#8 - Design Your Dream Life Through Passive Income

I must confess that I actually plagiarized the title of this post. I haven't done it out of laziness though (maybe just a little bit). I did it because I came across a Ted Talk with the same title on youtube yesterday and I decided that I wanted to write a post about it not just because the title so perfectly conveys some of my thoughts at the moment but because the video itself is so good I wanted to divulge it among my readers and friends. Running at only 15 minutes long, it nevertheless packs a lot of information and is an absolute gem you should check out. Being so brief it doesn't actually go into a lot of detail but it is an excellent concise explanation on why we should be all thinking in terms of passive income. The rest of this essay is an attempt at doing the same thing in a slightly different way and in written form.

Of course if you read the previous 7 posts in this blog you are no longer, unlike most other people, a stranger to the wonders of passive income. You know what passive income is and why it is valuable and if you don't, just go back and reread the previous posts and you soon will. So I won't repeat the things I wrote in those previous posts and I won't bother you with a long explanation of what passive income is. The purpose of this post is rather to, like Alex in his brilliant speech, to delve a bit on what passive income can do for us and how it can change our lives.

It doesn't matter where you live, passive income can change your life. To receive money regardless of having a job or not is akin to financial independence which in turn is akin to real freedom. The truth is that the majority of people in the world are slaves to the demands of money. They are utterly dependent on the financial security their jobs provide them with. Unfortunately though, that security comes at a high price. That price is often renouncing to many of the things in life they truly enjoy.

Passive income allows us to think in a way mostly only children can afford to think in in our world today. What would you do, who would you like to be, if money wasn't an issue? The reason this question probably sounds childish to most people is because they immediately associate adulthood with the many constraints money often places upon the vast majority of adults.

The great thing about the financially educated individual however is that, by educating himself, he can distance himself from that limited way of thinking and embrace other, superior, alternatives. By creating permanent sources of passive income the financially educated individual can subvert the normal rules of society and break the chains that once bound him to society's implacable human chain of production. He is no longer the slave of money but instead makes money his slave. He is transformed from slave into master through financial education and the creation of stable sources of passive income.

As Alex Szepietowski says in his brilliant speech, there  are several forms of passive income generation. He mentions options such as network marketing, affiliate marketing, owning a business or setting up a business within Amazon but, just like myself, he ultimately decided that the best single way to generate passive income was to build a portfolio of rental properties. He wasn't wrong since he amassed a considerable amount of wealth in a reasonably short amount of time by investing soundly in rental properties in England, where he is from.

Alex is just one more person that has believed in passive income and acted on that belief and was amply rewarded for it. Many have done this throughout the years, a great many deal of them because at some point they came in touch with one influential book by one influential investor. Yes, you guessed it, I'm talking about Rich Dad, Poor Dad by Robert Kiyosaki, a book which, by the way, Alex cites as one of his major inspirations at the end of his Ted Talk. So much success obtained by so many people, in so many places, throughout so many years surely can be no coincidence. In other words, this stuff must work!

In fact, to a great degree the primary goal of this blog is to create a community of people who share this very belief and who are willing to act on it in order to create great prosperity and, above all, great lives for themselves. In this sense, there is no concept more important to such people than the one of passive income and all the opportunities that it can provide us with and the freedom that it can deliver us.


online resources, learn with Alex Szepietowski:

Ted Talk

Interview

Website

#7 - The Five Essential Elements of Real Estate Investing

“Now, one thing I tell everyone is learn about real estate. Repeat after me: real estate provides the highest returns, the greatest values and the least risk.” -- Armstrong Williams, entrepreneur


First of all I would like to apologize to all my readers (yes, all two or so of them!) for the huge gap between the last post and this one. As I'm sure most of you already know a lot has happened in my life since then. In the last post I told everyone I had just moved to the United States and that I was prepared to commence a career as a real estate agent and investor and that is exactly what I have done in the past four months since I moved stateside.

In this post, however, I'm not going to get into any details about my personal life or even about starting a career as a real estate agent in the US. I will let that for another post. This time around I want to share with you some information I have acquired in the past months about real estate investing that might be useful to most of you guys out there who are planning, like myself, on kickstarting your careers as real estate investors.

So first of all let me tell you the 5 things you will need to start your career as real estate investors. Those 5 things are knowledge, intent, credit, capital and positive cashflow.

Let's start with knowledge. Now, this is probably the single most important element out of all five, at least in my opinion. Personally, I bought my first two real estate properties at the age of 26 without having a clue about what I was doing. I didn't know anything about finances back then, I had never handled more than a couple thousand euros before in my life, I knew absolutely nothing about real estate other than you can live in it and I was definitely utterly unprepared to become involved in a real estate transaction. Still somehow, in spite of all of that, I decided to buy two investment properties and that was probably the worst mistake of my life so far. Five years later that deal still gives me constant financial and emotional pain. So I'll tell you this, learn from my very costly mistake. Don't do the same thing I did. If you are serious about investing in real estate, make sure you educate yourself first or at the very least make sure you surround yourself with the right people that will teach you and protect your interests and not their own like what happened to me.

