This post is an adapted version of an article on economics and finance I wrote recently, dedicated to two of my former economics students, WL & YC, who participated in the National Economics and Financial Management Quiz 2013 organised by the Economics Department at the National University of Singapore (NUS). Currently, the National Economics and Financial Management Challenge 2014 is on - good luck to all economics students participating and all the best!
The Path to Financial Freedom and Financial Independence
Recently, I was asked interesting questions about the path to financial freedom (how to achieve financial independence), and it is one of the economics and finance topics that interests me, so here's my sharing on steps to financial freedom.
None of these ideas in this discussion constitute professional financial advice, and all ideas here should be considered principles, concepts, and ideas. I'm not a financial adviser. Take note further that while the steps may be simple, implementing them takes discipline and effort. The principles might be easy but the implementation and execution of these principles are much harder. Nonetheless, this finance article might be of great use to economics students who want to think through financial issues or who would like to learn about good ideas that I have collated via my experiences and would love to share with you.
Here are some simple steps to financial freedom and independence you should seriously consider.
(1) First, think through and plan your financial goals and objectives.
First, the most important thing about financial freedom is about goal setting and objectives. You must think about your life and what you want out of life. What does financial freedom really mean, to you, personally? If you want a luxurious life full of fast cars and fanciful toys, then clearly the passive income you need from investments would be much larger and harder to achieve compared to someone who wants a simple life with occasional luxuries.
Clearly there are many myriad possibilities - so plan first your financial goals and objectives.
First, the most important thing about financial freedom is about goal setting and objectives. You must think about your life and what you want out of life. What does financial freedom really mean, to you, personally? If you want a luxurious life full of fast cars and fanciful toys, then clearly the passive income you need from investments would be much larger and harder to achieve compared to someone who wants a simple life with occasional luxuries.
Clearly there are many myriad possibilities - so plan first your financial goals and objectives.
(2) Second, think about "Why".
Why? It should be clear that different people have different goals and objectives, but the idea is to make sure you know why you are doing what you are doing. "Why" is often more important than "what", since it means that you will be motivated, inspired, and able to achieve what you want.
Personally, I want to have the freedom and time to pursue the many hobbies I have, and so having the financial means to do so without worrying about my paycheck is a strong incentive.
Why? It should be clear that different people have different goals and objectives, but the idea is to make sure you know why you are doing what you are doing. "Why" is often more important than "what", since it means that you will be motivated, inspired, and able to achieve what you want.
Personally, I want to have the freedom and time to pursue the many hobbies I have, and so having the financial means to do so without worrying about my paycheck is a strong incentive.
(3) Third, always spend less than you earn.
This is important: you have to spend less than you earn. Simple: keep your spending lower than your earnings and always live beneath your means.
This is important: you have to spend less than you earn. Simple: keep your spending lower than your earnings and always live beneath your means.
(4) Fourth, earn additional income to augment your main source of income.
In fact, if need be, take up extra jobs or work harder in your current job to gain additional income.
In fact, if need be, take up extra jobs or work harder in your current job to gain additional income.
(5) Fifth, grow your money through sound investments.
With money you save from spending less than you earn, invest the money. The idea is simple - don't let money accumulate under your bed and certainly do not have all your money only in your savings account; invest and grow your wealth.
With money you save from spending less than you earn, invest the money. The idea is simple - don't let money accumulate under your bed and certainly do not have all your money only in your savings account; invest and grow your wealth.
(6) Sixth, gain and grow your passive income.
On this note, many suggest gaining passive income, for instance, through investment in stocks for dividends, and bonds for interest, and, for the more conservative amongst us, placing money into long term bank fixed deposits to gain interest might be a good idea. In short, invest your money.
On this note, many suggest gaining passive income, for instance, through investment in stocks for dividends, and bonds for interest, and, for the more conservative amongst us, placing money into long term bank fixed deposits to gain interest might be a good idea. In short, invest your money.
(7) Seventh, manage your debts.
Make sure you pay off your debts. Many people say, however, don't borrow; try not to get into debts at all; and debts are bad. One famous saying I usually tell my students is that Shakespeare says, "Neither a borrower nor lender be." On the other hand, I would say instead that it really depends on what your debt is about. If you borrow money to spend on consumption, such as borrowing for a new TV set, then that might not be a good idea. Try to pay those in full, because interest has this nasty habit of expanding and expanding. You always end up paying much more than you expect due to "effective interest rates".
