Personal Karma’s 10 Steps to Financial Freedom and Personal Financial Wealth

@Financial freedom Compounding

Are you sick of not being wealthy, or maybe worse yet – just barely making it to your next paycheck?

Do you find yourself frustrated at how little money is left over for saving even though you make way more money than you did several years ago?

 Is debt, or the Fear of Debt, constant nagging anxiety in your mind?

If you’ve ever looked at a wealthy person, at how free of worry they seem to be, and thought how in the world do I get there?

You’re in the right place. It might be hard to believe, but financial freedom is not impossible to achieve.


In fact, using these ten steps to financial freedom, anyone can dramatically change their approach to personal finance and achieve success.


Most people have never really thought about how they were raised to think about money, let alone actually studied personal finance. But just like any other area of life, education & knowledge is the difference between floundering about in anxiety and being secure and confident in your financial philosophy. There are loads of basic information out there, there is loads of (at least in our opinion) misinformation out there.

This article sifts through a lot of the old ways of thinking to establish 10 steps to financial freedom and personal finance success.

Important Note: This article is lifestyle driven and assumes a few things:

  • You aren’t facing any big life changes anytime soon (think marriage, change of career, etc.,), you’re ready to invest time and energy into developing wealth and won’t be distracted by any big changes.
  • You want to live better than paycheck-to-paycheck, you want to accumulate some sort of “wealth” in your life

As referenced earlier, there is no shortage of “X Steps to Financial Freedom and Personal Finance Success” articles out there, and some of them are from brilliant minds like Dave Ramsey and Tony Robbins, who take really particular approaches to wealth.

Ramsey likes to look at the progression as a series of Baby Steps.


Dave Ramsey’s Baby Steps to Financial Freedom
  • Step 1 – Build an emergency fund of at least $1000
  • Step 2 – Use the debt snowball method to pay off all debt
  • Step 3 – Start Saving – Save 3 to 6 months of expenses
  • Step 4 – Using your Roth IRAs and pre-tax retirement accounts, Invest 15% of household income
  • Step 5 – Start College funding for children
  • Step 6 – Pay off home early
  • Step 7 – Build wealth and give

It is important to note that Ramsey is taking a very specific approach to finance here, one that is pretty safely characterized as a conservative. He emphasizes safety from unknown factors like health disasters and financial collapse, opting for the Warren Buffet style of wealth accumulation: slow and steady.

For people who are just scraping by or climbing out of a hole of bad debt, this can be incredibly powerful. But there are other ways of building financial freedom.


@Financial freedom Tony Robbins seminarTony Robbins’s steps:
  • Step 1 – Make the decision to be an investor, not a consumer
  • Step 2 – Become an insider & know the rules before you start investing
  • Step 3 – Educate yourself: Make the game winnable through knowledge
  • Step 4 – Use the power of dollar cost averaging and proper asset allocation
  • Step 5 – Create a lifetime income plan using insurance and annuities if needed
  • Step 6 – Invest like the .1% percent
  • Step 7 – Just do it, (and don’t forget to enjoy it, and share it)!


Robbins gets at what we’re going to cover more here:


We should be able to have a measure of protection while still being open to risk because the risk is how we attain wealth.


But we have to be smart about our finances and design our investment portfolios in such a way so as to be sturdy in the face of sudden economic downturns while still being able to profit from the upswings too.


With that in mind, here are Personal Karma’s 10 steps to financial freedom and personal wealth:

# Step 1: It’s Too Risky Not To Take Risks: You MUST Take Risks — But They Should Be Asymmetrical


An asymmetrical risk is a risk scenario where the possible return is greater than the risk assumed (the possible loss). In your finances, these are the sorts of risks you should always be taking.

@Financial freedom assymetrical risk@0.5xAsymmetrical risk is like using a lever and prop to move a large boulder. There are times when the lever will snap in half, there will be times when the prop is crushed by the pressure applied, but there will also be times when the boulder is moved. Without asymmetrical risk being present, it is similar to pushing that large boulder with your bare bands, in a futile hope of trying to move it.”

If you’ve ever tried to increase your wealth by putting “what’s leftover” in your monthly check after paying bills into savings, you’ve been pushing a large boulder with your bare hands trying to move it. We’ll talk more about how to handle month-to-month things later, but for now recognize that taking smart, asymmetrical risks yield far greater returns more consistently than low-to-no risk endeavors and risky propositions.