The second worst thing you can do is, ironically, the exact opposite of the first one. That is, you can study real estate investing for thirty years but if you never decide to buy an investment property or flip a house, it won't make you a penny richer. I've covered this extensively in the previous post so I won't waste my time, as well as yours, repeating myself. Intent comes down to actually having the balls to make a move when you're finally ready. It means acting. Investing can be scary, but if you want to reap the benefits of it, and they are plenty, you need to be prepared to act at some point, even if that means taking some measure of risk. Intent without knowledge is dumb and dangerous. Knowledge without intent is just useless.

So now that we've covered the two abstract elements on this list, it's time to go over three more "down to earth" elements that you cannot do without if you actually want to buy an investment property. Let's start with credit which is something you truly must have in order to buy a property unless you are already rich. In the past months I've discovered that credit is actually the first thing you must secure if you're interested in investing in real estate, at least in the United States. It doesn't matter how good a deal is, if you don't have a bank lined up to give you financing you will never be able to actually secure the purchase of the property. So credit is a huge deal and, as I have found out recently, it can actually be quite hard to obtain. I will probably write more at length about credit in the future, but essentially the two easiest ways to obtain financing are either having a stable job or having someone that qualifies for the loan to get in the deal with you. If you're unable to do either thing, it is possible that your career as an investor in real estate won't take off for quite a while.

Once you actually have some sort of financing in place people will start taking you seriously. That's when you have to make sure you have the money to use as a down payment for the deal. Unlike what you will hear in lots of videos and blogs online, you almost always need at least some money in the bank to buy an investment property. After the collapse of the real estate market in the early 2000s banks have become cautious and very particular about who they loan their money to (as they should). That means they won't give you a 100% loan on a property no matter what, especially if you are a novice investor. That means you usually  need to be prepared to pay at least a five percent of the total price of the property at the time of acquisition, plus all the other costs associated with buying a house. In other words, if you're buying a $200.000 house, you must have at the very least $13.000 dollars or more in the bank to use for the down payment and buyer costs.

It is only after you secure all of the aforementioned elements that you will actually be one hundred percent ready to buy your first investment property. In order to do so, however, you will now have to identify the right property to buy. I will definitely go into more detail about that in future posts, however at this time I want you to understand that the single most important thing about a specific deal is the property's cashflow. Had I understood this before starting my real estate investing career five years ago, I would have saved tens of thousands of dollars. So, once again I tell you, learn from my mistakes not yours! This will save you a lot of money. I will write extensively about finding the best deals in further posts but for now I only need you to understand that whatever property you buy, it must have a positive cashflow. That means the property has to put money in your pocket every month. In other words, the rent you get from the property must be superior to the costs associated with it, including its mortgage payments. Basically, if you have to take money out of your pocket and put it into a property every month, that property is not an asset, it's a liability. If you want to be financially independent you will want to buy assets and avoid liabilities at all costs. If you still don't know this by now I emphatically encourage you to go back and read the previous posts or, even better, play the cashflow game online or read Rich Dad, Poor Dad by Robert Kiyosaki.

#6 - Going All In

 This post will be somewhat different from the first five I wrote in this blog. So far, I've been trying to share with you the amazing financial knowledge I've been able to acquire by reading some of the best resources out there on financial education. This time around however, I would rather just reflect on how this knowledge should be put into use in real life and, in this sense, I will take a moment to discuss my own personal situation at the moment.

Basically, the most important notion I want to share with you today is that I don't want you to just read this blog, I want you to act on it! This project is not so much about theory as it is about making a real difference in people's lives, in your lives. Most people live their lives in ignorance in what comes to finances and this keeps them in an imperfect financial situation. These same people could be doing so much better if they decided to acquire some financial education and were willing to act on it!

This week, I just want you to think about what you are wiling to do with the information I shared with you in the first five posts. Will you ignore it? Will you just read it once and think about it? Are you going to educate yourself further on this field? It is time you make a decision about this. Most importantly, I want you to decide if you will use this knowledge to change your life or not. If the answer is no, you might as well stop reading this blog now. If, on the other hand, the answer is yes, it is time to truly believe that you can use this knowledge to achieve financial independence and begin your path towards it!

I've said in the past that knowledge leads to power but this is not entirely true. The truth is that knowledge only leads to power or prosperity when you act on that knowledge. So reading this blog alone won't do much for you. If you just read about finances you will essentially be wasting your precious time. In order to really improve your life you must read, learn and then, and this is the most important part, you must apply what you've learned! That's when your life will start to change. As such, there will come a time, sooner or later (hopefully sooner) when you will have to stop reading, or procrastinating, and take decisive action. You will have to go all in! Don't be scared, just do it. Remember, all the knowledge in the world will be useless until you do this.

The point of this blog is not just to share theory with you. I believe that there are much better resources out there if you truly want to learn about finances and therefore improve your financial situation. In the previous posts I have already shared some of those resources with you and I will continue to do so in the future. The real point of this blog however is to put all the theory  from these blogs and websites to the test. I will serve as your guinea pig by sharing with you my experiences in the world of money. I will put all the theory to work and tell you about it. So it's up to you to decide if you wanna come into the arena and play as well or if you just want to watch from afar as a mere spectator. However, you must remember that, in the world of investments, like in any other game, you can only win if you decide to play.

