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I asked the following question to personal finance bloggers and will be featuring their take on:
The journey towards financial freedom has allowed me to meet online many like-minded individuals who share the same passion and interest as I have towards achieving financial freedom. I realise that to be successful in achieving your goal towards financial freedom, you have to have some support. This support comes from knowing that the steps you take towards financial freedom such as living within your means, being frugal, saving and investing and deferring today’s wants for tomorrow’s needs result in you being DIFFERENT from your colleague, neighbour or friend. People will laugh at you saying why are you so frugal? You could kick the bucket anytime and not enjoy your money. Others will be envious of your financial stability and want you to be LIKE THEM in spending like there’s no tomorrow and then later outlive their retirement funds.
I encourage you to be DIFFERENT but reading what other people who believe in living like no-one else think is the single most important lesson they have learnt in personal finance.
I think out of so many things I read and learnt from others, I can single out the most important component - savings. Savings is such a critical first step towards building wealth and towards the nirvana state of attaining financial independence.
With savings, one needs to settle one crucial equation : Income = Savings + expenditure. To save more, there is just two ways to do it - increase one’s income and/or decrease one’s expenditure. It can be done simultaneously or one at a time, depending on what kind of jobs one holds. I’m single, with no family, so I have a rather healthy saving rates of 70-80% of income. I intend to save at least 50% of income even after I have a family. If I don’t, that means I’m not earning enough!
With healthy savings, then we can start to seriously grow wealth by all the available instruments - stocks, unit trust, property rental etc. For anyone who starts out, I dare say this is the single most important lesson to learn - curb your expenses and start paying yourself first. Once a disciplined saving mentality is built in, the cogs of one’s wealth building machine can start turning to generate more wealth for one.
The most important personal finance lesson i ever learn was to pay oneself first. if you pay one self first. if you are able to pay yourself a portion of disposable income, u can build up a sizable spending buffer, retirement savings account or general savings account in general.
I find that learning that enables me to spend more freely after setting this aside as i know i have that portion taken care of to a certain extent.
Be it, if you are a student, an employee, a business person, a full time investor, everyone, I meant all of us, has the inherent responsibility to manage our finance well.
The most important lesson, I learnt in personal finance, boils down to setting financial goals.
In my capacity as a financial associate in Singapore, I get to talk to lots of people, every single day.
I realise most of them have an insurance plan, have an endowment plan, have an investment linked policy, yet many do not set that OBJECTIVES for having those plans.
When pressed for specific objectives, most will retort, “Don’t know. Just savings”.
A soccer player can’t score goals, if he does not know where his goal post is.
An athlete in the Olympics cannot win the game, if he is not clear on the perquisites to winning.
You get life insurance, for your coverage against death, permanent disability and 30 critical illnesses.
You save your money in the bank as a form of contingency funds for emergency use or for your everyday use.
You save your money in endowments, in investment linked products for child’s university education, for your retirement or simply to improve your living standards in the future.
The goal, the time frame and where you money is allocated to; everything is instrumental to your financial success.
Being clear of what exactly you want, and how much exactly you need, will help you in achieving your financial goals.
When setting financial goals, I always share with my clients this simple acronym, simple formula, which I termed as SMART.
If your child is 8 years old, and 10 years later, she wants to go to a local university; do you have at least $84,000 for her 3 years university education?
When you identify the goals that are important to you, you must find ways to make them come true.
Align with people who already achieved the outcome you want, and learn from them.
If you have been saving only $100 per month, to save $1000 per month in an endowment plan now, may seems farfetched.
So, just remember, setting financial goals are important, and when you set those goals, make sure it is SMART financial goals.
The single most important lesson is to know the difference between needs and wants. I realised that once you have managed to distinguish the two in theory and then implement it in practice, then you are well on your way towards being able to live within your means. The underlying reason why many of us take time to learn this lesson is that it is easier to distinguish between needs and wants in our heads than it is to do so when we open our wallets to buy things we don’t need and consume services that fulfil more of wants than needs.
Life doesn’t have to be lived only for needs but the ability to distinguish between them sows the seeds for financial freedom. Take drinking water for example. If you bring a water bottle to fulfil your need to quench your thirst and restrict buying soft-drinks or bottled water, you will find that you can fulfil your need to quench your thirst without paying so much money. Similar for a mobile phone. A very basic mobile phone vs a high-end one can mean a difference of a few hundred dollars. That is enough to buy groceries for quite a few meals for the family.
The ability to see a need and a want allows us then to determine where is the line we want to draw between spending and saving. Individual decisions made daily, weekly and monthly all add up, allowing you to save more than you thought possible.
Panzer, Five Cents Ten Cents | Financial freedom, one realistic step at a time., Aug 2008Note: The final appearance of your post may be different, depending upon your blog’s style sheets.