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Friday, June 13, 2014

Some Simple Steps to Financial Freedom?

This post is dedicated to WL & YC.

This evening I was treated to a wonderful meal by some former economics students who learnt about economics and finance from me. Our evening's discussion was interesting and wide-ranging, and it was fun to catch up with them over dinner. 

I was asked a few interesting questions about steps to financial freedom or financial independence, and it is one of the topics that interests me, so here's a post on easy and simple steps to financial freedom. Some of the ideas I thought of on my own, some are from research done on the internet, and some are just pure common sense, which I thought I'd like to share. 

None of these ideas in the following discussion, of course, constitute professional or commercial financial advice or investment tips, and all ideas written here should be considered in terms of principles, concepts, and ideas, rather than specific financial advice. I'm not a financial adviser, but in any case I'm sure I will write a more advanced version for my other blogs, since this topic interests me and probably interests many people in general. Take note, further, that while the steps may be simple and easy, implementing them often takes great discipline and effort, and people aren't often consistent or disciplined. Nonetheless, this might be of great use to people who can think through issues or who would like to see the ideas that I have collated and would love to share - would definitely be worth a read! :) 

Here are some simple steps to financial freedom that I have read about (or are pure common sense), which might be helpful to income earners or people planning ahead for retirement. 

Set your financial goals and objectives. First, the most important thing is about goal setting and objectives. You must first think about your life and what you really want. What does financial freedom or financial independence really mean? If you want a luxurious life full of luxuries, then clearly the passive income you might need from investments would be much larger and harder to achieve compared to someone who wants a simple life with basic necessities and occasional luxuries. Are you thinking about having the freedom to work as you please, and for who you like? Or are you thinking about having enough for subsistence? Clearly there are many possibilities, but if you fail to plan, you plan to fail. Some people suggest using SMART goals - specific, measurable, achievable, realistic, and time bound (meaning that there is a time limit to what you are doing); this might be worth a big shot. 

Why? It should be clear that different people have different goals and objectives, but the idea is to make sure you know what you are doing and why you are doing it. Why is more important than what, since after all it means that you will be more motivated, inspired, and able to achieve what you want, compared to someone who doesn't know why he is doing something. Be sure to know why. Personally, I want to have the freedom and time in future to pursue the many hobbies and interests that I have, and so having the financial means to do so without worrying about my paycheck is a very strong incentive for me. 

Spend less than you earn. Next, the central idea that many people write about - and I agree - is that you have to spend less than you earn. Simple idea. Spend less than you earn. Live beneath your means. 

Earn additional income. In fact, if need be, take up extra jobs or work harder to gain additional income. Earn additional income. 

Grow your money. With the money that you save from spending less than you earn, invest the money. This will take a whole post to write about, and certainly is an important topic, but the idea is simple here - don't let the money accumulate under your bed; invest your money and grow your wealth. 

Get passive income. On this note, many people suggest gaining passive income through investment in stocks for dividends, and bonds for interest, and, for the more conservative amongst us, placing money into fixed deposits might be a good idea. In simple terms, remember to invest your money rather than just putting it into a savings account. Personally, I invest heavily a lot in the stock market and aim for both capital gains and dividend yield. 

Reduce your existing debt. The first thing many people say is: try not to get into huge debts, and if you have an existing debt, try to reduce it as soon as possible. Make sure you pay off your debts. Now, I have a different opinion on what many people say. Many people say, don't borrow; try not to get into debts at all; and debts are bad. I would say instead that it really depends on what the debt is about. If you borrow money to spend on consumption, such as borrowing for a new TV set or a sofa set, then that might not be a good idea. Try to pay those in full, because interest has this nasty habit of expanding and expanding. You always end up paying much more than you expect (due to "effective interest rates"). If however you borrow money to spend on assets, such as a house (which is actually an asset as it can be rented out, or sold for capital gains) or to spend on machinery for your business if you are an entrepreneur, it is rather different from borrowing for consumption. I would say that in my opinion try to reduce "bad debt" and try to pay off your "good debts". However, I think it was Dale Carnegie who once said, and I paraphrase, the best way to get the best of an argument is to avoid it. If you can pay for things in full, it would always be better - but in my personal view if you have to borrow, try to borrow for the right reasons. 

Track your income and expenditure. I keep records of how much I spend and how much I earn, and it was with great comfort and some degree of happiness that I discovered that this is a good idea on the road to financial freedom and independence. Make sure you know how much you spend, and how much you earn, and this will make sure you have the knowledge to cut in the right places. 

Keep within your budget - have discipline! Enough said :)

Learn proper dynamic asset allocation. One of the financial ideas that might be useful here is asset allocation, and in particular dynamic asset allocation. Put your resources across various classes of assets, like stocks, cash, bond, REITs, and insurance, as this diversification helps you ensure that you can build up your wealth while reducing your risks drastically.

Build up an emergency fund. Once you do the above, build up an emergency fund for a rainy day just in case you need the funds quickly. Do this last because paying off existing debts and investing are the main and early priorities. Many people say that an emergency fund should be 3 to 6 months of your income, and that might be a good idea. 

Hope these ideas help you think through your own steps to financial freedom, and provide food for thought in your own journey. Do think through the ideas and concepts, and see which are applicable to your own context and situation. Thanks for reading my ideas on steps to financial freedom. Cheers!

Anything that interests me!