You could win the lottery I suppose but you’ve more chance of winning the office sweepstake when you pick Norton’s Coin in the 1990 Cheltenham Gold cup at 100/1. Norton’s Coin did actually win but it doesn’t happen that often. In this blog, Six Steps to financial freedom, I outline 6 simple steps you need to take to create a life of happiness, freedom and enrichment way beyond what the rat race can offer.
The education system failed me
Great, so I left school knowing the topography of Norway, Henry the 8th had six wives and I can calculate the area under the curve. Big Whoop. Did I know about the opposite sex, the tax system, psychology of the human being, social etiquette or money management? Not on your nelly. I will argue until the cows come home that understanding how to manage debt is much more practical than knowing how to do simultaneous equations (which I have never used ever since leaving school).
I suppose if we were much better informed about the everyday skills of life needed after school there would be no fun sending the 16 year old apprentice to the hardware store for a LONG STAND, SKIRTING BOARD LADDER or ELBOW GREASE. And indeed, if we had more knowledge about the opposite sex we might be better at choosing our life partners and avoiding the inevitable pain and suffering incurred during divorce proceedings but the cynic in me would argue that a few lawers would be put out of business adding to the already bloated welfare system so maybe the education system is setup for us to fail. There’s a few TED talks on Youtube that support this theory.
So what happens? We leave school and through no fault of our own make one mistake after another. If we’re not given the knowledge in the first place so how can it be our fault. One in three of us get divorced and we take on debt galore. Credit cards, home loans, car payments just because we’re trying to keep up with the Jones’. Your social standing must be maintained irrespective of cost, right? That’s what the TV would have us all believe. Is it any wonder we hit middle age and have a crisis. If we were only given an education that helps us make better decisions; an understanding about how the world actually works…. Imagine! These 6 steps to financial freedom are just good disciplines that, in my opinion, we should have been taught in school.
1. Control your finances
In my blog money management, I describe the reasons why we are trapped in the system and what is required to release ourselves from the hamster wheel existence and take control of our finances. Debts to Zero, Turn stuff into cash, Control your spending and maximising your time more productively are the first steps to creating financial freedom.
In 2012 George Monbiot wrote a piece in the newspapers about our pathological consumption over Christmas and how it is damaging our planet. It is worth a read here and I for one couldn’t agree more. Pathological consumption isn’t just at Christmas though. I actually know of a guy that has 5 push bikes that cost him 25K + to buy. I get that people are into their cycling but surely one decent road bike and one decent mountain bike would suffice?
It doesn’t matter how much you earn either. Millionaire rock stars, footballers and actors all regularly go bankrupt. They are simply not in control of their finances.
2. Live within your means
It’s no wonder the Jewish people are some of the wealthiest people in the world. All their money management principles are based on the 5 Jars. If you earn £100,000 a year it is split 5 ways
- £50,000 on living costs
- £20,000 on savings
- £10,000 for your faith
- £10,000 for charity
- £10,000 for investments
This is not rocket science, just plain discipline .The western capitalist world is based on ‘if you can’t afford it, put it on the never never.
I wonder why credit card debt is called ‘THE NEVER NEVER’? Maybe because you never never pay it off. I have no idea but banks, loan companies and ilk can’t wait to sell you as much debt as you really can’t afford. The TV is full of ads and manipulative suggestions such as you really need a new car, because you’re worth it, dare to dream etc. They suck you in surreptitiously and never let you go.
In simple terms, if you don’t live within your means you will always be living on credit and you are always going to be chasing that next paycheck. It is said that most of us are 1 pay check away from bankruptcy.
3. Surround yourself with like-minded people
Back in 1992 Vicki robin and Joe Dominguez wrote a book called Your money or your life in which they describe a world of early retirement and how to go about it. Just a straight forward set of disciplines involving saving income and spending less. What amazes me is that not many people took them up on their idea. It’s as if people are happy to spend 40 years working with very little retirement time at the end. So what’s the problem? In my blog, stock market psychology I discuss the concepts of tall poppy cutting and fear of social humiliation; Two significant traits of our psyche that are at the core of our behaviour. We are a pack animal first and foremost and as such like to group together. Any evidence of moving away from the status quo and the gaslighters, nay-sayers, put-downers and tall poppy cutters will spring out of your social circle making sure you stay in line. What, you think they are just going to let you leave them in their 9-5 whilst you go and change your lifestyle? Don’t think so. The easy part is identifying who they are because they will present themselves. The hard part is what do you do if they are your spouse, family or best friend? Seeing that change is required and initiating change for others to follow are worlds apart. Aligning yourself with like-minded people is the only way to financial freedom.
It’s a fruitless task of trying to change or convince ‘put-downers’ of the benefits a new financially free life because they are so resolute in their beliefs and will never follow you even if deep down they can see the light. I have had the unfortunate experience of having to cut my best friend and family members from my life as they indeed presented themselves as ‘put-downers’. It is hard to do but on the other hand, however, I am fortunate to have married someone who turned out to be completely in tune with the idea and we have made it happen.
