Tenets of Financial Freedom

“There are only two mistakes on can make along the road to truth; not going all the way, and not starting.”

There are seven unarguable truths that come to mind when I think of financial freedom.  The vision that I offer to my readers is deeply rooted in my beliefs and perspective.  It is my hope that these 7 tenets or truths will help you clarify your own beliefs and perspectives on the subject.

Tenet 1.           Passive cash flow represents the bloodline of financial freedom. 

This boils down to the very basic reality that we all need money to live on.  While most of us manage this reality by looking for employment, others look to passive income.  While I am not suggesting that there is anything wrong with being an employee, I am unequivocally stating that having a boss write your paycheck gives him/her an ability to control your financial well-being.  This is the opposite of financial independence.  On the other hand, being in total control of multiple sources of passive income is the ticket to financial independence.

Tenet 2.           Net-Worth is not a guarantee of financial freedom; you must know the difference between a                           real asset and simply something of value.

Net Worth is accumulation of perceived value denominated in dollars.  However, net worth does not take into account the distinctions among the three types of assets which I discussed earlier.  I don’t know about your bills, but mine show-up every month, like clock work.  To achieve financial freedom I must have the money to pay for my life on a monthly basis, a circumstance that an asset without cash flow has literally no impact on.  The conclusion is this: Net worth is a good thing if it is in conjunction with passive cash flow; otherwise it’s practically useless.

Tenet 3.           High income does not guarantee success, and low income does not guarantee failure.

This game is not about income so much as it is about cash flow.  Since the formula for cash flow is Income – Expenses = Cash Flow, than it is possible for an individual to have low income and still achieve a proportionally high cash flow due to excellent management of expenses.  Alternatively, it is easy for someone with high income to spend too much and end-up with low or no cash flow.  Therefore it could be said that expenses are far and away the more important element of this equation.

Tenet 4.           Living on a tight budget which is below your means is necessary at any income level.

Living on a budget is how you will be able to control your expenses – enough said!

Tenet 5.           Earned income is a necessary evil; passive income is the goal.

Let’s face it – most of us, at least at the beginning, have to rely on earned income.  But earned income is like a sword that cuts both ways: it will build your dependency on the paycheck if you let it, or it can buy your way out of the rat race, if you live frugally and invest as much as possible into acquisition of positive cash-flow assets.

Tenet 6.           Multiple sources of revenue, specifically passive revenue, represent safety.

Just ask yourself this: would you rather head into battle with one soldier under your command or many?  I hope that the answer is as intuitive for you as it is for me.  If one of your guys goes down there must always be others to finish the job.  Incidentally, for those of you are relying on a paycheck – you are the only soldier you’ve got.  In my opinion this is dangerous.

Tenet 7            .           Financial freedom is monthly passive cash flow in excess of monthly liabilities.

Do you remember my magic wallet metaphor from chapter 3?  The magical force that makes the money reappear every month is passive cash flow.  As long as this passive cash flow exceeds the amount of your monthly expenses, you can consider yourself financially free.  Remember, passive cash flow is money left over after all of the costs of doing business have been accounted for.  In reality you will probably want your passive cash flow to exceed your expenses by 30% to 100% in order to really feel free, but in principal it is just this simple.

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