Andy Liu outlines a few fantastic examples of asymmetrical risk, one which will be retold here adapted from The Richest Man in Babylon by George S. Glasson.

The merchant and the sheep

In ancient times cities would close their gates at night to ensure the safety of those within. A merchant who was returning from a successful deal found himself on the wrong side of the gate at night, so he had to sit outside and wait until morning with his bag of gold. Another merchant approached with his flock of sheep, it was impossible to tell how many sheep there were due to the immense darkness.

The sheep merchant’s servant approached and told him that his son back home was seriously injured due to an accident. In his distress, the merchant decided to try and sell his flock to the man he was waiting with. The merchant with the gold knew that if there were at least 200 sheep there, he could make an immense profit. “But,” he thought to himself, “it is dark and I don’t know how many sheep there truly are. If there were only 100, or even as little as 50, I would lose money!” So he refused and the merchant left his servant there to tend the sheep until morning.

And morning came over the servant and the immense herd of sheep, as well as the man with his bag of gold. When the sheep were all sold, the servant took a bag with four times as much gold back home to his master. And so the merchant watched the profit that might have been his be carried away back to the sheep merchant.

There was risk involved for the merchant with the gold, but the reward far outweighed sed risk, which meant it was one he should have taken. Even if he had bought the sheep and lost a little money on it, he still had his home and whatever income was saved there. The loss would not have been devastating, whereas the profit would have been incredible. He should have taken the risk because it was asymmetrical.

Seek out investments with this risk/reward balance, and take them. Even if you aren’t sure it will pan out in your direction, taking smaller, survivable losses is far better than missing out on massive gains.

We should always calculate our risk scenarios to have maximum return relative to possible loss—most stock portfolios aim only at return and don’t factor in risk at all. Making asymmetrical risks as investments means that you are more likely to make more money overall since your possible loss is lower than people who shoot for high return by itself.


#Step 2: Be Antifragile In Your Investing


Design your Portfolio that Benefits from Volatility

This is related to the previous point but is a more general principle. Always try to have more to gain than you stand to lose. That’s what Taleb means by antifragility, designing your portfolio to not merely be able to withstand change (a low-risk low-reward set of stocks), not to live-or-die by it (high-risk high-reward stocks where you’ll be decimated if things don’t go well), but to have a portfolio that net benefits from volatility. If the stock market is anything, it is volatile. Changes are hard to predict, and positive black swans are great and all but they are impossible to detect ahead of time.

@Financial freedom Goal target

This means you shouldn’t aim to merely match your returns, but instead structure things so that 10% is invested in high-risk high-reward and 90% is in set aside in conservative vehicle. In this way you set up your investments as asymmetrical risk, chances are you’re going to hang on to the 90% of income you have invested, especially if you let it sit for longer periods of time, but the possibility of startling profit with the risky 10% means you stand to gain far more than you could possibly lose.

This is called the barbell strategy, and it is a powerful method which opens you up to the possibility of massive benefits from a sudden surge in stock values while protecting you from the kinds of crashes and losses that can tank a portfolio.


# Step 3: Understand That Debt Is GOOD


This runs hard against common knowledge concerning debt, but common knowledge, in this case, is dead wrong. Most people will tell you that all debt is bad, that getting into debt is a bad thing and that the most important thing is to get out of it as soon as you possibly can.

@Financial freedom good debt Now, this is true with certain kinds of debt, credit cards for example. It might be more accurate to say that we should always avoid bad debt, debt that continues to cost us money over time. But that doesn’t mean we should avoid good 

debt, debt which leads to increased revenue over time.

The reason credit cards are bad is they are typically used to purchase things that depreciate in value like cars, televisions, etc. Other forms of debt, like a mortgage on a house, aren’t as bad because they typically don’t decrease in value but if all you are able to do is sink money into it then it is a bad investment.

“Dedicating extra money toward repaying high-interest consumer debt could leave you financially better off, even if early repayment delays efforts to save and invest for retirement or other financial goals.” – Christy Bieber

But you cannot gain wealth by merely paying down debt, you gain wealth through acquiring assets. The faster you build your balance sheet the faster you can build wealth. This might seem hard to believe due to the constant doomsday preaching about taking on debt, but we already talk about how this is true when it comes to student loans. Taking on student loans in order to obtain a college degree is worth the investment because it allows one to acquire assets (education, networking, qualifications) which increase one’s earning potential.

