Garrett Gunderson, in their book “5 Day Weekend”, define financial independence as having a 5:1 Passive Income Ratio (PIR). Passive Income is earned with little or no effort by the recipient. Put simply, its income you can earn while sleeping. It’s income from sources like rental properties, interest on bonds or dividends from stocks. The Passive Income Ratio (PIR) is the amount of passive income generated in relation to your expenses. Your initial goal should be to develop a 1:1 PIR, which means that you’re generating enough passive income to cover your monthly expenses. However, at a minimum your goal should be to get to a 2:1 ratio, twice the amount of passive income you need to cover your monthly expenses. A 2:1 ratio provides a contingency of surplus funds. For example, if your current monthly expenses are $5,000, you want to develop passive income streams that generate $10,000 per month.

 

Know Your Numbers 

I know, you are saying that this is impossible. This is for rich people. Those negative thoughts are playing in your head. Fight them, ignore them. Let’s focus on the next step. Let’s start with YOUR NUMBERS—To build up the assets necessary to generate the passive income needed to cover your expenses you must know your numbers.

 

You must avoid the trap of instant gratification and the desire to borrow to pay for stuff you really don’t need. As you think about that next purchase, consider the advice of Will Rogers, “Too many people spend money they haven't earned, to buy things they don't want, to impress people that they don't like.” Are you one of those people?

As you think about this, I want you to begin the hard work necessary to create a solid foundation of assets that will generate passive cash flow. You must start with your numbers, your income and expenses:

 
  • How much income are your earning every month? For most of us this is after-tax salary and wages. How much is being deposited by your employer into your bank account? 

  • How much money are you spending every month on your recurring living ‘expenses’: rent, electricity, food, transport, telephone, cable, etc., and on debt repayment? 

 

Think about this carefully. You can begin by listing your income and expenses/payments using this worksheet.


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