3% of the world population has wealth equal to the remaining 97%. Is this a coincidence? Why most of people who retire ended-up being broke, depending on monthly pension, or working despite the old age? Why only a few are financially free?
This article will discuss the different ways people generate income. It will also explain how to achieve financial freedom. Lastly, it will answer why money management is important in your small scale business?
How Do We Earn Money?
Accumulating money can be done in 4 different ways according to Robert Kiyosaki. First is being employed, when you are being paid for your normal 8-hour time-ins and your efforts. Second is being self-employed in which you earn base on your clients and projects. These are both linear income or just simply ‘no work, no pay’ scheme.
Next is having a business where-in you own a system and people work for you. Lastly is investing where money works for you. These ways can generate you a huge amount of income over time with decreasing time and effort.
Are Savings Enough?
With the high inflation and low bank interest rates, putting your hard earned cash in a bank will only spell doom to your future. As experts say, the value of money devaluates by 5 every 20 years. Imagine the price of your simple needs like owning a home, a decent car, and sufficient savings multiply by 5 in the next 20 years?! Or after you retire you take a magic pill and live for the next 50 years, will your retirement pay and pension enough to make you alive?
What is Financial Freedom?
Financial freedom according to best-selling author and entrepreneur T.Harv Eker is having the desired lifestyle without having to work or depend on someone for money. He also adds that it is not how much we earn but it what we do with what we earn. Earning 6-digits a month does not result to your freedom. It is what you do with those earnings that will make you free.
5 Wheels to Financial Freedom
Imagine your bus has 5 wheels. What if only 3 wheels are working, will your bus move? Probably yes but slower. What if only 2 wheels? What if only 1 wheel works? This is the same with your financial freedom. You need all of these wheels to work. What are these wheels?
1. Working Income
This is where you generate your most of your money. It can be your daytime job or your freelance work. A lot of people are dependent on this alone.
This is what you store in the bank or your piggy bank. It is where you allot the excess money from your working income. Many people are used to having the first two wheels.
These are your money-working-for-you methods like investing on paper assets (stocks, bonds, etc), real-estate, or businesses.
4. Passive Income
This is your income generated from passive income streams like royalties (books and songs), car parks, mortgages (owning), etc.
Simplify your lifestyle. According to Eker, it is having a simplified lifestyle that you’re still happy with. A 1 hectare mansion is way more expensive to have than a 300 sqm. bungalow. If you can be happy with less, the better.
Best Way to Manage Your Money
Why manage your money? According to the book Millionaire Next Door, many millionaires around the world have something in common. Are you excited to know what is it? Here it is! They are all good in managing their money! Eker introduces in his book Secrets of A Millionaire Mind, the best and easiest way to manage your money.
The 6-Jar System
This system is applied to your after-tax income. The rule is you have to separate your money into 6 different jars or accounts. For detailed explanation, you can read the book by T.Harv Eker. Here are the 6 Jars/Accounts:
1. Financial Freedom Account (FFA)
You are to devote 10% of your income. When will you spend this? Never! Never ever you will spend this. This is your golden goose. If you kill it then say good-bye to your freedom. You are only to use this account on investments (stocks, real-estate) and passive income businesses.
2. Long-Term Savings for Spending (LTSS)
10% of your income goes to this account. This account can be separated further into 2 accounts depending on what you want to save for future. This is for your children’s college fund, or down payment for your dream car and house, or for your trip out of the country. If you have existing debts, you can get your monthly payments here.
3. Play Account (PA)
You will dedicate 10% of your income on this jar. The rule is every month you will need to spend all in this account on something luxurious like a cruise dinner, a special massage, or anything that will make you feel rich. The most number of months to hold this account is 3 months.
4. Education Account (EA)
Another 10% will go to this account. This is where you will get to learn more on being financially literate like books, seminars, and other street-smart courses. As Benjamin Franklin once said, “If you think education is expensive, try ignorance”.
5. Give Account (GA)
You can allot either 5% or 10% to this account. This is for your tithes and love offerings. It is fulfilling when you give back a portion of what God has given you because remember that you started your life on earth with nothing.
6. Necessities Account (NA)
A grand total of 55% or 50% goes to this account. This is for your daily expenses on food, clothing, monthly bills, and other basic expenses.
What if my necessities account is 90% of my income? The answer is to simplify your expense up to the point that your NA reaches 50 to 55 percent. Or simply pay yourself a consistent paycheck twice a month as Eker emphasizes, “Your habit is more important than the amount”. Start with something small and watch it grow and multiply over time.
This system has worked miracles for those who applied it. Habit is the key in order for this to be successful. Imagine teaching this your 5 year-old child. I assure you that your children will never have a financial problem when they grow up. The money management is your major tool in bringing your small scale business in to new heights.
TJ is an alumnus of the University of the Philippines Diliman. He is currently running an online business from home. He writes business articles for passion. On his free time he plays Dota 2. He simply wants to be a good son, brother, boyfriend, and Filipino citizen.