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Why (and How) Should I Save?

Giving up your morning latté seems like a drag right now, but knowing exactly why you’re doing it will cheer you up and keep you focused.

The story goes something like this.

You leave school or university (probably with a bunch of debt), and get a job that’ll let you rent or buy a house you’re hardly ever in (because you’ve got to work to pay off that debt), a car (to get to work), and stuff that makes you feel better (about the fact that you’re now always at work). Then, when you’re old and grey, you’re finally have some time off (cos, retirement) to do what you want with your life, but boy-oh-boy, you’re old.

Sound familiar?

Most people blindly accept this as the only way. They leave school, get a job to earn enough money to survive adulthood, and next thing they know, they’re 60 and retiring, but haven’t really lived. Of course, life doesn’t end just because your job does – this is when you’ll need to use the funds that you’ve hopefully set aside for your retirement (in a pension scheme or retirement fund).

But what if there’s another way? We’ve already touched on the idea that being wealthy is about achieving financial freedom. And the key to becoming financially free is growing a passive income.

So, what is passive income?

It’s money you get for doing nothing or very little (minimal effort), as opposed to active income, which is regular payment for work you do (lots of effort). Your monthly salary is active income. Money you get from renting out your extra room, or royalties for a book you published, is passive income.

The problem with active income is that it’s linked to your time. As long as you’re working, you get your salary, but if you stop working it dries up. So to keep earning, you need to keep working. And, you can’t keep working forever, because eventually you’ll just be too old to work, but still very much alive.

Passive income is a way to keep money coming in so you can free yourself up to do something else. Like… literally anything you want (or nothing at all).

How do I get passive income?

You get passive income from owning good assets.

Good assets are things that grow your wealth, either by creating income (like a house you rent out), or increasing in value over time (like the house itself). The opposite of a good asset is a bad asset, like a car, which gets less valuable the older it gets and which costs you money to keep.

We’ve already said that the first step to financial freedom is spending less than you get paid.

That’s because the best way to get good assets is to save up for them. Once you’ve started generating passive income, you could even save that and buy more good assets to kick off a virtuous financial cycle (where your money just grows itself).

If you keep it up, you could get to a point where you’re spending less than you’re “passively” earning. And if you get this right, you can high-five yourself, because you’ll have achieved true financial freedom, and you’ll never have to work ever again, unless of course you really want to. You do you.

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