A Guide To Not Worry About Money: Financial Independence

Recently, financial independence has become a viral topic since many young generations have started sowing their money to be invested.

Financial independence is simply a state where you have enough wealth to live a life of comfort without the need to work further. In reality, however, it can be perceived in different ways by different people. Want to get there? A state where you can go to Bali anytime and choose any hotels without worrying about your work? Here are some tips!

1. Your lifestyle
Deciding which lifestyle you want to live in or more, determines how you value life. Just by taking the bird-eye view and a long-term framework, you’ll know how big the world is and how easy theoretically to be financially independent. One thing is for sure: the fewer expenses you live with, the sooner you’ll become economically stable, the more expensive or extravagant your lifestyle is, the later your financial independence day arrives.
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2. Your Money
“Control yourself, or someone else will control it” is a quote that aptly points out people’s current obstacles in becoming financially independent. In your financial independence journey, you’ll likely be confused on what shall be prioritized first: return on investment (The percentage you make from your initial investment within a year) or savings rate (The ratio of the money you save from your aggregate earnings). Our answer: focus more on the thing you can thoroughly control, which is the savings rate!

Below is the projection if you start with $150,000 with a 30-year value based on their savings rate and investment returns.

Figure 1. A projection of the percentage of $150,000 money being invested with different investment returns scenarios after 30-years.
Source: THOR Wealth Management 2018

The table shows that the bigger the savings rate, the bigger the money, even though the investment returns remain mundane. So focus more on how much money you can save rather than the investment return!

3. Your mindset

Having this mindset to save your money instead of throwing it away to buy unnecessary goods or services catalyzes financial freedom. Focus more on your “needs” rather than your “wants.” It is indeed cliche, but how many apply it to their daily life?

In his book, Rich Dad Poor Dad, Robert Kiyosaki aptly explains: the rich acquire assets, the poor acquire liabilities that they think are assets — damaging yet straightforward to everyone’s habit about money. What are assets, what are liabilities? Assets are things that put money in your pocket; liabilities are things that take money out of your pockets. No need for an accounting degree to comprehend that, right? Hence acquire assets, assets, and assets. Don’t acquire liabilities, by any chance.

4. Your plan

If you want to build a home, how will you start? If you’re going to make a country, how will you start? Well, it is by establishing the foundation first. No matter what things you want to build, you’ll commence it by curating a solid foundation. So how to develop a foundation in achieving financial independence?

If you were to seek advice from ANY financial planner, they’d need you to start setting up two things: emergency fund and insurance; they are the foundation. Hence you shall have a strong one.

As the name suggests, emergency fund is created for emergencies such as when you get fired, home repairs, or when your dishwasher is broken. It is used to ameliorate financial security by creating a safety net. So that when you’re broke, you’re not really broke as you’ve got a bulk of the money to be used in the meantime.

Assets in the emergency fund are assets that are easy to draw or commonly known as liquid. It can be cash or other highly liquid assets. It deteriorates the need to either take a high-interest debt option, such as credit cards or unsecured loans or jeopardize your future security by tapping into retirement funds or your investments. So how much will you need in the emergency fund? Well, it varies, but typically, it is 9x your monthly expenditure.
Nevertheless, try to adjust the amount by looking at how vulnerable or volatile your job is. The more volatile it is (Trader or Entrepreneur), the more emergency funds they need to establish a safety net. So build your safety net now!

In addition to the emergency fund, the insurance shall come next. We already have an emergency fund, why shall we need insurance? The answer: can you extrapolate when you get cancer or other expensive-to-treat ills? No right?

No matter how big the amount you have in the emergency fund, you cannot project what disease may attack you and how much it will cost. Moreover, the emergency fund can be washed up if you depend on the emergency fund to cover your health care expenditure.

5. Your investment

Yes! Investment! Saving is one thing, but investing is another. You shall start this only after your emergency fund or your safety net has been built. There is a devil that takes your money by the time you save your money without investing it. It is inflation. The money’s value will deteriorate over time, and just by keeping the money productive or investing the capital, in other words, we can tackle inflation.

First and foremost, the number one rule in investing according to Warren Buffet: Never lose money. Rule number 2: Don’t forget rule number one. Yes, we encourage you to diversify your investment portfolio and not heavily invest in one asset class. But, remember, we’re focusing more on the savings rate, not the returns you shall get per year. As Wiseman said, something is better than nothing, but too much of something is good for nothing.

Of course, there are more tips and strategies to get financially independent. However, this is not just a bold start that everyone shall take, but a solid foundation to be paved. Join our community to enhance your capability in business, economics and build an international network by clicking here.

Bibliography

PROBASCO, J. (2021, July 1). Declare Your Own Financial Independence Day. Investopedia. https://www.investopedia.com/financial-edge/0611/declare-your-own-financial-independence-day.aspx

Carter, E. (2021, July 5). 5 Steps To Plan For Your Financial Independence Day. Forbes. https://www.forbes.com/sites/financialfinesse/2021/07/05/5-steps-to-plan-for-your-financial-independence-day/?sh=a1423a2872a2

Schwab-Pomerantz, C. (2021, August 10). Just Starting Out? Take These Seven Steps Toward Financial Independence. Schwab Brokerage. https://www.schwab.com/resource-center/insights/content/just-starting-out-take-these-seven-steps-toward-financial-independence-0

Stechschulte, J. (2019, December 9). Savings Rate vs. Investment Return: Which is more important in wealth creation? THOR Wealth Management, Inc. https://www.thorwealthmanagement.com/savings-rate-vs-investment-return/

Emergency Funds. (2021, April 22). Investopedia. https://www.investopedia.com/terms/e/emergency_fund.asp