I said before that you will have to take a leap of faith and take decisive action if you really want to succeed in this world. I'm happy to say that I've finally decided to do just that. I mean, I've been an investor in some way or another for about five years now, but I was never one hundred percent committed to it. That has changed. About three weeks ago, I moved to the United States and I intend to make a living here by working and investing in real estate full time. My plan is to earn money as a real estate agent and as a real estate investor. This is how I intend to become financially independent.

In the future, I will continue to share with you all the financial knowledge and financial resources I can master so you can become financially educated people. However, I will also be sharing with you my experiences as an agent and an investor in real estate. I intend to put all the theory I've learnt so far to practice. I'm all in now. I've decided to take all the risks and collect all the rewards. You can learn from my mistakes and my successes by reading this blog. Yet, above all, I hope you too decide to go all in and join the fight for financial independence. I hope that, this way, we can become rich together!  

#5 - A Crash Course in Financial Literacy; or A Roadmap to Financial Independence

“It is better to have a permanent income than to be fascinating.”

Oscar Wilde 

I. Introduction 

Most people’s biggest financial problem is their lack of financial education. In this blog, my intention is to share all the knowledge I’ve acquired in the last five years through personal experience and the study of financial books so you don’t have that problem. In fact, I can guarantee that if you read this blog you won’t have that problem although you might have other ones since knowledge alone does not lead to wealth. What we do with the knowledge we acquire is what really makes the difference between failure and success.

This will be the most important post so far because I will deal with financial statements which are the base of financial knowledge and success. In fact, until you can write and read financial statements, you don’t really understand how money works. Fortunately, this will no longer be a problem for you, since this post, if I do my job right, will teach you how to read and write financial statements.

II. Income Statement

A basic personal financial statement has two main parts, and each part is divided into two columns. The first part is the income statement, which is something most people are somewhat familiar with. An income statement has two different columns: the income column and the expenses column.

Your income column is composed of all the money you make every month. For the average poor or middle class person, this column will only have one item: his or her salary. This is because, for the vast majority of people, their income is equal to their salary or some other form of active income. For liberal professionals such as lawyers or doctors, their income might actually be a sum of fees paid directly to them by their clients. For sales people, their income will usually be the sum of a base salary and the commissions they were able to earn that month. All these types of income are active income, which makes up the totality of most people’s income altogether.

However, if you read the last post, you know that there are two essential types of income: active income and passive income. Most rich people will have both types of income in their income column and some will only have sources of passive income and no active income at all. There are several possible sources of passive income: rental properties will produce income in the form of rent. Stocks and bonds will provide you with dividends, usually on a quarterly basis. Business owners receive income generated by their businesses. Both active and passive forms of income are good since they put money in your pocket, the difference is that you don’t need to work for passive income.

The second column in an income statement is a lot less pleasant. Everyone is familiar with this column to some extent, they just aren’t accustomed to put it into writing. I’m talking, as you might have already guessed, about the expenses column. Everyone has expenses. Usually, those expenses come in the form of accommodation, clothing, food, leisure, transportation, utility bills, communication and other life expenses. Each of these different expenses should constitute an item in your expenses column and the sum of all of them will constitute your total expenses figure.

After you have exact figures for your total income and your total expenses, you can see how well you’re doing financially by determining your cashflow. Your cashflow is essentially how much money comes in or out of your pocket each month. You’ll always want to have positive cashflow, that is, more money coming in than going out. Cashflow is the most important word in personal finance, so always keep it in mind.

People generally associate a large income with great financial success but this is incorrect since what really matters is not how much you earn, but how much you keep at the end of the month. If you only look at someone’s income column you’re only getting half of the picture. If you want to draw any meaningful conclusions about a person’s or a company’s finances, you really need to look at the whole picture. Remember, an income statement is composed of two columns: income and expenses. It is only when you compare the two that you understand if someone is financially successful or not.

If you want to be financially independent you have to stop thinking as most people do. Most people tend to react to an increase in their income by increasing their expenses proportionally. As a result, their net income (total income – total expenses) tends to remain always dangerously close to zero. As a matter of fact, in some cases, people’s net income decreases even if their income increases. That’s because the more money they make the more willing they are to spend a lot of money in unnecessary things like big houses, expensive cars and luxurious consumer goods.

A financially savvy person, on the other hand, knows that cashflow is king. That person is always looking straight at the net income figure (total income – total expenses). Almost no one becomes truly wealthy by just producing a great income. In order to become wealthy one needs to produce a considerable positive gap between income and expenses. Make a lot of money and spend a lot less money than you make. Save and invest the difference. That’s the formula for success and that’s how you have to shape your income statement if you’re serious about becoming financially independent. You don’t want to look rich by having a Porsche and living in a huge house. You want to be financially free and never have to work on something you hate ever again in your life.

III. Balance Sheet

As important as the income statement is, however, it is certainly not the whole picture. Actually, it is only half of the picture. The other half is called a balance sheet and, just like the income statement, it is divided into two columns: the asset column and the liabilities column.

