Financial freedom is a goal many individuals strive to achieve. It is when we have little financial worries as our expected expenses are taken care of by our savings/investments. Many have been mislead to think that this goal of financial freedom can only be achieved by studying hard to obtain a good degree which will eventually lead to a well paid job. However, this is not entirely true. Even without a high paying job, it is possible for one to achieve the goal of financial freedom. For me I believe financial freedom is centered around these 3 steps:
1) Work Hard
2) Save Well
3) Invest Wisely
Work Hard involves increasing income one receives in life.This can be done by enhancing one's skill sets to be promoted / seek a higher paying job or the decision to seek opportunities supplement the income we receive from our main job such as dividends from stocks or teaching tuition.
Saving Well involves the monitoring of one's spending patterns and making sure you spend within your means. An individual who earns $10,000 but spends $9,000 will never save more than an individual who earns $4,000 but spends only $2,000. Hence it is important for us to be conscious of our spending, seek good value for purchases and start saving for young.
Besides being conscious of our expenditure, basic financial knowledge will be important to help us save well. With this knowledge, we will be able to avoid financial mistakes which harms our saving patterns such as not chalking credit card debts to fuel consumption behavior. Lastly, the act of saving when young is important if one wishes to build up his savings. This is because of compound interest.
Albert Einstein called compound interest "the eight wonder of the world" and rightfully so. Lets consider an example to illustrate it. Two individuals, Ah Huat and John, enters the workforce at 25. Knowing the importance of saving when young, Ah Huat decides to set aside $7000 yearly from age 25 to 35 and does not save further from age 35 to 60; John on the other hand starts to set aside $7000 yearly from age 35 to 60. Both invests in the same investment which yields a 6% return per year. At the age of 60, Ah Huat has amassed $476,782; while John has $438,940. Hence, despite saving for only 10 years as compared to John (25 years), Ah Huat has saved up a larger amount of money thanks to compounding! From this example, it shows how important it is to start saving when young to enjoy this eighth wonder.
Investing wisely is a key component towards building one's wealth for financial freedom. This is because it affects the rate of returns obtained for wealth accumulation. As a benchmark, it is good to set your investment target at 7%. Why 7%? One may ask. 7% is the long term average return of the Singapore Stock market (ok it is slightly higher and closer to 8%). This means should one invest wisely in the stock market, it is reasonable to expect a long term annualized return of 7%.
In addition, the return obtained affects how long it takes to accumulate wealth for retirement. To double one's investment from $50,000 to $100,000, it will require 30 years should our savings be placed in an account earning 2.4% interest. However, if one invests in the stock market and obtains the long term return of 7% with a careful risk management strategy, the doubling of money will only take 10 years.
There are two paths of investing in the stock market- passive investing through ETFs and active investing. Both paths have their pros and cons in terms of time needed and potential returns. While individuals may be tempted to associate active investing with speculative bets/trading, this is not necessarily true. Active investing requires a significant effort in analyzing and understanding a company's prospect and industry and not just solely relying on stock tips.
For me, I have decided to walk the path of active investing due to my interest and passion.
Purpose of this blog
As mentioned, it is not entirely true with a good education will one achieve financial freedom. Gaining knowledge in the areas in the areas of "saving well" and investing wisely" can help us achieve financial freedom. So don't worry about being an ordinary person who had obtained a decent degree and had no scholarship. The road to financial freedom is still open.