Even our conceptions about what being wealthy looks like are mostly wrong. Fancy cars? Sprawling houses? Nannies and second homes and $10,000 refrigerators<\/a>? As a culture, we\u2019ve bought into the mythology preached by reality TV.<\/p>\n A third of Americans live hand-to-mouth. Not so surprising\u2014until you learn that over two-thirds of them are middle-class or richer<\/a>. It\u2019s even worse among Millennials earning six figures, 44% of whom live paycheck-to-paycheck<\/a>.<\/p>\n These rat-racers, desperate to keep up with the Joneses by showing off luxury cars and oversize homes, often have no financial security.<\/p>\n \u201cWealthy\u201d is not only a vague term; it\u2019s a useless one because it tells us nothing about what’s going on behind the scenes of a person’s finances. A person can earn $200,000\/year and be broke, living hand-to-mouth. Another can earn $40,000 and achieve financial independence.<\/p>\n Forget the flash. Here are more specific steps, a ladder that someone in the middle class can climb to create true financial freedom.<\/p>\n Those high earners living paycheck-to-paycheck have no financial protection at all. If they lose their job, they are up a gnarly-smelling creek without a paddle.<\/p>\n The working and middle classes can start their climb by building financial protection. First, they need an emergency fund, which can cover 3-6 months\u2019 minimum mandatory expenses.<\/p>\n Minimum mandatory expenses include housing, basic groceries, necessary transportation, and utility (gas, electric, water) bills. It doesn\u2019t include dinners out, cable TV subscriptions, a fancy car, beer, Netflix, etc.<\/p>\n Related:<\/strong> The Secret the Rich Understand About Building Wealth (And No, It\u2019s Not All About Cash Flow)<\/a><\/em><\/p>\n Before creating an emergency fund, first tackle your most expensive debts by snowballing<\/a>. You should have a $0 balance on your credit card debts at the end of each month.<\/p>\n It\u2019s easier to reach financial protection with lower expenses\u2014it leaves with you more of your paycheck to save, and your emergency fund doesn\u2019t need to be large. Just imagine how quickly you could get there if you lived on half your income<\/a>!<\/p>\n Beyond an emergency fund, insurance matters too. Financially protected families carry health insurance (of course), but also disability and life insurance if the household is dependent on one earner.<\/p>\n Emergencies happen all the time. Build a financial buffer to protect yourself from the next one\u2014not for\u00a0if<\/em> it comes, but for\u00a0when<\/em> it comes.<\/p>\n When a family can cover its minimum mandatory expenses with income from their investments, they\u2019ve reached financial security. It usually takes years, but once again, the lower your minimum mandatory expenses, the easier it is to get there.<\/p>\n Families build financial security by investing in income-producing assets: rental properties, dividend-paying stocks and funds, bonds. After achieving financial protection, they can start investing aggressively for income.<\/p>\n House hacking<\/a> is a great way to leapfrog there faster. By removing your housing payment from your mandatory expenses, you leave the much lower costs of groceries, utilities, and transportation. With shrewd investments and a lean budget, you can cover these costs in no time.<\/p>\n As you\u2019re pursuing financial security, you should also be investing in retirement accounts. IRAs, 401(k)s, and similar retirement accounts offer great tax benefits and create a diverse second layer of long-term security. These equity-based investments serve as an excellent counterbalance to more immediate income-producers like rental properties.<\/p>\n Being able to cover your minimum living expenses with your investment income is an incredible feeling. It\u2019s the first glimmer of invincibility\u2014you could be fired tomorrow and never work again and survive indefinitely!<\/p>\n But not comfortably. After all, the texture of life is made up not of eating ramen noodles every night, but in being able to travel, to grill up a ribeye, to enjoy it with a glass of Haut Medoc.<\/p>\n It gets easier from here. After reaching financial security, you now have substantial income from your investments. If you can avoid lifestyle inflation, that means you have a huge portion of your income that can go toward even more investments.