How to Escape the Rat Race – Step 3

Invest!! Buy or create assets.

If you have completed steps 1 and 2 you are on your way to financial freedom. By completing step 1 you are now living below you means. Every month you are bringing in more money than your monthly bills. Completing step 2 has now taken the shackles off you by removing all non-mortgage debt. You should now be living well below your means, allowing you to put by a tidy sum each month.

Before you begin to invest, I suggest you first save enough money and put it in an ISA that will pay your bills for at least 3 months. That way, if the worst comes and you lose your job, or you have a huge unexpected bill come through, you have a financial cushion.

Assuming you have this cushion you are now ready for the most exciting step of escaping the rat race and becoming financially free (remember, being financially free is when your passive income exceeds your monthly expenses).

It’s all about assets! Assets are things that put money into your pocket automatically. Whether it is dividends from shares you own, rent from a house you let, interest you get from savings, it is something that puts money into your pocket every month and you don’t have to work for it.

Most people stay poor (well, don’t become financially free) because they never buy assets, they only buy liabilities. Liabilities are things that take money from your pocket, e.g. cars, boats, holidays, etc.

I’m not saying you should never buy liabilities – of course, most people need a car, and everyone should try to buy a house, although that is a liability. A house takes money out of your pocket, but you need to live somewhere and rent can take the same amount out of your pocket, and wouldn’t you rather pay for your own house than someone else’s?

When you can though, you should buy assets before liabilities – use your money to invest in something that will ultimately pay for your liability. For example, I want to buy a new boat. I have saved a lot of money for this boat – £20,000 in fact! Now, I could buy the boat outright now, since it costs £20,000. However, I do some research and find a good investment that will pay 10% return per year. So I buy this investment (asset) and from it I earn £2000 a year, or £166 a month.

I then manage to get a loan for £20,000 that will buy my boat for me, and cost me £150 per month to pay it back. I have therefore bought my boat and but still have a positive cash flow. What’s more, when my boat loan is paid off I’ll be left with an asset paying me £2000 a year!

So, as a summary, now you are living below your means and have paid off all your debts, you now are in a position to buy and create assets. More on this in the coming posts…