Quick 5 Step Plan for Financial Freedom

If financial freedom is your goal in life, then what steps are you taking to achieve your goal?

Let me share the five step approach in building up your plan for financial freedom.

5 Step Approach in building up your financial intelligence

Step 1: Know where you are financially in terms of net worth
How many of you actually have a personal balance sheet detailing your assets and liabilities? Knowing our assets and liabilities in clear detail is the first step in knowing how to reach our goal of financial freedom. During my army days, the first step in trying to navigate the ground to get from point A to point B on a map is to first find out where you are on the map!!! This is what we called orientating your map to the ground.

If you do not know where you are on a map in a relatively new terrain, you will find it very difficult to navigate accurately to reach your destination.

Your personal balance sheet will tell you what exactly is your net worth, where:

NET WORTH = ASSETS - LIABILITIES

Assets can be your home equity (amount that you can realisitically sell your home for, e.g. valuation), cash in bank, fixed deposits, value of shares, unit trusts (mutual funds), gold, foreign currency fixed deposits, bonds, CPF monies), guaranteed cash value of insurance policies minus your liabilities that include your outstanding credit card balances, personal credit balance, hire-purchase balances, car loans, housing loans, etc.

It is common to find yourself in a negative net-worth position. All of us who own homes cannot finance it 100% using cash and CPF and must take out some mortgage. The trick towards financial freedom is to have a plan to move ourselves from a negative net-worth to a postive net worth to whatever we have set as our target for financial freedom.

Step 2: Know where you are going in terms of expenses and savings
Your net worth only details your financial position at a point in time. What gets you moving from where you are financially to where you want to be is your income and expenditure. You either study, work, run a business or are retired. Whatever your trade, profession, business or vocation. In order to reach your financial goal, you must have a source of income and you must also spend money. The key to financial freedom is to make sure your income (almost) ALWAYS EXCEEDS YOUR EXPENSES SO THAT YOU CAN SAVE!

Some of you may complain, but I NEED TO SPEND $XX ON A, B, C. Yes, all of us have living expenses BUT YOU DETERMINE THE LEVEL OF LIFESTYLE YOU WANT. If you do not take responsibility for your spending, then you might as well stop reading my blog and just live your life as you wish. I do not wish to impose my ideas on anyone.

Let us be adults and realise we have the power to determine whether every dollar we earn is spent on expenses or is saved to be invested. It is about deciding between needs and wants. The more wants we succumb to, the longer it will take us to reach our target of financial freedom.

Back to the income and expenditure statement. Once you have noted down your income (which should include passive income from dividends, interest, capital gains) and expenditure, note down how much you can save each month. This forms the basis of your investment monies. This how you grow your investible savings to be deployed to beat the pathetic bank interest of 0.25% or even fixed deposits at 2%+.

Step 3: Determine what rate of return is needed from your monthly savings to achieve financial freedom
This is where it becomes clear. Once you have established your networth, how much savings is coming in each month, then you can start to compute how long it takes for you to reach your goal of financial freedom. A very basic calculation (with illustrative figures for returns) involves:
1) Insert figure for financial freedom, say, $750,000
2) Compound your monthly savings, say $1,000 for next 30 years at different interest rates
a) At treasury bill returns of say 2.3% = $517,774
b) At CPF special account returns of say, 4% = $694,049
c) At equities (say, 8% per annum) = $1,490,359.

It becomes obvious that the higher the returns (and usually with higher risk or volatility of returns), the faster or higher the future value you can get in 30 years' time.

Step 4: Decide which asset class to invest in based on what is your targetted return/time frame
Therefore, depending on your time frame and % return you are looking for, different types of assets will be able to meet your criteria. The question is are you ready for the amount of risk that you need to take and do you know enough about the asset classes?

Step 5: Understand the asset classes that give you the required return and take steps to invest in them
The earlier steps help you clarify why you need different asset classes. In general, a safe and steady plough everything into treasury bills approach will get barely get you to about half a million at today's treasury bill yields. But it is very safe and guaranteed. In order to reach your financial freedom target realistically in your working lifetime where you can earn income and save, you need to seriously consider other investment asset classes because by taking on some calculated risk, you can reap much higher returns and move yourself faster towards your target of financial freedom.

Investment is RISKY. Financial freedom is a journey that is FRAUGHT WITH RISKS. But to avoid taking calculated risks to seek higher returns is to accept the RISKS OF INFLATION ERODING OUR PURCHASING POWER AND TO RETIRE ASSET RICH AND CASH POOR.

You have the power in YOUR HANDS.

You decide WHAT RISKS ARE WORTH TAKING AND WHY.

You control your own financial destiny.

Be well and prosper.