There are three factors which I consider as crucial to get started on the journey towards financial freedom. To get started, I would define financial freedom to be the ability to sustain your desired lifestyle with little or no further work. That means that without having to work, there will still be income being generated from other avenues that can meet or exceed your expenses. What are these factors which I consider as crucial ? These three factors are Earnings, Savings and Investment. These three factors are closely linked to each other and the combined strength of these factors is greater than the individual sum of these factors alone. If you are able to do well in just two of these factors, you should be rather financially stable after all. But if you can do well in these three factors, you should be able to achieve financial freedom after a period of time. The three factors are being elaborated below.
Earnings
The ability to generate earnings can give rise to a higher proportion of savings which can give one much more capital to channeled it into investment, which can then give rise to a higher absolute return. Consider the case of two persons who are earning $1,000 and $5,000 monthly. Let's say that both are able to save 20% of their salaries. At the end of each year, both of them will be able to accumulate $2,400 and $12,000 respectively. If both of them are able to generate the same investment return on their savings, who will take a shorter time to hit $100,000 ? This answer is pretty obvious for the one who earns less must either take a longer time or generate a higher investment return to hit his investment target.
Savings
The ability to save is equally important too though this factor is usually not deemed to be as important as earnings generally. Irregardless of your earnings, if you are not able save much, there will not be much capital left for investment. Without capital, it will be difficult to acquire assets which can generate streams of income. As such, both earnings and savings are equally important to me.
Investment
If the above two factors are satisfied, you should have a substantial amount of capital for investment. But the foremost rule of investment is to preserve your capital. As such, one should always be wary and prudent of any investment opportunities for it takes time to build up a substantial amount of capital. The capital should be deployed to investments which can offer capital gains and a steady stream of cash flows over a period of time. Some examples could be in the form of purchasing equities or properties which can give capital gains during a price appreciation of these assets. Dividends and rental income from these assets will also give a steady stream of cash flows. Such gains and cash flows can also be reinvested to acquire more of such assets which can give rise to a higher capital gains and cash flows.
However, it is not easy to satisfy all these criteria. The reality is that all of us are in different circumstances and these circumstances may not allow us to meet the criteria easily. Some of us may be stuck in industries or companies that do not pay as well or do not possess enough qualifications to command higher earnings. Others may find it hard to save due to inevitable expenses such as payment of loans or parental support or even the need to sustain one's lifestyle. To add on, investment is an another totally different game which the majority of us may not do extremely well for it takes knowledge and experience on top of the ability to rein in your emotions to be able to achieve a higher return. Doing well for any of these two factors should ensure that you should be financially stable but doing well for these three factors will get you started on the road to being financially free.
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Hey :)
ReplyDeleteI treat savings as a function of earnings and expenses. The equation goes like this:
Savings = Earnings - expenses
The only way to increase savings is to reduce expenses and to increase earnings. One have to work on both to increase the savings, just like what you had written :)
Hi,
ReplyDeleteYeah, that's another way of looking at it.
Kay
Doing something you enjoy takes a lot of fear out of having to work a long time.
ReplyDelete