Guide to Financial Freedom

Sunday, October 14, 2018
All of us dream of having Passive income, which is earning from sources where we are not actively involved in. I dare to say it is possible to retire without financial worries regardless of current earning power, during the process what's important is time and health. 


The question is how to achieve financial freedom? Read till the end, apply what you've learned and you will be there in a blink of time. My personal goal is to help people around me to be prudent in money management and live without financial worries because I know how it feels to have no money at all. 

Active Income

An active income is received from salaries or/and businesses while working. I believe this is the main source of income for most people. Example: A service crew who works for a monthly pay check. When the crew stop working, he/she will stop receiving income.

Here is an example of how an active income can be distributed based on an employed Singaporean/PR:


These 3 component work hand-in-hand to achieve financial freedom. Please be receptive, read on and you will understand the whole idea.

Expenses

I know many people who are living pay check to pay check and want to wait until their life is stable or when they are earning more to start doing a proper financial planning. Therefore, they are all stuck at receiving active income and spending all on expenses. The thing is there is never a right time to start doing it that's why what I would recommend is to start small first because financial planning is a process.

There are 2 main types of expenses we incur in our daily life: 

Fixed - Bills (phone, utilities, subscription, memberships), food, transportation, house loan, car loan, children tuition fee, etc.

Variable - Money token (wedding, birthday, funeral), a replacement for broke-down house appliances

Educate your parents on this Financial Planning Model so that they can plan for their retirement too, which the cost might factor into your fixed expenses in the future if planning is not done properly. Variable expenses are something unexpected. However, it is good to set aside some cash for the important event.

Wealth Protection

You see, the problem is many don't see the need for wealth protection and there is plenty of reason behind it. The most common reason is "I don't have enough money now." and "I already have enough.".

Remember our childhood story about the Golden Goose??


Imagine, you are the goose who are working for more golden eggs which are money. Would you protect the goose or the eggs? Yourself, of course! As long as you are healthy, you can generate wealth. Without money, your fixed variable will be in danger, your wealth accumulation will be wiped out for medical bills too. A person’s greatest asset is their ability to earn an income. You are a gorgeous golden goose and don’t ever forget it!

In this context, we are looking to protect yourself in the unexpected event of: 

Disease - Example: A simple fever, rashes, and headache could be symptoms of Dengue and Zika and can lead to hospitalization when things get serious and there will be a need for money for the hospital bill. This can be covered by getting health insurances

Death - Example: If you have dependents, anything happens to you and you stop generating active income to support your loved one, a life insurance will then come in handy to provide for your family expenses.

By getting your wealth protection properly done, your large bills will be covered by the insurer making sure that you won't have bigger liabilities on your expenses and your personal savings can safe as you wouldn't need to touch them because those savings are for a purpose and not to pay for hefty medical bills. Rather set aside a small amount monthly right now than having to wipe out your savings when in need, worst case scenario is your savings isn't even enough to cover the bills.

Wealth Accumulation

Every one of us has our dream. I have friends that just want to save for the sake of saving just because they have extra money to set aside. I have also met people who want to save for a purpose, such as children education, retirement, new car, new house, an overseas trip, and much more reason. When you define your financial goal and plan to work towards it, you will definitely achieve it in a blink of time. Together with wealth protection, you can ensure that saving towards your goal will be a smooth one.

There are a few ways to build your wealth:

Systematic - This is more like a force-savings approach where you set aside a fixed amount of your income on perhaps an insurance savings plan. Take CPF account as an example, I am sure majority have more money in there compared to their bank because they are forced to set aside those amount on a monthly basis. The same thing, there isn't a right time to save but we can always start small and increase the limit when we have greater earning power.

Progressive - This is an enhancement. Let's say you receive a pay rise, or bonus and are able to maintain the same lifestyle by using the extra cash to do something more. You can consider getting an additional savings plan and/or do a single premium investment as an acceleration to achieve financial freedom.

To prevent a financial crisis due to a job switch or loss of job, I would suggest you have a personal savings of 3 to 6 month of your Active Income before starting any wealth accumulation so that it will not disrupt the monthly allocation to expenses, wealth protection, and accumulation. At the same time maintaining the same lifestyle. 

Passive Income

When you are protected from losing your wealth and your savings is starting to accumulate, this is the time when you are generating passive income and of course years are needed for it to be possible that's why I call it a process. Therefore we start early and small because time is the essence.

Image source: https://www.edelmanfinancial.com/education-center/articles/the-power-of-compound-interest

By doing wealth accumulation using a proper instrument, your savings will be hedged against inflation and will also grow exponentially due to compounding interest. When your passive income become more than your active income and it can sustain by themselves, you can achieve this thing called Financial Freedom.

Example: Alicia and Benny, same age. Both just started work and want to save until retirement age of 65 year old.

If Benny can start small and wait until he is making more to set aside additional money for savings, he could already have more money than Alicia. 

Image source: http://wealth.visualcapitalist.com/visualizing-power-compound-interest/

Financial Freedom

Don't give an excuse that you don't have enough money, because we all should spend within our means. Here's a guideline on how to allocate your income based on individuals life situation to be financial prudence:


If you are a student or young adult that does not have much liabilities, this is the best time to do wealth accumulation by saving up for the next 20 to 40 of non-working years after retirement. I understand that many young adults want to save up for house/car and do not want to do wealth protection and think it is too early for them to start thinking about it. However, there will be a day where you might not be able to buy it even if you wanted to, insurance is purchased with health, not money.

For parents, priority is to focus on wealth protection as you are the golden goose and have dependents to look after therefore, there is a need for income replacement due to any unforeseen circumstances which are unexpected. Many sensible parents I have met also made plans for their children education by getting an endowment plan. Later, they do something extra when there's pay increment. What I would suggest is for all parents to take care of their retirement first so that they won't burden their children in the future, as the children also have to build their own life. Parents must remember that they are the goose, if something were to happen to them, their children will also be affected too. Therefore, parents must always take good care of their health.

As for a retiree with lesser financial responsibility, because they have already done their part during the earlier years by getting their financial planning done, they can afford to have bigger expenses without active income because they already have built their passive income. Some still continue their wealth accumulation to create a generation wealth to leave a legacy.

Wealth Distribution

After achieving Financial Freedom, we still have one last planning to do.

Who do you like to pass down your asset/estate to? (Spouse, Children, Charity etc.)
What do you want to pass down? (Investment, Property, etc.)

Even if you are someone who acquires a sum from family passing you still need to learn how to preserve and grow it.

Financial Planning is a Process

Last but not least I would still want to emphasize, start planning for your future by doing a small contribution and slowly enhance it when there's a bigger earning power. Doing it or not is ultimately for your own benefit, not mine. Think of why do you even bother reading this post in the first place. Either way, we have to be responsible for our own life. Without a proper financial planning, you are planning to fail in life. I have done my planning, I am not sure about yourself. Share this post with your family/friends if this has benefited you 😊

Power phrase of the day:
Your parents are not your emergency fund, your children are not your retirement fund, build your own wealth.
- Sunil Mangal Kanpur

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