4. Good debt, bad debt and Tax free incentives
In my blog Managing debt, I explained the difference between good debt and bad debt and how to use both effectively. Dave Ramsey will shout till the cows come home that having zero debt is the way to go and he’d be right and Robert Kiyosaki ( of Rich Dad Poor Dad fame) will have you believe that to become wealthy you have to load yourself up with a much debt as you can and he’d be right too. What’s the old adage ‘If you owe the bank 100K that’s your problem but if you owe the bank 100M it’s the banks problem’. Using debt to buy goods and services is a bad decision but using debt to buy assets that are cash generative is a good idea and it shouldn’t take the brains of Britain to work out which ones which. In my blog, Investing Tax free, I outlined some of the tax free benefits the UK government allow, no offer us all to take advantage of and I’m amazed how many people don’t. It’s not tax evasion, it’s a legal incentive from the Government so let’s use it. Never look a gift horse in the mouth. I have no idea why or where that phrase came from but we all know what it means.
5. Learn to invest, not save.
There’s a big difference between the two. In my blog on the banking system, I described how the banks take your savings and then go and invest it. They offer you 3% interest and get 6% in the stock market making 3% on your money. Then they offer you loans, mortgages and credit cards all using the money they made on your savings. It’s the biggest daylight robbery ever and it’s happening right under our noses. At least Dick Turpin wore a mask.
By bypassing the bank and learning to invest directly is simply imperative to financial freedom and today it couldn’t be easier. The internet provides all the tools and vehicles to do so from your armchair. Back in 1929 when the Great Depression hit there was a clear divide between bankers and savers. The roaring 20’s saw the birth of the Gin n Tonic and the Charleston and the rich were getting richer and the poor were clueless that they were in the biggest stock market bubble of the time. Until it all went south. Everybody stuck their savings under the mattress and money stopped flowing. When you are scared to go to the shop to buy something, the shopkeeper can’t buy from the wholesaler and the wholesaler can’t buy from the manufacturer resulting in total collapse of economies.
Dissemination of information was so poor that it took 20 years for the stock market to rebound but rebound it did. There was a small matter of a 2nd world war during that time too which may not have helped the recovery. If the stock market can recover from this period then there’s every reason to think that given the dissemination of information available to us these days ( again thanks to the internet), the stock market is a safe place for our money. Human nature will always provide boom and bust scenarios ( 2008 credit crisis), but as long as we take a long term view we can beat the bank rate and stop them becoming richer off the back of our hard earned money. It’s payback time.
We’ve been hood-winked by the banking system since its’ inception. Learn to invest yourself and take control of your financial future.
6. Understand People.
It would appear logical to me that in order to get the best out of living in the human race we must understand ourselves more than we actually do. Why, for instance, did the 1929 stock market crash happen and why did it happen again in the 2008/9 credit crisis. I’ve got some bad news for you. Those aren’t the only two. The first one was the Dutch tulip bulb crash of 1637 and there have been over 50 since. History, it would seem, keeps repeating itself. But Why?
Very simple. Human beings haven’t changed that much in 5000 years. Greed and fear, fight or flight, egotistical, prejudist, insecure, recklessness, stubbornness, smugness; the list goes on. The reason why I’ve listed some of the negative traits of human behaviour, because there are many positive traits too, is to highlight that each and every person is a mix of all of these in varying proportions. Hence the reason for stock market booms and busts.
Be fearful when others are greedy and be greedy when others are fearful
Warren Buffet
The quote of all quotes.
Just because he wears a pin stripped suit, Armani shoes and has 6 degrees ranging from Business studies to Chartered Accountant does not qualify him for ‘expert’ status. No such thing as expert. There’s always lessons to learn and mistakes will always be made. Just because the share price is going down doesn’t mean the company is bad. It just means there’s an opportunity to buy that share at a knock down price.
6 steps to Financial Freedom – Conclusion
Let me first of all caveat that my rant about the education system has nothing to do with the quality of the teaching profession, I think teachers under the circumstances do a marvellous job. I’m merely questioning what is being taught, is all.
When I look at this list it seems a trifle simplistic. Unfortunately the way to financial freeedom is simple. K.I.S.S (Keep it Simple Stupid) has served me well. In fact, Warren Buffett said ‘If it’s too complicated to understand I don’t invest and uses the analogy of Wrigley’s chewing gum. “If you gave me all the money I need to compete with Wrigley’s I would lose’. Peter Lynch made a fortune investing in Dunkin Donuts. All it takes is discipline and a good work ethic.
These six steps to financial freedom should be Embedded in our education system
I’m on with the education minister tomorrow. Lol
Thanks for the inspiration! I love the jewish five jars! Never heard about it before, so made som extra digging and made a blogpost of it (that will be published another day). I also think that the education about how to grow your money should be in the school, but parents have a big responsible to encourage saving and giving in early years.
I only came across the 5 jars recently. Makes sense. It’s just discipline.