I retired this year, I was able to do so as I had planned for my financial freedom over a decade or so. When i thought work was no longer fun nor interesting, my investments would enable me to live without working. This is the essence of financial freedom.
Your definition may be to have sufficient passive income, or minimized expenses that you can finally take up your poorly paid dream profession, or you can easily weather the threat of job loss.
So when do YOU plan to achieve your financial freedom or retire entirely from paid employment? Are you afraid of committing to this because you think of retirement is something old folks do, or it’s something you could never even contemplate? Perhaps you’re simply unsure about it. Without careful thought you won’t create sustainable sources of income that exceed your monthly and annual expenses- you’ll never be financially free.
Planning for your financial freedom early is entirely possible for those who start saving and investing when you are young. The steps that I outline in this article are vital for your financial freedom – ignore these and you’re bound to face obstacles later on as you progress. This isn’t for everyone, but for those who dream about being independent its something to plan for.
#1: Track Your Monthly Spending
One of the most important things you need to do is analyse your monthly expenses. Don’t spend mindlessly or without thought or plan- sure you can have a discretionary spend part, but the key is to be mindful of everything you spend. That daily Starbucks- $6 – amounts to $1500 a year. That $20 lunch and drink twice a week amounts to $1,000 a year- it all mounts up. Taking this step will give you a clear idea about where your money is going, and how much of the spending is justified or mindful. Look around, most businesses keep meticulous track of their cash flow to keep afloat, so why not you?
There are simple excel trackers to assist you (a good comprehensive budget spreadsheet can be found here). Once you have itemized everything, you can be clear about which spend is worthwhile and which is wasted.
“But, I like shopping” I hear you say… that’s simple, be clear about what you need to shop for, the budget you are willing to invest, and your window or internet shopping will become “mindful” as you try to spend less on your purchase. Your shopping becomes a game or hobby and not just a wander around looking for ‘bargains’.
To achieve financial independence early, set your financial goal like a business goal where every penny counts, at least early on in the process. You need to manage your finances in a way that whatever you spend and save helps you move towards your goal- if you are genuinely committed to financial freedom. Setting up your own financial tracking system will enable you to become mindful of your spending quickly and easily. Use this system honestly for 2-3 months and you will see for yourself how much money you waste and what should be reduced.
#2: Focus on Saving (as much as you can)
When you take control of your spending by measuring it, the next step is to save this extra cash for the future. If you’re below 30 years of age then you should aim at saving at least ten percent of your gross income (not from your take home salary but from your full pay before taxes and CPF/EPF/other Government matched savings). You will get used having less in your pocket after a while, and end up saving much more than you expected.
If you’re over 30 years of age then you should aim at boosting your savings rate to fifteen percent or even more than that if possible.
For many of you, the word ‘impossible” will now spring to mind. I need an apartment. So let me introduce a concept “house poor” which many of my Singapore friends are. They have great apartments, they have borrowed as much as possible to provide them with the very best place to live that they can afford. But they are shackled to their jobs to support their house and after mortgage, maintenance etc they have nothing left for 30 years. They hope their salary increments will provide some breathing space, but they’ve been locked into mortgages at the lowest interest rates possible, and no good will come when interest rates increase. In time they will have a great house, and no cash or investments. In Singapore even their retirement CPF goes to the house, so their nest egg, is just a nest. To release the cash, they will have to sell the house, and their hope is that the house will appreciate in value. As all financial advisers know, don’t put all your eggs in one basket, diversify. If you start with a modest dwelling and invest the difference, it means you won’t be shocked when interest rates go up, and you won’t be shackled to a job to pay for a mortgage. It will provide you with the basis of financial freedom.
#3: Don’t Make Your Investments Complicated
Invest wisely by learning more about investing and educate yourself to an extent that you becomes sure of your investment decisions. You don’t have to become an expert, but since investing wisely requires you to take the right steps patiently, you should seek the needed knowledge without making things complicated.
The first step in creating a solid passive income portfolio, is to know where you’re headed and what your goal is. Keep in mind that this isn’t about impressing your friends with extensive financial jargon, but it’s about understanding your investments. No matter what type of investment you choose to make, in the end, it is all about the kind of results you achieve. Your goal may be to create a sum invested that is able to cover your monthly and annual expenses, enabling you to be financially free. If you wish to spend $4,000 per month after tax in today’s value, then you’ll need between $1.2M and $1.5M invested. If you’re 25 and you wish to be financially free by 50 you have 25 years to accumulate this investment through both reducing spending and increased savings. Or maybe you only want an extra $1000 per month,. to enable you to pick and choose your jobs.
There are two critical concepts to consider here. The first is the power of compounding. Investing the interest or dividends earned on your investment speeds the generation of value to you, especially in your early days of savings. The second concept is passive income, where using high dividend paying companies or a business investment, or rental accommodation to create your future income stream. Typically high dividend companies are able to return between 3-5% of your purchase price to you during a year. Their share price may not increase in value as much as high growth companies, but the purpose of this portfolio is not to divest when the stocks are worth more but for it to work for you while you are able to enjoy your life away from work.
Many if not most financial analysts have been unable to outperform the S&P 500 or STI, or other indices even after trying for years, so what makes you think as an active part-time investor you also can. Then consider matching it effectively through index investing and ETFs (exchange traded funds) that minimize management fees, or buy into the stocks that ETFs invest in to gain the direct dividends. This isn’t an investment blog, so no financial advice, other than get your self into a position where you CAN invest.
In summary, if nothing else think about your financial future, check your spending and earning and review your investment strategy away from just having a nice apartment.
How much you save, invest and what year you plan to achieve financial freedom differs from person to person. Which is why nobody out there will be as determined and dedicated as you when it comes to reaching your goals. So stay focused and keep your eyes on the final prize – it will be worth it.