Let’s begin with the asset column. In last week’s post I already talked about assets and explained why they are so important. In fact, assets are essentially like money-making machines since they create passive income for you. As Robert Kiyosaki would say, assets put money in your pocket. Examples of productive assets are: real estate, stocks, bonds or private businesses. Hopefully, those assets will be producing money for you on a monthly or quarterly basis.

Assets, however, can also be of a non-productive variety. That type of asset won’t necessarily put money in your pocket, but they possess a certain market value. In other words, you can still sell non-productive assets if you wish to do so and receive a considerable amount of money in exchange for them. Examples of non-productive assets are: precious metals and stones, commodities such as oil or natural gas, raw land or even currencies such as dollars, euros or British pounds. These assets, even though they don’t put money in your pocket on a regular basis, can be sold at any time in exchange for money. As a result, they contribute to increase your total assets value, which is the sum of the value of all your assets (productive and non-productive) combined. 

Your liabilities column, on the other hand, is an inventory of all of the things you owe. It’s a picture of your debt to others. Examples of liabilities are: private debts, credit card debts, mortgages, consumer debts, car loans or tuition fee loans. As a general rule, you want to have as few debts as possible because debts usually have to be paid sooner or later, and that means money coming out of your pocket. In other words, whereas assets tend to increase your income, debts (liabilities) tend to increase your expenses. There are, of course, some exceptions to this rule, since some types of debt are good. However, most debts are bad, and those are generally the debts most people have. Generally, all the following types of liabilities are bad and should be avoided: credit card debts, consumer debts, car loans, boat loans and private debts such as asking money to friends and relatives. There are debts that might be desirable at times, debts that actually put money in your pocket, but that will be the subject of another post.

For now, let us establish that, as a general rule, one must accumulate as many assets as possible and contract as few debts as one can. The objective is to achieve a great total assets value and have a small or inexistent total liabilities value. The final and most important number in a balance sheet is what we call net worth, which the total assets value minus the total liabilities value. Essentially, the higher that number is, the richer you are.

IV. Conclusion

So now that we’ve covered the different sections of a personal financial statement, I believe we are in a good position to track the essential elements that lead to durable wealth building and financial independence. At first sight, one may conclude that the most important part of a financial statement is the income statement. After all, everyone’s primary concern is to pay for one’s key monthly expenses, such as accommodation and food, and the way to do that is to generate enough monthly income. However, things get a bit more complicated, and a bit more interesting I might add, when we start looking deeper into the nature of income.

Even though active income is mostly unrelated to one’s balance sheet, this is definitely not the case of passive income. In fact, there is a very intimate connection between one’s passive income and one’s asset column, since one’s passive income is entirely generated by one’s productive assets. Therefore, we must conclude that the more and better productive assets one can accumulate, the higher passive income one will be able to generate. This establishes, to a considerable extent, a relation of cause-effect between balance sheet and income statement. Thus, if one wishes to achieve financial independence, one must acquire enough productive assets in order to generate a sufficient passive income. This, I believe, is the path to financial freedom and it requires at least some knowledge of personal finances as you can see. 

As a way of concluding this essay, I want to direct you to some easily accessible resources that will help you understand these concepts more clearly and in more depth. Firstly, I want to recommend that you read Robert Kiyosaki’s seminal book Rich Dad, Poor Dad. I’ve already recommended that book before but if you still haven’t read it you absolutely must if you’re serious about becoming financially independent or even just financially literate. If you like this essay, you will like that book even more! Secondly, and perhaps most importantly, I want you to play Robert Kiyosaki’s board game, which is called Cashflow. You can easily play it online and you can do so completely free of charge.  I’ve played that game dozens of times and I emphatically suggest you do the same. The game is a simulation of real life and it’s a great opportunity for you to learn and use the concepts outlined in this essay in a fun and intuitive way. Trust me, after playing the game a dozen times you will become very familiar with essential concepts such as income statement, assets, liabilities, passive income, cashflow and so on. The goal of the game is to generate enough passive income to cover all your monthly expenses. In other words, you win the game by becoming financially independent. As we have seen, you achieve that by building your assets column.

I think you now have a roadmap to financial freedom, it is your job to use it to get there!


Online Resources:

- Cashflow game: www.richdad.com/apps-games/cashflow-classic

- Podcast on Balance Sheet: www.getricheducation.com/project/52-building-you-how-much-are-you-worth/

- Podcast on Income Statement: www.getricheducation.com/project/53-building-you-whats-your-income-and-cash-flow/

#4 - Declare Your Financial Independence !

Money is a terrible master but an excellent servant. 

P.T. Barnum

Although this blog is officially about things like money, investments or real estate, it's driving ideal is somewhat more noble and romantic. At the end of the day, it is all about freedom. Financial freedom, but freedom nevertheless. In my fist post I set out to prove that, either we want it or not, we all take part in "the money game". In the second post, I emphasized the need for financial education as a way to perform at a higher level in the "money game". In this essay, I wish to clarify the end goal of the "money game" when it is played intelligently. In other words, I wish to talk to you about a concept called financial independence, which is the only way to achieve true freedom in our economic society.

