Editor’s note: This article was first published in August 2010; the figures in its examples, including a €1,500 starting salary, a 2.5% six-month deposit, an 8% guaranteed fund and €450 rent, are from that year. The investment returns described in this story are one person’s account and are not typical. Buying shares on the basis of non-public information about an upcoming takeover is insider trading, which is illegal.
In the previous article we saw a practical example of what most people do, and why they never achieve financial freedom. If you have landed directly on this chapter, I suggest you first read the previous one here and then come back to this one. That way this other story will make more sense. How do you start down a path towards financial freedom?
This is the story of Pedro. Pedro was even poorer than Eduardo, the young man in the previous story, so much so that he had to combine his studies with work to help his family financially. Pedro and Eduardo were even classmates at university.
While Eduardo went out partying on Friday and Saturday nights, Pedro worked behind the bar of a pub every weekend. He had no time to go out because he was working. Pedro was worn out and tired of studying and working, so in his free time, which was scarce, he spent some of it studying finance and trying to understand money, looking for a way to get rich and not have to work so hard.
That did not stop Pedro, every month, after handing over part of his pay at home, from putting €100 into a savings account without fail. When he finished his degree, the same year as Eduardo and at the age of 24, Pedro had €5,765 in his savings account. His savings came to €5,500, which had earned him €265 in interest: not much, but enough to learn that money makes more money.
Pedro joined the same company as Eduardo, on the same salary, €1,500. He needed a car, but did not want to take on payments the way Eduardo had. He bought a second-hand car for €3,100, which he paid in cash from his savings. Pedro’s €1,500 was free of expenses, except for the €300 he kept giving at home.
Pedro began his financial planning: every month he put €800 into an investment savings fund with compound, guaranteed interest, and kept putting €100 into his savings account. After two years, Pedro’s financial position was as follows.
In the fund:
- Investment fund: €17,600
- Interest: €1,408
- Total: €19,008
In the savings account:
- Savings account: €5,065
- Interest: €123
- Total: €5,188
Total across his accounts: €24,196.
And he still has his €1,500 salary.
Now, like Eduardo, Pedro meets a girl and starts a steady relationship. It is not that he doesn’t take her out to dinner or to parties, but he does so bearing in mind that he can spend at most €300 a month, since the rest of his salary goes to his savings account and his investment fund, and he still contributes financially at home.
Pedro follows a financial plan without straying from it, and he is now ready to continue his financial education.
Pedro withdrew €10,000 to invest in five-year government bonds and another €10,000 to invest in the stock market over the medium term. In six months he turned his €10,000 into €19,200, thanks to selling his shares at the right moment during a rise.
He looked for ways to take part in businesses as a small shareholder, with a new investment of €7,000 in small lots of diversified shares, and in stakes in some companies that Pedro knew beforehand were going to rise in value because they were in the process of being taken over by large companies. He invested €8,000 in those companies.
He placed another €10,000 in a six-month fixed-term deposit at a bank, at an interest rate of 2.50%.
At the age of 27, Pedro’s capital was €75,349, not counting the €10,000 he had invested in government bonds, which gave him income every month.
Pedro kept his job, but he was now aware that he earned more money with his money than with his effort at work. He kept investing, putting his money to work in the stock market, bank deposits and investment funds, not counting the money he still kept in his savings accounts, which also earned him interest.
The time came to get married. Pedro did it at the registry office with only his closest relatives, without a big wedding. They found a flat to rent for €450, which Pedro called “My Love Nest”.
The rent does not hurt his finances at all, since he shares expenses with his partner. He advised his father on finances, and his father no longer needs money from his son: thanks to Pedro, he now has an income of more than €430 a month on top of his pensions.
Today Pedro is 33 and has capital of €347,500. He owns three small businesses, is a shareholder in four large companies and an investing partner in five business projects. He bought an old house and renovated it to rent to students. He still lives in a rented home and has two children, aged three and a year and a half, so his love nest bore fruit.
He left his job to devote himself fully to his businesses and investments. One of his businesses earns him €1,300 while he sleeps, and he receives an average net profit of €12,550 a month.
Pedro reckons that next year his capital will be €580,000. When asked whether he plans to buy a house to live in, Pedro replies:
You have no idea how reassuring it is to live in a rented home knowing you could buy a house outright.
This is an example of someone who is not rich, but has more than achieved financial freedom. You could say that financial freedom is reached when your passive income (income you don’t have to work for) is greater than your expenses.
For anyone who thinks this is an absurd example: as I said at the beginning, these are two real cases. Pedro (not his real name), in particular, has been a friend of mine for more than 15 years, that is, since childhood, and he is part of the reason I decided to start writing about how important a good financial education is from the very beginning.
According to Pedro, the books that changed his life included Rich Dad, Poor Dad and Cashflow Quadrant, both by Robert Kiyosaki. I certainly recommend reading those two books: they will not give you any miraculous keys to financial freedom, but they will open your mind to achieving it.
Further reading
- The 7 types of investors and types of investments
- Getting started in investing, part 1
- How to get rid of personal debt
- How to be a successful entrepreneur in business
Featured image: Compagnie des Indes, autorité émettrice, CC0 1.0, via Wikimedia Commons.