If, however, you borrow money to spend on assets, such as a house (which is an asset as it can be rented out, or sold for capital gains) or to spend on machinery for your business if you are an entrepreneur, it is rather different from borrowing for consumption.
I would say, in my opinion, try to reduce "bad debt" and try to pay off "good debts". If you can pay for things in full, it would be better - but in my view if you have to borrow, try to borrow for the right reasons.
Make sure you pay off your debts. Many people say, however, don't borrow; try not to get into debts at all; and debts are bad. One famous saying I usually tell my students is that Shakespeare says, "Neither a borrower nor lender be." On the other hand, I would say instead that it really depends on what your debt is about. If you borrow money to spend on consumption, such as borrowing for a new TV set, then that might not be a good idea. Try to pay those in full, because interest has this nasty habit of expanding and expanding. You always end up paying much more than you expect due to "effective interest rates".
If, however, you borrow money to spend on assets, such as a house (which is an asset as it can be rented out, or sold for capital gains) or to spend on machinery for your business if you are an entrepreneur, it is rather different from borrowing for consumption.
I would say, in my opinion, try to reduce "bad debt" and try to pay off "good debts". If you can pay for things in full, it would be better - but in my view if you have to borrow, try to borrow for the right reasons.
(8) Eight, keep track of your incomes and expenditures.
Personally, I keep records of how much I spend and how much I earn, and this accounting keeps me disciplined. Make sure you know how much you spend, and how much you earn, and this will make sure you have the knowledge to cut in the right places.
Personally, I keep records of how much I spend and how much I earn, and this accounting keeps me disciplined. Make sure you know how much you spend, and how much you earn, and this will make sure you have the knowledge to cut in the right places.
(9) Ninth, and this should be pure common sense, always spend within your allocated budget - have discipline!
Set a budget and spend within the budget.
Set a budget and spend within the budget.
(10) Tenth, you could learn about dynamic asset allocation.
One of the recent National Economics and Financial Management Challenge 2014 FaceBook post questions in the competition was about comparing dollar cost averaging and asset allocation.
One of the financial ideas that is definitely useful here is dynamic asset allocation. You could allocate your resources across various classes of assets, like stocks, cash, bond, REITs, and insurance, as this diversification of investments helps you ensure that you build up your wealth while reducing company-specific and other associated risks drastically.
One of the recent National Economics and Financial Management Challenge 2014 FaceBook post questions in the competition was about comparing dollar cost averaging and asset allocation.
One of the financial ideas that is definitely useful here is dynamic asset allocation. You could allocate your resources across various classes of assets, like stocks, cash, bond, REITs, and insurance, as this diversification of investments helps you ensure that you build up your wealth while reducing company-specific and other associated risks drastically.
(11) Finally, there is also a need to eventually build up an emergency fund.
Once you do the above steps in your journey to financial freedom, build up an emergency fund for a rainy day just in case you need the funds quickly. Many people say that an emergency fund should be 3 to 6 months of your income.Do this last because paying off existing debts and investing for long term dividend and capital gains should be your main priorities.
Once you do the above steps in your journey to financial freedom, build up an emergency fund for a rainy day just in case you need the funds quickly. Many people say that an emergency fund should be 3 to 6 months of your income.Do this last because paying off existing debts and investing for long term dividend and capital gains should be your main priorities.
Hope these economics and finance ideas on financial freedom help you think through carefully about your own journey to financial freedom. Do think through the ideas and concepts carefully and reflect on what you have learnt from them, and see which finance ideas are applicable to your own particular context and situation, and which ones will be important to you in future. Thanks for reading and cheers!
JC Economics Essays - This simple finance article is my personal sharing about the path to financial freedom and financial independence. Thank you for reading my sharing on economics and finance ideas and knowledge, and hopefully it is helpful for economics students competing in the National Economics and Financial Management Challenge 2014, NUS, Singapore. Thanks for reading and cheers.
JC Economics Essays - This simple finance article is my personal sharing about the path to financial freedom and financial independence. Thank you for reading my sharing on economics and finance ideas and knowledge, and hopefully it is helpful for economics students competing in the National Economics and Financial Management Challenge 2014, NUS, Singapore. Thanks for reading and cheers.
