Reaching Financial Freedom: 3 Ways To Get There

The debate goes on. If you want time, location and financial freedom, should you cut costs and invest long-term, or focus on earning as much as possible?

Let's break it down...

Option 1: Cut costs, invest for the long-term

This route means cutting life expenses so they are as low as possible, then investing a chunk of your income into property or low-cost index funds.

This is a pretty good way to go. And almost guarantees that you'll be able to retire in 30+ years if you wish.

The downsides? You may have to sacrifice a lot today. I talk a lot about long-term gratification, and I do truly believe that it's something everyone should embrace. However you need to balance certain things.

Of course you want to be able to afford basic necessities like bills and food. But you don't want to punish yourself or those around you by never going out for meals or travelling, for example.

In fact, travelling and socialising is one of the highest ROI activities that doesn't give you a direct income, because of how much you can learn from the experiences.

Not only that, but if you sacrifice comfort when travelling it can have serious long-lasting health affects.

This is where you need to find the balance. Find a way to cut expenses as much as possible, but still allow yourself treats and the ability to spend for time and comfort.

Option 2: Spend high, earn high

This is the method of investing almost all of your income in earning more. While not worrying too much about your expenses because you're so confident that you'll make it back.

This usually means investing in something with high risk and high returns. Like ecommerce, forex, niche sites etc.

A lot of people have got rich this way. The problem lies in the fact that you don't have much to fall back on if a business venture fails. Or worse, if multiple fail at the same time.

Plus you could run into the trap of increasing your living standards to compete with others around you, or even just to make sure 'everything matches' (also called the diderot effect). That's definitely not sustainable long-term.

Option 3: The sweet spot

It doesn't take a mind reader to work out that my preference is somewhere in the middle. I believe that the sweet spot is dedicating a certain % of income to new business, index funds and living expenses.

How much you dedicate is truly up to you and depends on factors such as:

- age

- risk factor

- happiness in current situation

- monthly income

- monthly expenses

For me, currently, my budget is:

- 30% living expenses

- 5% longer term savings (holidays, new car if needed, future property etc)

- 40% business ventures

- 20% index funds

- 5% emergency fund

This changes quite often, and when I build a larger stream of regular passive income my business ventures will probably decrease, while index funds and longer term savings % will increase.

I have high % for business ventures as I'm young and living comfortably at the moment. That means I can afford to risk a lot of my income.

A 40 year old with a mortgage and 3 kids, who is trying to build a passive income stream to quit his 9-5, might have a budget that looks more like this

- 50% living expenses

- 10% longer term savings

- 10% index funds

- 20% business ventures

- 10% emergency fund

Due to having higher outgoings his living expenses is 50% of his income. This means he can afford less into other investments. However, his business ventures is still the highest other category because his goal is to quit his 9-5. But he still leaves a chunky 10% for an emergency fund because he has a whole family to provide for if things go wrong and he gets laid off.

You can edit your numbers accordingly.