So you’ve made the decision to tackle this and you want to know how to become financially free. Or you want to know what I have to say about it; want to see if you can learn something more. Or are you just curious whether there is really something behind the flowery marketing swirl on my homepage? Great. Then let’s get started.
On the way to financial freedom, we first need some basic knowledge. It’s similar to learning a new language in school: first a few vocabulary. It doesn’t work without it. But don’t worry, we limit ourselves to two terms. If you understand these two and the difference between them, you are already half the battle. It’s about spending and investing.
In short, when I spend one thing, I buy something that will be worn out or used up afterwards. The whole thing does not bring in any more money. When I invest, I spend my money in order to have more money later than before. On the way to financial freedom, we essentially want to make investments and avoid expenses.
Of expenses, luxury and frills
Let’s give a few examples: classic expenses are food (is consumed) or clothing (is worn out). Unfortunately, this also applies to the world of women: the beautiful, new, shiny pair of shoes is at best an emotional investment. But as soon as it disappears in the closet among the other hundred pairs, it has to be written off as an expense. Other examples of expenses are new furniture, the new car or a privately used property.
“But Markus, I need the things to stay alive. Without food I starve to death and without a car I can’t get to work. Then I can’t earn the money that will eventually make me financially free.”
Right! So there are two classes of expenses. Let’s call them necessary expenses and bells and whistles. What is necessary is the food I need to avoid starvation or the clothes I need to do my job. If this allows me to live more comfortably and have more motivation to earn money, then a fancy car or a nicer apartment can also be necessary expenses. However, this needs to be carefully questioned and weighed up. We’ll find out exactly how this works in a moment.
First, we need to know a little more about the second class of expenses: By frills, I mean expenses that go beyond what is necessary. Things that “only” offer emotional added value. If I only need my car to go shopping and to work, theoretically a used small car for a few thousand euros will do the same. A Porsche, on the other hand, would clearly be frills for this purpose – or even impractical because I can’t get the second case of beer in the trunk. And I can hardly carry it on my own lap while driving a car.
Please do not get this wrong. I don’t want to deny anyone a reasonable dose of luxury here. It can help if certain bells and whistles, carefully dosed, provide better motivation to achieve your own goals. It just shouldn’t use up too much money that could otherwise be put into investments. When buying luxury goods, I always weigh up: do I really need this luxury now? Or can I wait until I have enough passive income and this purchase no longer directly costs me my own working hours? Then the luxury is practically free. It no longer eats up the foundation I am building and I can enjoy it a lot more.
I can take an example from my own life here: so far I have been able to do without my own car permanently. One day I’ll be able to afford a really fancy luxury sports car. I even have one in my eye. So far, I just wouldn’t have really enjoyed it because it would have burned too much investment potential. I’ve found that you don’t really need a car in the big city. I chose my apartments so that I could take public transport to work. There was car sharing for the bulk shopping at the weekend. But the apartment was a bit more expensive because it was closer to the center. And I found that even better than a car because I lived more centrally and didn’t have to go that far when I wanted to go out in the evening. The luxury of a fancy apartment gave me more than a fancy car. And so on …
The example may sound stark to some. But not everyone has to do it that way. It is important that you learn to question your expenses in the future and to “check” them for necessity. If you’ve never done this before, you’ll be amazed at the places where you can save money everywhere. You don’t have to optimize everything very precisely towards the “one big goal”. There should also be some fun in between so that you know what you live for. The path to financial freedom is one thing above all: often longer than you think. But especially for people who are a bit clammy in places or who want to uncover even more potential for their investments, it can be worthwhile to critically question their own expenses for a while and to optimize their own lifestyle. If you think about the various options for a while, sooner or later you will find a sensible compromise.
About investments, scaling and vitamin B
So much for the expenses. Investments, on the other hand, are made with the intention of bringing in more money than they originally cost. In the best case, with less time investment than in the current job. It is important that the time that is put into the investment brings in more money per hour in the medium to long term than the current work. Otherwise I could go to work better instead because I earn more with it.
But there is one exception: a new investment can often bring in a little less at the beginning. Sometimes it takes time to negotiate the learning curve and make the necessary progress to get things going. But backwards I want my investments to be more lucrative than my current work.
And how do I know how lucrative my work is? You can calculate that right away. You simply divide the monthly net salary by the number of hours worked per month and you already know your own hourly wage. This gives you a good guide to what your work is worth and what an hour of invested lifetime brings in money.
But back to the investments. Examples of classic investments are trading in shares, buying a rented property or setting up your own business model. But hobbies can also be investments if you can turn them into money. This can range from collecting and trading in any rare or valuable item to something as absurd as sweepstakes. When I was a student, I used to take part in all kinds of competitions for a while. Not just because of the money. It was fun for me at the time and I wanted to know if and what you could win. In the end, I actually automated it and even registered with providers who charge a little money in order to register for new competitions. I then sold the stuff I won on eBay. That was fun for a while. What was missing here was further scalability. This is another important quality of investments. At some point they should bring in a multiple of what I earn through my normal work. The investment should be expandable; I want to be able to take it to the next level at times. At some point in the sweepstakes I failed to increase the income per hour of work. With stocks or real estate you can start with a relatively small stake and keep increasing it up to the millions or even billions. The return mainly depends on the amount of money invested and less on the time invested.
And there’s one more important aspect that can help immensely when scaling an investment: relationships. By exchanging ideas with other people, I can test out what is important to these people and what they may need. If I happen to have something that someone else needs and they are also willing to pay me more for it than I originally paid for it, then the classic win-win situation arises. This can range from trading goods for money to placing an order that a competitor in the same business cannot process in terms of time and therefore passes it on to me. The latter, most likely in the hope that I would do a favor in a reverse situation.
Unbelievable economies of scale can be achieved with the notorious B vitamin. It’s a shame that there are people who talk badly about relationships. It is often said: “He only managed it because he has connections.” I think people who say this either have no relationships themselves and are jealous of others who do. Or they have not yet properly understood the principle behind it or they do not yet know enough to be able to apply it in a way that makes sense. I definitely don’t want to offend anyone here. But if someone should feel addressed by these lines, then I recommend checking once whether the previous life has consisted mainly of a kind of lone warrior. How does z. B. Collaborate with colleagues at work? How often does it consist of teamwork? And is this teamwork fun? I am writing this because I was a lone fighter myself for a good part of my life. B. human friction or protection against losses and fraudsters have worked harder than the benefits of cooperation. In the course of time I have learned more and more how I can turn the former from an unpleasant mammoth task more and more into a necessary routine so that the latter works better and better.
And that brings us to the flip side of the coin: sometimes a little caution is required when dealing with relationships. There are also people who do not have the noblest of intentions. Security contracts can help. And whoever thinks there are enough others who do certain things for me and lazily themselves in the process, will probably find themselves very quickly off the beaten track. Fortunately, in today’s world you no longer have to expect to be found with your throat cut in the gutter if you ever catch a black sheep in the financial sector. But the money invested – as the saying goes: it is not gone. It just has another.
Let’s summarize: On the way to financial freedom, we want to get away from expenses, i.e. purchases that consume money, above all from unnecessary luxuries (frills). We want investments, i.e. purchases that bring in more money than they cost. We want to generate passive income by increasing our own hourly wages through suitable investments and scaling these investments. The better the knowledge we have about the investments, the better. A good network of relationships can also work wonders here and needs to be built up and maintained.