One achieves financial independence when one does not need to work anymore in order to pay for one's living expenses. This is how most rich people live. It is not how the poor or the middle-class live. In fact, for most people in the low and middle-classes, financial independence is little more than a mirage or a crazy notion. It is hardly a serious consideration in their lives. I want you to think differently from them. Financial independence is a real thing. Many people in the world are financially independent, so why shouldn't you be? Set it up as one of your goals and you have a good chance of attaining it if you are willing to think and act as a rich person. Think, act and become financially independent.

Some people might ask why should they even want to become financially independent. After all, there is an entrenched notion in the poor and middle classes that we should always work for our money. To them, the only time it's okay not to work anymore is when they are old and ready to receive a retirement pension from the state. This makes perfect sense to them. I must confess it doesn't make quite as much sense to me. In fact, the idea of spending my whole life working for money truly bothers me.  I don't want to be a life-long slave to a job or even to the necessity of having a job. I don't think that is real freedom. If you are always obliged to structure your life around a money-making activity that takes up most of our time, are you really free to pursue your true interests and goals in life? In my case, I don't think so. it's for that reason that I decided to make financial independence a primary goal in my life. I don't think I have a moral obligation to spend the best years of my life helping someone else get rich. I much rather work towards achieving my own financial independence.

In order to achieve financial independence, you must learn to think differently than most people. You have to stop thinking as a poor or middle-class person and start thinking as a rich person. The financial vocabulary of a poor person or a middle class person is composed of words such as: salary; boss; work ethic; 9 to 5; retirement age; retirement pension; safety; unemployment; wages; getting paid; paying bills; work to eat; vacation; holyday; weekend; Sunday football; mortgage; credit card debt; 10 dollars per hour; benefits; seniority; 20 dollars per hour; job stability; etc... These words define the poor and middle classes.

The rich, on the other hand, have very different words. Their words are: financial freedom; financial independence; passive income; assets; liabilities; financial statement; financial literacy; investments; interest rate; equity; return on investment; appreciation; capital; inflation; deflation; p/e ratio; income statement; balance sheet; compound interest; or infinite passive income, among other terms. Now notice that most people don't even understand most of these words and that is why they will probably never be rich. If you want to become rich these words will have to become a part of your financial vocabulary. These are the concepts that make the rich, rich, just like the concepts in the previous paragraph are what makes the poor, poor and the middle class, middle class. Our thinking patterns define us. Our words shape us. Think and talk like a poor person and you are guaranteed to remain poor. Think and talk like a rich person and you might just become rich too.

So, if you're serious, like I am, about achieving your financial independence, you must locate and master the concepts that will lead to it. Thus, you must understand that working for money is not the way to wealth. If you want to be financially independent, you must learn to make your money work for you. Or, even better, make other people's money work for you.

In order to do that, you will likely have to change your thought process in all things related to money. This is the financial equivalent of when Neo is offered the chance to see a new reality beyond the matrix. You have the choice to stay poor or middle class or embrace a new reality and see the world as rich people see it. This is the choice you must make now. If you want to change, than you should keep reading. If you want to conserve your poor/middle class mental framework, then this blog is not for you. You can stop reading now. 

Ok, since you are willing to continue reading, it's because you're probably interested in changing the way you think about money and start your journey towards financial independence. In order to do that, the first thing you must do is change the way you think about money itself. Most people see money as a thing they would like to have so they can spend it. Rich people, however, see money in a very different way. To them, money is a commodity they wish to gather and accumulate as much as possible of. Poor people want to spend a lot of money. Rich people want to accumulate a lot of money. That's a huge difference!

Rich people want to accumulate as much money as possible, not spend it, because they understand, unlike poor people, how money works. Money is not just something you can use to pay for your bills and a variety of luxuries. Poor people and middle class people see money simply as a currency, as means to achieve an end. To many of them, the highest use for money is to go to Disneyland, buy expensive clothes, live in a mansion or a penthouse or build a collection of sports cars. Even if, by a matter of luck, they ran into lots of money, like some famous athletes, musicians or actors, the truth is that they would still think essentially as poor or middle class people. They would continue to look at money as something you spend. The more money you have, the more you spend. I mean, if you look at middle class families you will realize that whenever they get a raise or a better paying job they spend all that extra money on a bigger house, a better car, luxurious vacationing or in luxury goods such as a huge flat screen TV or a boat. This is not how rich people deal with money and that is why middle-class families very rarely transition into rich families. They might even earn enough money for a while, but they don't possess the right mindset. As far as money goes, they remain uneducated.

The difference between rich people and poor people is that rich people recognize the ability money has to generate more money. They see each dollar or euro as a little soldier or worker ready to work for them and make more money and recruit more little soldiers and workers. If you manage to keep money, instead of spending it straight away, you can put it to work for you and, if properly trained and commanded, your money can make you loads of money, a lot more money you could ever make by working yourself. This is why rich people make their money work for them while poor people and middle class people choose to spend most of their time working for money. When  a poor person sees a pile of a million dollars what he sees is a bunch of sports cars. When a middle class person sees a pile of a million dollars,  he or she is seeing a nice single-family home, a big, comfortable, safe BMW and a nice boat to go sailing on the weekends. A rich man sees a million dollars and what he's really seeing is an army of little workers who will pay for his immediate retirement. He sees freedom.

