Have you ever had a dream that one day your parents come to you and say ‘Look, we are not actually poor/middle class, we lived a modest life to teach you the importance of being financially prudent and to teach the value of money .. now that you learnt it the hard way, you will inherit xx million dollars and you may utilize as you wish or you can live the life you envisioned’
At least, for me the above is still only a dream and I have to wake up to get ready and start putting in all the hard work to earn money to be able to afford a decent and modest living.
As I mentioned in the previous post, reason for financial freedom varies from person to person. While it is so.. Here are my reasons to achieve financial freedom.
Getting out of the rat race of working hard to pay bills every month (While I don’t hate working hard, and solving problems. I firmly believe there are other things out there that have lots of meaning and importance too. Even if I achieve financial freedom, I don’t intended to be a couch potato and binge watch all the Netflix series).
Spending more quality time with family is another reason for me. As I mentioned in the introduction post, I have left my immediate family to be in a different country to study and work. This also means that I have spent very little time with my family and friends at home. Most of the time only seeing them for 10-15 days a year and through occasional audio calls and thank god now even via video calls.
Whilst I’m married and started a family with a one year old son, I wish I had more time with them to watch him grow and to be more attentive to each and every milestone he cross. Again being grateful to the blessing in disguise work from home, which allowed a little more time at home. However, with the ever busy timelines and meetings post office hours, work still eats up into personal and family time too. I’m sure many of you can relate to this experience.
The other reason for me to achieve financial freedom is to have the ability to try out other things in life, starting a business and trying to solve some of the problems that still exist in the world and to add value to the world and the people in it and finally leave the world as a better place than I found.
Having financial freedom will also enable me to travel the world and explore other geographies and nations and learn how people live in other part of the world, try their food and experience their culture and learn from them too.
Well, these are only some of the goals and there are plenty of other things that I can envision myself doing after I have achieved my financial freedom.
When to start the journey to financial freedom?
At least some of you may have heard the Chinese proverb that says “The best time to plant a tree was 20 years ago and then the next best time to plant a tree is now.” The same goes for the financial freedom journey as well. The best time to start was when I first started working. Since, I couldn’t do it then.. At least eight years after, now is the time for me to begin the journey. For you – same thing, if you haven’t started already.. It’s the time to start your financial freedom journey as well. I will mention some of the points that can help you understand more about this journey and along the way, I will also share more guidance and steps based on my experience and what I’m doing.
Finding your financial freedom number?
Have you heard of this financial freedom number? Even if you didn’t that’s okay. Because it took me some time to realize also that too.
With the help of financial freedom number, it can actually help us to plan a lot better and to understand what and how much do we require for us to achieve financial freedom.
To calculate financial freedom number, all you need is to understand your monthly expenses (Not your income). Your expenses that you pay on a monthly basis and * 12 to basically see how much is that number for one-year period and then multiplying this number with 25 will tell us how much we need to set aside for the rest of our life.
You may ask, “Are you even considering inflation?”. Of course yes. You need to factor in inflation. You should be able to get a return of at least 4% above the inflation rate. i.e, If the country that you are living in has an inflation rate of say 3%, then your ideal return required on your capital would be 7%.
Let’s take a case study, in case if your monthly expenses is going to be $3,000 per month and in order for you to sustain this lifestyle in the future you will need to have $36,000 a year and when we multiplied by 25 that will result in $900,000. Now the currency and the number is totally up to you to decide and anyway you got the idea on how these numbers needs to be manipulated to find your number.
Once you have secured this amount, park it in an account or an investment that returns 4% after considering the inflation rate of the country you are living in and then proceed to withdraw four percent of that capital on a yearly basis. You are now free to go and do whatever you wish to do provided that you don’t live a more expensive lifestyle than the previously allocated $3000 per month. Well, technically you can, if you are able to achieve greater return for the capital that you have put in. An example: If you consider the average rate of return for the S&P 500 index (Standard and Poor’s stock market index from US) for the last 130 years or so, you will understand that it has actually returned 10 percentage average return for during this period.
Remember the assumption that the $900,000 can be invested with a return of 4% after inflation.
Baby steps to financial freedom
Decreasing/eliminating the bad debt
It is important for you to understand what is a good debt and bad debt. While this deserves to be a separate topic altogether, let me put it simply that a bad debt means that your cost of borrowing is high (i.e, higher interest rate). Eg: Car loans with 10% interest, most credit cards charge you 25% annually if you do not pay the due amount in full by the due date.
