Financial Freedom or financial independence is generally used to describe the state of having sufficient personal wealth to live a happy lifestyle, without having to work actively. Definition of ‘happy lifestyle’ varied in each individual. It depends how much you want. The more you want, the more wealth you need to create. Nonetheless, the formula to achieve it can be summarized in two simple steps.
(1) Create Surplus – Increase Income Reduce Expenses
As been known, create surplus is the first step towards Financial Freedom. Surplus is an amount left over when basic needs have been met. However, it is challenging especially for nowadays youngster. Reason being they are confusing between what is wants and what is needs.
Traditionally, immediate basic needs are food (including water), shelter and clothing. In modern life, transportation and communication have also categorized into the list of needs. Unintentionally, most of the time people tends to overspend on so-called ‘needs’ and put themselves into cash tied situation. Example:
- Dining out. Why not just enjoy home cook food?
- A bungalow. Why not just a cozy terrace or apartment? Renting is another option too.
- Branded clothes. Non-branded clothes are nice and comfortable as well.
- Luxurious car. Why not an economy one or an average one?
- Smartphone and laptop price can be varied from few hundreds to few thousands as well.
Think twice. Is all those really your needs or wants? Overspend here and there causing you have very little surplus, no surplus or even negative surplus with the convenience of credit card.
Increase income and reduce expenses must be co-exist in your financial planning. It can be done by having a proper personal budget. Overtime, you build up surplus and ready for the next step.
(2) Generate Passive Income – Create Money-Making Machines
Passive income is an income received on a regular basis, without or with little effort required to maintain it. Each tool that you used to generate passive income is your money-making machine. It can be any types of investment and/or businesses. One need to have more than one money-making machine as part of risk management to ensure smooth generation of passive income. One can declare Financial Freedom when their machines able to generate a total income that is greater than their expenses.
Most money-making machines require some sort of investment up front. This is where your surplus come into the picture. Great things almost always start small. Likewise in financial planning. Start with one money-making machine with your initial small surplus. As time goes, build it up, diversify and further build it up. You will definitely closer and closer to your goal – Financial Freedom!
About the Author
T. Halona T. Halona is a Licensed Financial Adviser with ten years experience in financial planning industry.