Now you will probably be wondering how you can make your money work for you or, in other words, how can money generate more money. The answer to this question is passive income. There are two essential types of income: 1) Active income which comes from one's labour, usually in the form of a salary; and 2) Passive income which comes from one's assets, who generate money without the direct intervention of their owner. Passive income is how money generates more money. It is also the primary form of income of the majority of wealthy people. Some examples of money generating assets are stocks, bonds, real-estate or businesses.

In reality, achieving financial independence is just a matter of accumulating enough money-generating assets, which will in turn generate enough passive income to pay for all your expenses. That is, if you can accumulate assets capable of generating enough passive income to cover for all your expenses every month, and as long as you can maintain those assets indefinitely, what you will have is infinite passive income, capable of supporting you for an infinite number of years. When that happens, you will never be forced to work for money again. You will be financially independent. You will be free to choose whether you want to work or not and what you want to work in. You will never have to spend most of your time doing something you don't like just because you have bills to pay for. Your assets will cover the bills, they will buy your freedom.

Obviously, acquiring assets capable of generating enough passive income to buy your financial freedom is not an easy task. It will take time and effort. You will have to put in the time to study finances and get to know the different markets for financial assets. If you are unwilling to make such an effort, I recommend you make this post the last one you read in this blog. If, however, you are wiling to work hard for a number of years in order to buy your financial freedom, please keep reading this blog every week and don't stop there! Read the best books out there on personal finances. Work harder to generate income. Save money every month. Take the money you save and put it into investments. Start buying assets. The more you buy, the faster you buy, the better. Learn as you go. Learn from your mistakes. Buy your first bond. Buy your first stock. Buy your first rental property. Start a business. The art of asset accumulation is the art of getting rich. Make today a great day, make it the day in which, at least in your mind, you declared your willingness to achieve the goal of financial independence. Make it your goal to: 1) buy assets; 2) generate an increasing amount of passive income from those assets and; 3) declare your financial independence! Let other people work for their money and make sure you start making your money work for you!   

#3 - The Compound Effect

“The real cost of a four-dollar-a-day coffee habit over 20 years is $51,833.79. That’s the power of the Compound Effect.”

Darren Hardy

I've always regarded self-development books suspiciously, at least until I actually started reading some of them. The reason I started doing so is that there is often only but a thin barrier between the fields of personal finance and personal development. (This applies both to the literature on those subjects and to life itself.) In other words, becoming rich is often the end result of a process of personal development just as much as it is a consequence of financial education or hard work. This symbiotic relationship between the two fields finds a perfect illustration in the book Think and Grow Rich by Napoleon Hill, which shows how our thought process deeply conditions the success we achieve in life, economic or otherwise. Think and Grow Rich is both a great personal development book and a brilliant treatise in personal finances and has helped millions of people achieve great success in life. In fact, in the future I might dedicate an entire post to Napoleon Hill's seminal work, but this time around I want to tackle another book that can help you succeed both in your finances as well as in other aspects of your life. That book is a modern classic amongst entrepreneurs but is just as much about life in general as it's about business and investments. The title of the book is The Compound Effect, and it was written by Darren Hardy, a former publisher of Success magazine.

In The Compound Effect Hardy presents us with a plan that has the potential to completely change our lives for the better. Although like any other plan it will be wasted on someone unwilling to take action, I believe that if one is willing to put in the necessary time and effort, Hardy's plan has the potential to transform lives. In fact, I came across this book several times whilst listening to interviews with some of the greatest real estate agents and investors out there. This is a very important fact, since several people who achieved massive success in their lives did so partially by reading this book and other similar works. This just goes to show that this book is not just theory or self-help commercial mumbo jumbo. This stuff works, just like all the best self-development books out there also work.

Firstly, I want to introduce the incredibly powerful concept of compounding, something that can certainly be a big help in all aspects of your life if you use it right and is at the heart of Hardy's theory. Basically, compounding happens when you put something relatively small (it can be energy, money, actions, habits, etc...) to work, repeatedly and consistently, over a long period of time. The effect of compounding turns that initial "small something" into a future "big something" through exponential growth which is produced by consistent effort multiplied by a number of days, months or, more commonly, years.

A lively way to see the compound effect in action can be found in the following scenario: imagine I ask you to choose between one of two things. You can either 1) have a million dollars immediately or 2) a simple penny whose value doubles each day for the duration of a month. The vast majority of people has a quick answer to this question: Give me my one million dollars now! Let us assume, nevertheless, that you chose the penny. On the second day, you'll have two pennies. On the third day, you'll have four and so on... by the end of the tenth day you'll still only have 10,24$ which is a far cry from a million dollars, and you will probably start getting nervous... in fact, by the end of the twentieth day you will likely be feeling even more stupid since your money will "only" have grown to 10.485,75$, which is not bad considering you started with just a penny but is still very, very far from one million! Yet, if you waited a little bit longer, things would start getting better fast. By the end of day 25 you would be making 335.544,32$ and two days later you would finally be up, standing to receive 1.3 million dollars and with three days left to let it grow some more. By the end of the thirtieth day you would stand to receive a total of 10.737.418,24$, grown from that single penny on day one, at a daily interest of 100% over a 30 day period! Is it magic? It's a sort of financial magic no doubt, but it's really called compounded interest or compounded growth. It's the compound effect at work!

