Savings are good. But what’s the best way to do with them? How can you start saving? It all starts with budgeting which is in another category here in Ciao, but let me fire away by giving an overall understanding of a few concepts.
What is wealth?
The best way to define wealth as prescribed by some financial experts would be how long you can live without having to work for money. It is not defined by an absolute number or value of a currency but by the number of days you can live without having to work for money.
So if you have savings that are good for 3 months of your current lifestyle, your wealth is equivalent to 3 months.
Hence, financial independence is equated to the state of not having to work for money ever again. You are free to do the things you love to do without having to work for income.
This is determined by two important factors:
1. How much passive income you have?
Passive income is income from investments like mutual funds, bonds, stocks; rental income from your properties; royalty income; etc… This is income you get without having to work for money. It doesn’t come your own personal effort. But it does begin with it, with active income.
2. How much is your expense rate?
This is determined by how much money you need to live with your current lifestyle. Do you live simply? Do you live below or within your means? Or do you live the life of a prince with a pauper’s income? Are you currently living above your means? Try to make an account of how much you spend in a month. List down everything from medical bills to utilities. Make sure everything you spend on is taken into consideration.In mathematical terms, Financial Independence is achieved if:
Passive income = Expense rate
If you can make this happen, you can afford not to work for money ever again. So the real target should be: Don’t be a slave of money, instead let it work for you.
Build your assets. In fact buy/build assets, not liabilities. Save some money and use it to buy assets that can generate passive income (rental property or some shares of mutual funds, stocks, etc…).
What? You can’t save?!? Really huh?
The reason why most people "can’t" save is because they follow the equation below:
Income – Expenses = Savings/Investments
For most people, nothing is ever really left for savings. What can you do then?
Work on a budget. Cut down your costs. Save on electrical bills. Reduce watching movies from thrice a week to once a week. Eat in restaurants less often. You’re making other people, the businessmen who own these businesses rich instead. You are giving your money to them. Will they pay for your medical bills when you get sick? Will they support you when you get laid off from work?
Instead do this and pay yourself first:
Income – Savings/Investments = Expenses
So give money to yourself first, then the rest you can use for necessities. Come on. You know you can still survive. Once your passive income grows, things will be much easier. You will feel more secure. You don’t have to be entirely dependent on your job for money.
What do you really want: You working for money? Or money working for you?
Here’s an overall Financial Strategy that you can apply:
1. Increase Cash Flow
– Earn additional income. Manage expenses.
2. Manage Debt
– Consolidate debt. Strive to eliminate debt.
3. Create an Emergency Fund
– Save at least 6 months income. Prepare for emergency expenses.
4. Ensure Proper Protection
– Protect against loss of income. Protect family assets.
5. Build Long-Term Asset Accumulation
– Outpace inflation. Reduce taxation.
6. Preserve your Estate
– Help reduce estate taxes. Build a family legacy.
So what are you waiting for? Don’t wait until it’s too late. The ark wasn’t built when it was already raining.