Increasing income/earnings
Earning more is harder than said, but it doesn’t mean that it is unachievable. It is definitely achievable and how you can do so is by providing more value to your current employer and asking them for a raise. If it’s not possible, you may need to find the better paying job elsewhere. This may require upskilling. You go out to learn more and when you’re ready, make your potential employers realize that you are worth more.
In the current world there are plenty of opportunities to earn more money. Example: If you have a few extra hours to spend after work, you can pick up a part time job that pays you for the hours that you put in or you can even consider working on your weekend. Another example is to be a food delivery rider. If you know how to program websites or other languages then you can also consider signing up for freelance websites like Upwork. You can make an account there and pick a problem that you are able to solve, and deliver.
Observe your spending patterns, Create a budget
This is much easier than learning more or working more. But first, you definitely need to identify where you spend your money.
There are plenty of apps that let you track your expenses on a daily basis and if you do this consistently over a period, say one month or two months you will definitely know how much you are paying on an average. Your internet bill/ mortgage/ rental expenses are some of the fixed expenses and you will know this in advance. By tracking you can gauge your variable expenses too, eg: phone bill, petrol, groceries and dining out.
Once you identify your spending patterns, next thing is to plan in advance. Do some research to identify some of the areas where you can spend less. Example: if you’re renting at an expensive area – you can consider renting at an area further from the city. If your mortgage interest is high, you can go to another bank to refinance the loan for a lesser rate.
Living below your means
This is yet again an another key point, ‘live below your means’ – Even if you’re earning $10,000 a month that doesn’t mean that you have to spend all the $10,000. What matters more is the rate of your savings, imagine you are earning $10,000 a month and you are only able to put aside $1,000 at the end of the month and consider another person who only earns $3,000 a month but is able to put aside $1,500 at the end of the month. When it comes to financial freedom, the person with the $3,000 salary is likely to achieve financial freedom much earlier than you do unless you change your financial habits.
When you get a new job with better pay, remember to not inflate your lifestyle . At this point, I’m very sure you’re more keen about achieving financial freedom and not having to worry about how to earn money or how to pay your bills in the future. It is worth more to save and grow that pot of money for your future consumption.
Save before you spend
Nowadays, it’s much easier to put aside the savings with the help of an auto savings plan, so you can work with your bank to set aside a fixed amount of money at a particular date upon your salary credit. This will prevent you from accidentally overspending and you will not end up with nothing much to save at the end of the month.
Setting mini goals
While the financial independence number you found earlier may be intimidating, you can have many sub goals before you eye on the bigger prize. If you’re starting up fresh and you do not have a single dollar to start with, your first goal could be accumulating $1,000. This is your first mini goal. Next you have to eye on $10,000 and so on until you reach your financial freedom number.
In order to keep you motivated, you can also have mini celebration when you hit these mini milestones. Reward yourself with some thing you enjoy ( Remember to spend < 2.5%).
keep in mind not to over celebrate and delaying financial freedom.
Start investing the money you don’t need now
This is the other thing that you can start doing. When you identify that you don’t need too much money in the bank account for a long period of time, say – next five years, you can put it into an investment vehicle that fits your risk tolerance and goals. Let the compound interest do its magic and let your money work for you even harder when you’re sleeping. (Will be writing more posts regarding this in the near future, remember – stay subscribed to the newsletter).
Protecting your downside
Last but not least, one more important and under-rated topic that you need to look into is to take care of your downside. This can be achieved by having adequate insurance coverage for yourself and your family by having health and life insurance.
In this world of increasing hospitalization/health/ well-being related expenses, it’s very important to have a proper health insurance and if there are dependents living based on your income, you will also need to consider a term life insurance too. This will help your dependents to tide over any unprecedented situation like total permanent disability or even death.
Conclusion
While there are other articles, online posts or even YouTube channels that advocate on being extremely frugal and to even skip your morning coffee, I’m not supportive of that because i don’t see much of joy being so cheapskate and not enjoying a tiny bit of life. After all, the whole purpose of life is to live your life and to be fulfilled. And this is not a one-off exercise where you can do one round of calculation for just one month ignoring this for the rest of your life. You will definitely need to do this consistently over a long period of time so that you can achieve your financial freedom and then you can take the legs from the pedal and you know you don’t need to pump so much gas to keep the vehicle going.
Are you keen to achieve financial freedom or did I scared the sh*t out of you? Leave your comments as a reply and I’ll clarify your doubts on any of the points mentioned in this post.