The example above perfectly demonstrates why compounded interest is one of the most powerful forces in finance and one of the best tools you can use in your quest to become financially independent. In reality, few other things can transform small quantities of money into true fortunes like compounded growth. Study this concept.  Memorize it.  Nurture it in your mind. It can become one of your most powerful allies if you let it. And as Darren Hardy demonstrates in The Compound Effect, it can also be applied to any area of our lives, not just money and interest rates. You can apply the power of compounding to fitness, happiness, sports, friendships, your career or even your love life. The possibilities are endless if you understand the compound effect and put it to work in your favor.

Hardy explains in his book how simple things have massive impact on our lives thanks to the exponential growth throughout time. Things such as small choices, seemingly unimportant habits or our everyday influences, such as the news we listen to, the shows we watch or the people we interact with. Hardy shows how, at the end of the day, these little things end up shaping us and defining us as long as they are constantly repeated throughout time. As such, small changes that affect little things can end up having massive results and change us completely due to the compound effect.

Hardy identifies three major categories of things that produce the effect described in the previous paragraphs. These are 1) the choices we make, 2) the habits we develop and 3) the influences we cultivate. He tells us that, by controlling them, instead of being controlled by them, we can create the lives we really want. It is all about being mindful of the things that shape our lives and start controlling them, thus changing our lives in the process.

The interesting thing is that, although such changes to choices, habits and influences are small at first, they will, in time, and due to the action of compounding, lead to major, life-altering results up ahead. It's all about taking action to make a change, sustaining that action through a considerable period of time and letting the compounded growth take place. To give an example used by Hardy in the book, the choice to cut 125 calories from one's diet is a very small change, easily achieved by having mustard instead of mayo on your sandwich or having one less cup of cereal for breakfast. It's really not a big deal and it won't produce much of a difference on the short-term. On the long term, however, if maintained, this habit can have convincing results. Let's say we cut 125 calories from our diet for 31 months (940 days). That's 125 calories less times 940, which amounts to 117.500 calories saved. Since each pound amounts to 3500 calories burned, a total of 117.500 calories saved lead to a loss of 33.5 pounds (15.2 kg) in 31 months. That's a big change that derives from a very small change in one's routine. Even though the action of saving 125 calories in one day is seemingly small, when followed scrupulously throughout a long period of time,  it can lead to major results, in this case, a substantial reduction in one's weight. It is thus evident that small changes in choices or habits can indeed lead to big results overtime thanks to this ripple effect. The only question is, do you want this to work in your favor or against you?

Assuming the answer is that you want to use the power of compounding to your benefit you must harness this power by creating the habits, making the choices and choosing the influences that will lead you, somewhere down the road, to the life you want to have. Remember, small yet meaningful changes can, over time, lead to major results.

After you read this essay, reread it, and then think about it. Really think about it. There are very few tools as powerful as this one both in finances and in life. If you use it right it can make you successful. If you allow the compounding effect to work against you, it will prevent you from ever becoming who you want to be in this world or lead the life you want to lead.

One last thing. Like Hardy says, information without implementation is the start of self-delusion. Knowledge will only work in your favour if you actually put it to use. So do it now! Take action! Go read The Compound Effect by Darren Hardy and then read other self-development books and books about finances and investments. And don't stop there! Apply the concepts you learn in your life. Adopt the right habits. Make the right choices. Choose the right influences. Buy real estate. Buy your first stock or your first bond. Lose weight. Gain some muscle. Become who you wanna be in life. Think, act and grow successful, or die trying... just make sure you really try!        

#2 - Financial Knowledge is Power

“Formal education will make you a living; self-education will make you a fortune.” 

Jim Rohn

The interesting thing about financial education is that you don't realize how bad you need it until you start receiving it. Although I started investing about five years ago, it wasn't until less than two years ago that I truly started investing in my financial education. Needless to say, I immediately realized how foolish and uneducated I had been up to that point.

It is not uncommon to hear someone say that a book changed their lives. However, most times this is actually a gross exaggeration. What people actually mean is that the book had a powerful effect on them or that they absolutely loved reading that book. Even I used to think and occasionally say that books like Herman Hesse's Siddhartha or Eiji Yoshikawa's Musashi had changed my life because they had changed my way of thinking about some important aspects of life. Yet, I can now see that those books didn't really change my life.

I know this because two and a half years ago one book truly changed my life in a drastic way. When I read Rich Dad, Poor Dad by Robert Kiyosaki, I realized how ignorant I had been about money, investments and even life in general up until that point. So the first and most important thing I want to tell you today is this: read Rich Dad, Poor Dad by Robert Kiyosaki! It will transform your world by allowing you to understand money for the first time in your life. I know this is a bold claim, but it's true. If you read the book and don't like it, feel free to tell me all about it, but I don't think that will happen. By the way, Robert Kiyosaki is a self-made multi-millionaire real estate investor, so he knows what he is talking about.  