This means that someone with a degree can make vastly more money in a shorter period of time than if they had taken the first job available and worked steadily for years on end. A Bachelor’s degree that allows you to get a $45,000 salary means you will outperform someone who works at thirteen dollars an hour in the long-term, even though you took on $70k in debt and didn’t work full time for four years.

It is better long term to acquire assets, even if it means taking on more debt than to work a job and slowly pay down debt. So first you should eliminate any bad debt you have (high-interest rates, above 10% especially), and then focus on acquiring assets rather than trying to get debt free as fast as possible. With large long-term loans with low interest rates, you’re actually losing net worth and could make more money investing.


# Step 4: Take Advantage of Leverage/OPM


OPM is a term in personal finance that means Other People’s Money. Essentially it is using the finances already existing in another party’s ledger to finance acquiring assets that you control.

“In general terms, getting access to Other People’s Money (OPM) is a form of leverage that enables you to go beyond the limits of your own resources and instead apply resourcefulness to everything you do. In business terms, leverage is the key that differentiates a self-employed person who owns a job from the business owner who owns a business. And in financial/investment terms it means getting access to cash that’s not yours in order to buy assets that you control and that produce income.” – Keelan Cunningham

Leverage enables you quick access to the funds needed in order to pursue an opportunity. Sometimes that is a long-term purchase of a house for your own use, a mortgage is the most commonly understood form of OPM. Except for the person making a profit in that scenario is typically going to be the bank that gave out the mortgage. If, on the other hand, the mortgage taken out was for a rental property that made enough money to pay the mortgage back plus extra, that is using OPM effectively. There’s a reason most of the “average” millionaires in America made their money in real estate.

You obtain leverage in a variety of ways depending on your context, a business plan or a portfolio of creative works, for example. These show potential investors (other people) that you are worth the investment of capital (money), which enables you to enact sed plan. In mortgage environments, you obtain leverage by having a certain percentage of the total cost available as a down payment, typically around 20%.

Once you get leverage, it is important to be careful with it. The same stick that can lift a boulder out of the way can also send it rolling back onto you. Coach Carson gives four tips for using leverage safely, but one that is especially important to consider is seeking out Master Lease options. A Master lease is a rental agreement where the renter is given the right to sublet the property, allowing them to make money without owning it. Options with Right to Purchase are great as well, as they allow the appreciation of value to cause a profit, again, without owning the property. His whole article on leverage is worth reading, but on to the next point.


# Step 5: Pay Yourself First


This might be difficult to wrap your brain around if you grew up in the bean-counting world of traditional line-item budgeting, but many people have far more success with this method of personal budgeting.

@Financial freedom Saving pay yourself firstRather than taking your monthly income and paying bills with it, using the leftovers for savings and other financial goals, set up a static amount of money you want to save each month and take them out first. The reason this shift is important is that when we do it the other way, money has a way of being eaten up quickly.

“In the past, you’ve always said you’ll save money for retirement or for that vacation. However, when your paycheck comes in, it seems to get used up by bills and unexpected expenses, and any surplus gets frittered away on a dinner out, some fast food or trips to the nearest Walmart for non-critical items.” – The “Pay Yourself First” Budgeting Method

Flipping that around and moving a portion of monthly income to financial goals before paying bills and settings things like coffee budgets means that you’re likely to reach those goals far faster, which frees up monthly income for new goals. For wealth building, this is an important first step.

The numbers are always going to vary based on your situation, but you’ll likely want to use the first 10% or 20% of your monthly income paying yourself this way. If your financial goals don’t currently take up that amount of your monthly income, you need to broaden them out to include more. In this way, you will start to actually build towards your goals with real progress each month.


# Step 6: Set It and Forget It


Speaking of saving, this next piece of advice has to do with the best way to ensure that you’re allocating money towards your financial goals without fail. You must set up autopayments from your “pay yourself” account to fund your investment vehicles.

