For majority of us, our primary source of income is from our personal efforts (job, business or profession). More often than not, our entire lives and consequently those of our families, revolve around our careers - long hours of work, ruthless competition, insecurity about the future, lack of personal time, and so on. To keep up with our own demands, as well as so as not to be left behind in society, we immerse deeper into our work, resulting in even more stress, failures in personal relationships and lower self esteem. Ironically, all this is done with the desired objective of providing our families with a better quality of life.
Wouldn’t it be great if one doesn’t have to entirely depend upon personal efforts to take care of one’s needs? This would entail creating additional streams of regular income, to supplement or even replace the primary source. If this was possible, most of us would no longer be working without choice, but would work for joy and self fulfillment. We would have the flexibility to work at our own pace and devote our time to other pursuits we are interested in. Our objective of a better quality of life would be fulfilled. This is what is known as financial freedom – when one is no longer dependent upon personal efforts to maintain a desired level of living standard.
Financial freedom is directly linked to wealth creation, and cannot be achieved without elaborate planning, first to reach the goal of being financially independent, and second to maintain that level. The goal is to achieve an amount of capital which not only provides enough regular returns to meet ongoing lifestyle expenses, but also that the composition of capital is such that it is likely to increase in value over time, so that future returns are generated on the increased capital base and are able to take care of the future increase in expenses due to inflation.
While for the majority of families it would seem very difficult to reach such a level, it is certainly not impossible, and can be achieved with some discipline and sacrifices.
Below are some of the rules which from my experience are paramount in wealth creation and consequently, in achieving financial freedom:
Decide upon your level of wealth required for financial freedom - This will be directly proportional to the lifestyle you wish to follow after becoming financially independent. If one is used to living and dining in Five Star comfort regularly and expects it to continue after becoming financially independent, obviously a much higher level of wealth has to be targeted than for someone who is happy eating out once or twice a month. Hence scaling down one’s lifestyle can lower the threshold required for financial freedom.
Know where you are before you start - It is essential to make a complete list of one’s Assets and Liabilities, Incomes and expenses (both current and expected in future) and cash flows before one starts. One cannot reach a destination without knowing where he or she is starting at.
Give priority to protection of what you have - Insure all your assets as well as payment of liabilities against unforeseen circumstances which have the potential to destroy your wealth.
Know your attitude to risk - This depends upon one’s personality, age, commitments, current level of assets/liabilities/income, etc. Attitude to risk is not fixed, and may change over time or due to changing personal or external circumstances. Generally, higher the capacity and willingness to bear risk, higher is the return, but this is not always true.
Get your finances under control - This implies stopping money leakages, however small or insignificant they may seem. Most money leakages are through unnecessary tax and interest expenses, wrong spending and wrong investments. Money leakages are the most common reason for inability to create wealth.
Pay off debts on priority- Unless the debt is incurred for creating an asset which is expected to increase in value or for business purposes, it is not advisable to incur debt. Any other debt, if incurred, should be paid off on priority.
Keep the taxman at bay - Apart from interest, tax expense is the highest expense item which prevents long term wealth creation. Be prepared to pay for expert tax and financial advice. It may seem expensive at first, but the benefits will far outweigh the costs in the long run.
Understand that there is no such thing as free advice - Advice given by many financial product sellers may seem to be free (as they do not charge you fees but earn from product commissions), but in the long run it must align with your financial goals. If not, it can be very costly indeed.
Understand that there are no secrets to creating wealth - There are only 2 mantras which ultimately work – spend less than you earn, and buy low and sell high.
Understand that gaining wealth is a slow process - Earning it too quickly (say a lottery or inheritance) may make you rich, but it does not give you experience in acquiring wealth, which is vital for keeping and growing that wealth.
Understand and implement the power of compound interest - Albert Einstein called it the Eighth wonder of the world. Interest compounded over a long period of time has a tremendous capacity to create unimaginable amounts of wealth.