The main message contained in Rich Dad, Poor Dad is that, although most people are literate, they are also financially illiterate. There is a big difference between the two. Although people know how to read and to write, they can't read or write financial statements, which just happens to be the most important single element in personal finances. And if you can't even read financial statements you don't understand money at all. That is why Robert Kiyosaki is such a big advocate of teaching people financial literacy, a crucial skill that is systematically ignored by the world's many national educational systems. I personally went to school in four different countries and not once was I taught how to read financial statements or, for that matter, any other basic financial skills. This is a travesty and it constitutes a huge handicap in a world where money matters a great deal.

Financial literacy changes lives. Financial knowledge is a key skill. So you have to start learning these things because you sure didn't learn them at school. Read Rich Dad, Poor Dad and then keep reading books about finance and investments until you start to understand how money works. This is the main message of this post.

In fact, when you start educating yourself on the subject of money, you will soon realize that there are thousands of books on the subject out there. Some are good and some are bad, but the more you read the more knowledgeable you will become. This will change your life in a profound way, I promise you. It has certainly changed mine.

I believe in financial education because it teaches us skills of immense value in our society. Reading financial statements is an essential skill that most people in my generation lack. And the sad thing is that they don't even realize how big of a handicap that is. You can learn to read a financial statement in one day and it will deeply change your life for the better, and yet most people will never learn this basic skill. That will keep them poor. Even worse, they won't even realize that they're poor or why they're poor. They will keep looking at rich people and thinking they got to where they are because they were born wealthy or because they're dishonest or both things. They will distrust and envy rich people and they will remain poor or middle class. Becoming rich is not easy; you don't do it in a day or a month or even a year. It takes time and effort, and it also requires plenty of knowledge. That's why I'm educating myself and that's why  I think you should start doing the same.

#1 - Money Matters

“A wise person should have money in their head, but not in their heart.” Jonathan Swift

In the world we live in everybody needs money. We need money to ensure our very survival. We need money to fulfill our most basic needs such as food, water, accommodation or clothing. Without money, none of these very basic needs can be met. But we also need money to fulfill all of our other needs, such as healthcare, education, transportation or even leisure. We live in a society where virtually nothing can be accomplished without money and this is why no one can ignore money after reaching a certain age. It's always there in one way or another. Let's just say it now and be done with it: money is important. Money is very, very, important...  

I know that what I just said is painfully obvious. However, even that being the case, I must confess that, until relatively recently, I hadn't been able to fully grasp this simple and obvious truth. In fact, for most of my life, I regarded money with disdain. I truly believed I was above such a thing as money. I was more concerned with the higher things in life, such as metaphysics, ethics, history, politics literature or cinema. Money did not seem worthy of my attention. It lacked the nobility, the elegance, of other, more important, matters.

It wasn't until about five years ago, when I graduated from university, that I started to fully understand the pivotal role of money in society. In other words, it wasn't until I stopped being financially supported by my family that I realized how important money is. In fact, I quickly realized that, unless you can make enough money to support yourself every month, everything else quickly becomes unimportant, since you start having trouble meeting your fundamental needs such as food or accommodation.

The truth is that either we like it or not we live in a capitalist society where money is at the very base of the social structure. Every adult who wishes to lead an independent life needs to make money somehow. This is the harsh reality people face when they finish their studies and stop being supported by their families. In fact, a consequence of this reality is that the vast majority of adults in the world today are forced to structure their lives in such a way as to produce enough income to cover their monthly expenses. In other words, most adults exchange most of their time for money. We call this process "working" or "having a job". In fact, the normal status for an adult these days is precisely to be an active worker, that is, to have a job. This usually means working for another person or for a corporation, which ends up being almost the same.

My case is  strange since I'm thirty-years-old and I've never had a job.  Yet, in spite of never having had a job, I have been able to support myself for almost five years without asking anyone for money. I've done this by investing my money, which has allowed me to produce enough income to cover my expenses in these past years.

I got into the investing world by chance, since the only thing I did was run into an investor who showed me the world of financial investments. If it hadn't been for him chances are I still wouldn't know anything about investing, just like most people that are my age and even older. I decided to start this blog in order to share what I've learned so far with those very people. I hope that, through this initiative, I can contribute to improve people's financial knowledge and their prospects in life as a result. I also hope to refine my own knowledge through writing about these subjects on a regular basis.

I must state that, in spite of having been an investor for almost five years now, my knowledge is still extremely limited and I'm sure there are millions of investors out there who are  more knowledgeable and much more successful. Therefore, my contribution can only be a small one, yet I believe that it can be valuable to the extent that I can raise some awareness to the often overlooked fact that there is a world of financial knowledge and prosperity out there waiting to be discovered. If money is so important, as we have seen in the beginning of this essay, shouldn't people dedicate some time to learn about how to make more money with less effort and less time?

The truth is that having a job is not the only way, or even the best way, to make money. I'm not saying that people shouldn't have jobs, what I'm saying is that there are other options worth being explored. Most importantly, if we admit that money is an essential element in our lives, I believe that it makes perfect sense to take some time to understand  how it truly works, since this can lead to more money and more free time and better quality of life as a result. Even though I consider myself an investor, I'm certainly not an expert. I'm just someone who is willing and eager to learn more about the world of money because I believe that this is very important in our day and age. If you agree with me on this, learn with me and from me by reading this blog. Welcome to the Investor's Den, a place of discussion for investors and anyone else who wishes to learn more about money.