There are a few different reasons that automatic payments are more beneficial than manually adding the money each month. If you’re budgeting for yourself and a partner (especially if you also have children), it might be tempting to take that money just this month and put it towards some immediate want or need. If you’re choosing to put that amount towards your investments each month instead of having it automatically taken out, you’re one lower case “e” emergency from deciding that it would be better not to. And just this month is likely to turn into almost every month, things have a way of coming up.

Removing the possibility by having the money taken out immediately means you will have that income in your investments where they can do far much more good in the long run, and since they aren’t sitting in your normal checking account they won’t tempt you to use them or set off arguments with your partner about how best to spend that money. Long-term investments will benefit you far more in the long run, even if it means things are slightly tighter in the immediate moment.

This regular cycle of automated investment allows you to engage in Dollar-Cost Averaging, a form of stock acquisition that is statistically shown to be far more beneficial than the old buy-low-sell-high method. The reason for this is that the cost of investment is static and doesn’t shift with the ups and downs of the economy. One month your regular investment might buy 15 shares, the next it might by 11, the month after that might be 9. But over a longer period, the average cost per share is reduced, and income is generated steadily. Sure, if you had kept all of that money in hand and bought only when the stocks were low at 9 you might have made more of a profit. But you are just as likely to make a grave error and lose money in that scenario.

Dollar-cost averaging is a way of building wealth that minimizes financial risk because it is relatively unaffected by the ever-changing tides of the stock market. This strategy might seem a tad counter-intuitive but if you have a 401k you’re already using it!

  • Speaking of which, you should also put the maximum amount into your 401k, even if it means borrowing to make sure everything is covered after doing that. Just like the automated payments mentioned before, this income benefits you far more in a 401k than anywhere else.
  • If you have children, you should set up regular payments to a Coverdell Education Savings Account. You’ll find that children tend to grow up and apply for college far sooner than you think, and if you don’t prepare for it ahead of time you and/or your children will be saddled with debt that might not have been necessary. More on Coverdell accounts here.

All of these things should be set up to happen with automatic payments, that way you’re building wealth and investment in the future even when a month is particularly tight or difficult. You’re far less likely to spend that money on momentary things if it doesn’t ever touch your hands and goes straight into the investments you’ve made.


# Step 7: Know the Game You Are Playing


If you’re going to invest, you need to understand how the system works. There are rules, players, and there are people who change the rules. Knowing how the game works means you’re far more likely to win, and inversely you’ll be far more likely to waste away your savings if you don’t understand the system before investing.

@Financial freedom SavingsYou should understand compounding, the process of reinvesting interest back into the investment you’re building. This is a basic tenet of investment and is exceptionally important for young people investing for the first time. Investopedia, an excellent resource for investors just starting out, lays out exactly why this is so vital:

  • A 25-year-old who wishes to accumulate $1 million by age 60 would need to invest $880.21 each month assuming a constant return of 5%.
  • A 35-year-old wishing to accumulate $1 million by age 60 would need to invest $1,679.23 each month using the same assumptions.
  • A 45-year-old would need to invest $3,741.27 each month to accumulate the same $1 million by age 60. That’s almost 4 times the amount that the 25-year old needs.

Investing 101: The Concept of Compounding

Being young means you have more time between now and when you need to have money but can no longer work, it also means you have more time to build and compound interest on your investments. The longer an investment’s interest is compounded, the greater the final sum will be.

A second important piece to understand is The Rule of 72. Basically, for most low-return investments it is possible to approximate how long it will take for the investment to double in value by taking the number 72 and dividing it by the rate of return. This rule becomes less accurate the higher the rate of return, but for low-rate investments, this is immensely helpful in determining how long it will take for an investment to duplicate itself (more on that rule here).

If investing is a game, the government is like the game designer who can release updates on the fly that fundamentally change how the game is played. In this way investment isn’t a game like Monopoly or Battleship where the rules are static and unchanging but something more of a mix between Simon Says or Dungeons & Dragons.

In both of those games, the players have to deal with another party that completely determines how things will go, for good and for bad. This is true of the government, which will incentivize or disincentivize certain investments through taxes. They’ll make taxes way too high on some things (capital gains, non-homestead real estate, etc) and give deductions for other things (Mortgage interest, student loans, charitable contributions, certain green initiatives, etc).

