How to be financially free – why a $100 000.00 a year salary does not necessarily make you a millionaire.

According to 7 out of the top 10 highest earning profession’s in the world are in the health care industry. This ranges from specialist surgeons to dental practitioners.For instance,general practice physicians make an average of $187,200 a year.

If you take into account possibly a more lavish lifestyle with fancier cars and bigger houses these people should be millionaires in 7-10 years right? Wrong.

According to the Association of American Medical Colleges, the medical school class of 2013 graduated with a median debt of $175,000, and 86% of all graduates left with some debt. This means that even the highest earning people in the world are taking on life on the back foot. This is before any credit card debt or vehicle/housing loans are considered and before this super earner knows it they are in a financial spiral on the fast track down to a life of debt.

But what if you turn the above equation around? We start with a very simple yet surprisingly difficult question to answer. How many people know their net worth? This question can be phrased in a different way, all factors considered how many of us actually know what the figure is at the end of every month after considering all the money that went in and all the money that went out? Recently published an article, you need a net worth of just $3,650 to be among the wealthiest half of the world’s citizens. That is the equivalent of having fully paid off a 2004 Ford Fiesta SE without having any other debt or any other assets.

Forbes wealth infographic

How do you calculate net worth? It is quite simply:

A list of all your assets.


A list of all your liabilities or debts.

The above equation can be quite confusing as it is not often clear what is an asset and what is a liability so a simpler way of looking at this equation is:

What is the money coming in every month


What is the money going out every month

While this is not technically the correct equation to calculate your net worth it may be more valuable to you to calculate your financial position

If the result of the above equation is a positive you are on the right path to becoming financially free.

The problem that many people face is knowing what is the difference between an asset and a liability. For example in school it is taught that a house is an asset. The harsh reality is that a house in most peoples cases is their biggest liability and the reason for this is that painful concept of interest. Depending on how the loan for the house has been calculated your house will either be a liability for 5/10 or even 20 years if you are only paying the minimum amount back into your bond per month. For example lets assume you recently made a purchase of a $100 000 house over a 20 year period at an interest rate of 10%*. Now lets slot that back into the financial position calculation using only the house as the equation.

Financial position = Money coming in minus money going out

Total Money Coming in = the value of the property minus the money owed on the property plus the growth on the value of the asset

Value of the property: $100 000.00

Total owed on the property: $100 000.00

Growth on the value of the asset: estimated at $500 per month**

= $500

Total Money going out = monthly repayment of the property plus interest per year

Monthly repayment = $960

Interest at 10% per year or $833.33 per month

= minus $1793.33

Meaning that your financial position is at a loss of $1793.33 per month. More shockingly if you look at the total repayments over 20 years you would have payed $131 000 in interest on an asset worth $100 000. This is not bad news. If you are able to get ahead of your interest you will quickly turn this liability into your greatest asset.

But how do we do this, how do we get financially free?

How to be financially free is actually easier than you think and it is a simple matter of turning your financial equation into a positive every month. But how do you do it? Use these 2 simple methods and you will quickly work your way to financial freedom.

  1. Reduce debt by paying off liabilities that have the most interest being charged to them per month.

The trick here is to beat interest and to make it work in your favor. Never ever and it needs to be reemphasized never go into debt on your credit card. Banks can charge you up to 30% interest on the credit card meaning that even a small purchase of $10 or $20 can quickly result in a mountain of debt.

Lets say you are able to pay off $500 debt on your credit card without spending a cent on interest, now lets assume that your favorite fast food restaurant opens near your office and you decide that $5 is worth loaning on the card for you to pay off in the near future. Doesn’t sound to bad? Well it is.

  • Month #1: there’s a $505 balance and you pay $500
  • Month #2: you are charged interest on the full $505 from the first month at 17% ($7.15) plus the extra shortfall ($5) – you’re $12.17 short
  • Month #3: interest on $512.17 ($7.26) plus this month’s shortfall ($5) – you are now $24 short

$24 for a single burger is ludicrous but….

After 10 years, you’ll have a credit card debt of $4,282.69. If you couldn’t pay it off when it was $505, things are looking much tougher now. So the lesson here? Never ever ever use the credit card for more than you can afford and if you are in debt PAY THE CREDIT CARD OFF FIRST.

2.  Grow your assets by investing more money per month or Getting the assets to work for you.

If you are able to pay more into your house or investment every month instead of spending the money, you will very quickly see that you can use interest to your advantage and get the most out of your assets.

Even better if you are able to get the assets to generate their own income then not only will your financial equation be a positive but you will grow your net worth.

Interest can be a real bitch and debt can be truly crippling. But if you are able to manage your wealth efficiently and effectively you can get your money to work for you to become financially free.

An extract from The Young Millionaires Bible

References and notes

*Interest rate is purely an example and not based on actual figures

** Estimate derived from:

Meet the Realist – for the bond calculator

One thought on “How to be financially free – why a $100 000.00 a year salary does not necessarily make you a millionaire.

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