4 Steps to Start Building Financial Freedom Today

There's a difference between financial freedom and wealth. Tony Robbins, the famed motivational speaker and life coach, suggested wealth is an emotion, we can all feel wealthy, while financial freedom means having a money machine.

Source: Randy Stewart.

Not a literal money machine, but having your investments earn enough to live on, which is probably more spectacular. To achieve such an incredible feat Robbins actually laid out a step by step plan.

Step one
The entire program hinges on our ability to accomplish this one goal. You have to spend less than you earn. While this isn't groundbreaking, if we're going to start building up a portfolio of investments we're going to need something to invest. From there it's a matter of what to invest in. Robbins suggested there are three buckets that should be filled in order: security, growth, and dream.

Security bucket
It's not sexy, but the first thing every investor needs to do is build a safety net. According to Robbins, enough to support your expenses for two to six months minimum. The closer you are to retirement, the bigger the security bucket should be.

The first chunk will go into your plain vanilla bank savings account. For most banks, this will yield less than 1% per year, but it's as liquid, or accessible, as you'll find. And the place you'll draw from when unexpected expenses rear their ugly head.

Source: ally.com.

Bonds are good options for the rest of your safety net. Though, with volatility and historically low yields plaguing the market, there are better options. The first is using CDs, or certificates of deposit, which is a time deposit. You agree not to touch the money for a specified time, and in return you'll receive a higher interest rate. 

Discover and Ally, in particular, have some of the best rates. I would suggest spreading your money across six-month, eighteen-month, and three-year CDs. This will avoid having your money tied up for too long, but still taking advantage of the best rates.  

The second option is even simpler, and that's to set up a savings account with Bank of the Internet. It's insured by the FDIC making it just as safe as any other bank. The big difference is instead of yielding approximately .05% on savings accounts, a Bank of the Internet account will return .61%. Seemingly insignificant in the short-term, but as money compounds over time it can make a substantial difference. 

Growth bucket
After you nail down your safety net it's on to the "steady as she goes" investments. If you feel more comfortable with funds, I suggest the Vanguard Total Stock Market ETF (NYSEMKT: VTI  ) (NYSEMKT: VTI  ) (NYSEMKT: VTI  )  . It has rock-bottom fees, it'll give you extreme diversification, and steady returns over the long-haul.

There are plenty of other great choices, but I would encourage investors to explore Exchange Traded Funds, or ETFs. Because they are not actively managed, there are much lower fees -- which can help avoid thousands in compounding costs over time. 

Source: pg.com

If you enjoy researching companies, however, individual stocks are a fantastic alternative. Though, I would still recommend playing it fairly close to the chest with a few like Procter & Gamble (NYSE: PG  ) (NYSE: PG  ) (NYSE: PG  ) (NYSE: PG  ) (NYSE: PG  ) . The consumer goods giant earns about 90% of its profits from 50 of the most recognizable house hold products on the planet. It's not going to wow anyone with growth, but it's a company that can weather a storm, and best of all it yields a 3% dividend, which has been steadily growing.

Your growth bucket will vary in size, again, based on your retirement timeline and tolerance for risk. With that said, the old adage is put a percentage next to your age and invest the remainder in the stock market. So, a 40-year old would have a minimum of 60% in the stock market. 

Dream bucket
You set aside money in case of an emergency, and you've built up a sizable portfolio of stable stock market investments. Now it's time for some real fun. I don't know if Robbins and I have the same idea of what a "dream" fund should be. For an investor, though, the dream is to find stocks with massive growth potential.

Source: GreaterBostonChamber.

This isn't exclusive to seasoned investors. Legendary investor Peter Lynch believed, as I do, that anyone can spot great businesses. Think about the products you use, the stores you shop, and the car you drive, there are potential investing opportunities everywhere.

Because growth stocks are inherently risky, they should almost always make up the smallest percentage of your portfolio. With that said, if you have a safety net, and a portion of your portfolio in stock market funds or steady businesses, you've earned it. So, don't be afraid to dream big and swing for the fences.

 

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  • Report this Comment On May 01, 2014, at 9:15 AM, Blackhawk wrote:

    For me personally, a good read and somewhat of a confirmation of sorts.

    As a recent retiree my goal(s) were/was/is hit the milestones:

    1. Fully own any/all property with no liens/mortgage - done

    2. No other outstanding debt - done

    3. Re-enter market (now that I have some time to spend) and try and as fully as possible (with MF help!!) to understand what I/we should do with our cash nest egg - shall be an ongoing and hopefully profitable process

    4. Member - SA, SN & RB

    5. Began a spread of mixed 20+ stocks, that I liked at the time from above MF recs, but not doing very well

    5. As an overseas investor in the NA market, I am still a vestile (sic) virgin when it comes to tax/cost liabilities concerning ETFs, REITS, MLPs etc. and would appreciate any direction that would be more advantageous in securing as much profit, and hence securing, to adhere to a (generally speaking) 4% retirement plan whilst maintaining the nest egg so to speak.

    Appreciate any/all input !!

    Fool on!!

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