When your passive income reaches this level, you’ve reached financial freedom.

Financial Literacy Month in April.

Financial literacy is determined by the National Financial Educators Council (NFEC) as “having the skills and information in financial affairs to confidently take effective action that best meets an individual’s personal, family, and global community goals.”

keywords? “Take Action That Works.”

This week, I’d want to discuss the basic base of financial planning, the pillars upon which everything is built, namely your income and expenses. What ties these two together? What role do they play in a broader financial strategy? What should you do, and how should you do it?

We’ll start with your earnings.

Active income and passive income are the two sorts of income. Active income is earned by physically being present at work (it does not have to be geographical). This includes both staff pay and owner drawings as a business owner. All income earned when you are not physically present or through ownership is considered passive income. Rents, dividends, and even your participation as a silent partner in a corporation are all included.

What is the relationship between your active and passive income?

If you are employed, you are paid a salary; if you operate a business, you are paid just by showing up. Because you cannot labor indefinitely, your active earnings are limited. As a result, the strategy gradually transitions from active to passive income. When you invest, you create a closed system by reinvesting your earnings from your portfolio to compound your gains.

For instance, suppose you make N500,000 every month, and you intend to set aside 10% of each salary, or N50,000. As a result, your action plan calls for you to put N50,000 into an asset class that either…

It provides you with passive income.

Reduces the amount of money you spend

Thus, if you invest N50,000 in Zenith Shares, you can either use the dividends generated by Zenith Bank and acquire more income-generating assets or save money on future needs like rent.

Goal: To convert 100 percent of active income to passive income over time. Please keep it simple: aim for 1%, 2%, and 3%.

Expenses are now

Expenses are divided into two categories, similar to income. You have your Non-Discretionary Expenses, such as food and rent, which you must pay regardless of your income or ability. These are what we refer to as required expenses. Then there are discretionary expenses, which you can make at your leisure. This includes costs such as a trip to Greece or a new suit.

Spending becomes crucial while dealing with expenses, and spending is an emotion-driven action. When it comes to spending, humans aren’t always reasonable. Remember that every naira set aside for non-discretionary spending implies less cash is available for discretionary spending. When all expenses are labeled as “important,” budgeting becomes difficult.

What is the relationship between your non-discretionary and discretionary expenses?

Your overall revenue (both active and passive) should be equal or greater than your expenses. If your costs surpass your earnings, you can reduce your spending or learn a new skill to increase your profits. You have complete control over how much money you spend. It’s also tough to tell the difference between discretionary and non-discretionary spending. Is eating out at a restaurant considered non-discretionary? By eating at home, you can save money.

The long-term goal is to ensure that your revenue matches your expenses and that your passive income covers your non-discretionary costs.

Creating and implementing a budget to capture and manage expenditure is part of managing expenses. All four factors should be included in your budget.

Active Earnings

Passive Revenue

Discretionary Earnings

Discretionary Earnings

In my book “Let’s Talk About Your Money,” I go into greater detail.

The difference between income and expenses is frequently filled by debt. Borrowing should not be used to support non-discretionary expenses; instead, debt should increase passive income-generating sources.

When do you plan to retire?

Retirement is defined as the time when your passive income is sufficient to meet and pay your non-discretionary expenses.

Whether you’re an employee or an employer, your goal is to make an income first, then gradually invest that cash to produce and build passive income. The next step is to use your passive income to cover your basic non-discretionary expenses. Once you’ve accomplished that, you’ve reached financial freedom and can retire.