To play smart, we have to cater our strategy to the whims of the institution that is in charge. We need to learn the rules and adjust strategies based on that. Why is that? Think back to compounding, if the tax laid on a particular investment takes 25% off of the top of your investment, then you will need 33% more return in order to break even. Whereas if you move that investment to something that isn’t taxed so heavily, you stand to gain more.


# Step 8: Have a Walk Away Number (& A Plan to Reach It)


What is the point in all this number-crunching and work if you don’t have a goal? Too many people in life scramble for more and more forever without actually recognizing when they’ve achieved enough to make them satisfied. Pick a number that you want to set as your goal, the amount of money you’re happy to live off of and be free of care with. That number can be ridiculously high, but it needs to be specific.

Once you’ve got that number, now you have a goal to structure your plan towards. You need to have a goal because that will tell you much to save and invest to reach it. Instead of a fantasy saying “one day I’ll have enough money to be happy,” you have an actual end total and then life and investment become an algebra problem you solve to reach that total.  

Don’t assume that everything will be okay, money is the last thing we should put our heads in the sand about. Set a goal that firmly shows you where you want your life to be and make a plan to get there.

You don’t need to have a plan immediately, but you really need to understand the number. Is that a residual total that you’ll live off of in retirement? Is it a goal of monthly income to continue working with? How much do you want by when, and why do you want it? It is far easier to make sacrifices for good financial planning if you know why you’re sacrificing. If you know what it is for, you’re far more likely to take the hard steps to get there.


# Step 9: Create Access to Liquidity


It is important to be able to access a good sum of cash quickly, for a number of reasons. If a mind-blowing investment opportunity presents itself, or if something horrible happens to you or a loved one you need to be able to quickly get the money together to make things happen. Here are a few different ways to have access to your cash quickly:

    • Emergency Fund – most financial advisors say a good emergency fund covers three months of expenses, but you can adjust the total to whatever makes you feel comfortable. (note: if you’re investing in the barbell strategy from point #2 you already have this cash sitting around ready to be liquidated in a pinch)
    • Equity lines against your house or assets – having assets like a home or rental properties gives you a certain amount of access to credit, which means you can leverage this towards whatever need springs up. Don’t be frivolous with this as it can backfire, but taking credit and investing it into an opportunity that gives returns beyond what you’d have otherwise is the way many people have built wealth.
    • Good Old Fashioned Credit Cards/Other Lines of Credit – You can almost always just use a credit card, but this comes with its own set of risks. If you default on a personal credit card your assets become a target, so it is best to establish a business line of credit if possible (That’s an article for a different day). It is always important to remember that fast lines of credit like most credit cards have steep interest rates and should be avoided if possible, and paid down very quickly if not.


# Step 10: Live with the Right Wealth Philosophy


Approach your finances from a perspective of abundance, understand that money is actually unlimited. If you want more money, you can invest time and energy to get it. Better yet if you can find solutions to problems that other people have they will be happy to compensate you. Finding evergreen sources of income is best; things like songs, royalties, websites, patents, etc., can give you a greater return on investment because they continue to pay long after you completed them. So if you’re pursuing a hobby of some kind, keep this in mind and direct your energies toward something that can give back to you in the long run.

@Financial freedom MentoringMake sure you take time to give back. Someone helped you get where you are today, someone gave you time and money to get started. In terms of giving – mentoring someone is going to help far more than merely giving money away, remember money is infinitely accessible, time and energy are precious. Ideas and massive action, not loads of money, can change the world (when those ideas get loads of money, of course, but you need the idea first).

Give your time to someone who is where you were ten years ago and help them to succeed. You’ll find that the exchange ends up benefiting you as well, being in relationships with younger people who are farther behind you on the road to success can help bring perspective to how far you’ve come, and also there’s a good chance they might see some new opportunities that you might have missed otherwise.

This next piece might deserve its own point entirely but 10 steps sound better than 11:

You cannot take material wealth with you.

Just having all the money in the world will not make you happy, it will not make you satisfied or well-adjusted.

So spend that money on what will make you happy, invest in relationships and experiences that you’ll treasure far more than a nice home or a fancy car.

As you’re in the midst of working to create financial freedom for yourself, don’t forget why you set out to get it in the first place. Enjoy nature, adventure, and the people you love. After all, that’s what the money’s for, isn’t it?

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