<\/p>\n Don\u2019t give in to the temptation to go out and buy a ski chalet in Aspen or a BMW M3! You\u2019ll slip back a step on the ladder. Instead, keep building passive income from investments, so that it can cover increasingly more of your total lifestyle expenses.<\/p>\n As more of your discretionary expenses can be covered by your investment income, you’ll reach financial contentment. Which is only a short hop from financial independence.<\/p>\n When your investment income can cover all of your monthly expenses, you are no longer dependent on a job. Not just the minimum costs, but the fun stuff too. Dinners out. Travel. Entertainment.<\/p>\n Congratulations, you\u2019ve reached financial independence!<\/p>\n You can retire any time if you want. My uncle, a financial genius, used to call this \u201cf#%k you money\u201d\u2014you aren\u2019t dependent on your boss, your job, the government, or anyone else. You can tell off the entire world and then go make yourself a cup of hot cocoa, put your feet up, take a nap, and not worry one whit about what anyone in the world thinks.<\/p>\n If you own more than a handful of rental properties, you might want to think about hiring a property manager<\/a>. Or not\u2014maybe you\u2019d rather quit your day job and just manage your rentals instead. But if you quit your day job now, you probably won\u2019t reach the final step.<\/p>\n Up until now, you\u2019ve stayed disciplined, maintained a tight grip on lifestyle inflation. Sure, you enjoy some traveling, and you like eating good meals sometimes. But as you\u2019ve built financial security and independence, you\u2019ve still had to maintain a budget.<\/p>\n The top rung of the ladder means that you\u2019ve graduated beyond that tight budget that\u2019s been so helpful for you. You now have enough income from your investments that you really can go buy that ski chalet if that\u2019s what you really want. Building financial freedom means that you can have just about anything you truly want\u2014and you can afford it.<\/p>\n To come full circle, attaining financial freedom is to truly become \u201cwealthy,\u201d if we have to use that vague, unhelpful word.<\/p>\n Much as I like the ladder metaphor, it\u2019s missing something: momentum. When climbing a ladder, each step takes just as much effort as the one before. But that\u2019s not true in working toward financial freedom.<\/p>\n With each step, it actually gets easier. Instead of a ladder, imagine standing on a bicycle, preparing to ride. The first pedal rotation is hard; it takes a firm stomp of your feet. Your quadriceps scream as you force <\/em>the pedal down. The bike isn\u2019t very stable or balanced at first either, without having achieved spin stabilization.<\/p>\n The next rotation is slightly easier, as you gain a little speed, a little stability, a little momentum.<\/p>\n After a few grinding rotations, you can start upshifting to a higher gear. You build momentum, and eventually, you reach a comfortable cruising speed.<\/p>\n It\u2019s no different as you start saving and investing a higher percentage of your income. It\u2019s no fun to live a modest, low-expense lifestyle while your friends live it up and show off their new Audis and Acuras. But as you trim your expenses down and simultaneously start earning more, your investments will help you start creating true financial protection, then financial security, and one day, you\u2019ll wake up and realize that you are no longer dependent on a job to keep living your lifestyle.<\/p>\n A disciplined person living in a modest house who bikes to work can achieve financial freedom much faster than the flashy yuppie droning on about their country club membership. Forego the flash, create stable long-term wealth, and sooner or later, your spend-happy friends will be asking how you did it.<\/p>\n Isn\u2019t it time we rethought our definition of \u201cwealthy?\u201d<\/p>\n![\"Mans](\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/04\/look-ahead.jpg\" "\\"\\"")
<\/p>\nThe 5-Step Ladder From Middle Class to Financial Freedom<\/h2>\n
Step #1: Financial Protection<\/h3>\n
Step #2: Financial Security<\/h3>\n
Step #3: Financial Contentment<\/h3>\n
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<\/p>\nStep #4: Financial Independence<\/h3>\n
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\nRelated:<\/strong> Stop Swinging for the Fences: How I\u2019m Building a Multi-Generational Wealth Engine the Low-Risk Way<\/a><\/em><\/p>\nStep #5: Financial Freedom<\/h3>\n
Momentum<\/h2>\n
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