Monday, May 21, 2012

Seven steps to achieve financial freedom

"If you would know the value of money, go and try to borrow some." - Benjamin Franklin

Step One: Change your mindset.

Since I was a kid my parents told me to work hard if I want to buy something I like. They also trained me to work and study hard so that I can get good grades and get a good job later. This pattern of work-earn-buy is how many of us were raised.

I remember back when I was in college, I get an allowance of Php 200 every day and I was happy that I can save a little with that amount. During my first year of work, I was earning Php 350 a day and it wasn’t enough. I began to ask myself “What’s happening? I’m earning almost double the amount when I have in college but it seems that it’s not enough.

I realized that, what I want in life and my lifestyle changed. I’ve bought new clothes for work, ate from more expensive restaurants with my officemates, have a new line subscription from Globe Telecoms, etc. And even before I got my salary, taxes and insurance are already deducted from it. Without realizing it, I’m acquiring expenses and liabilities.

Like I said the first step in becoming financially free is to change our mindset. If I ask you now, if for example you get a bonus of Php 20,000 would you invest all of it on stocks/mutual funds/small business or buy a new laptop/any cool gadget? For almost all us the answer is simple, buy the things we want, go to a vacation, spend the remaining on expenses and if there’s a little amount remaining, save.

I believe that it’s not impossible to change our mindset. It may be hard but it’s doable. My mentor and good friend of mine told me that we humans can program our thoughts like a machine if we really want to. Whatever your age is it it’s never too late. We need to change our mindset from work-earn-buy to work-earn-invest and when our investments paid off it, we will be financially free.

Step Two:  Invest in your financial education.

Like arts and sciences, we need first to invest in our education to become what we want. If we want to be become a programmer, take an I.T. course or computer science. So, if we want to be rich and financially free we have to study the art of making money. The first thing that we have to do is to have a personal financial checkup. And yes, you can do this in private J.

a)    List all your assets (work, investments, anything that gives you money)
b)   List all your liabilities (expenses, phone subscription, debts, anything that takes your money)

By doing so, we’ll have a picture of our cash flow.

c)    Learn to budget, segregate your assets in different areas.

I’ve learned about this on a seminar that I attended. For example, I have a Php 100,000 in my savings account. It’s a huge sum right? Wow, I can even buy a second hand car. But by segregating it like this it’s really a small amount:

Retirement Fund: 20%
Retirement fund is composed of insurance, pensions and savings in preparation for your golden years. Who doesn't want to retire young and rich? Maybe it's still small today, but after years of acquiring good investments you’ll see it grow and you’ll be amazed on how big it will be. I suggest that you get a savings account with passbook so that you won’t easily withdraw it. If it reached the minimum amount for time deposit, please do so. If you have enough money please get insurance, this is more important if you have a family already and it’s cheaper to get if you’re younger.

Expenses: 20%
Okay, there’s nothing we can do about this. They say that we humans are the only one that pays to live in this planet. Expenses are composed of taxes, electric bills, phone line subscription, food, water, clothes, etc.

Education: 10%
Education does not end in college or in our career. For example, if I’ll have enough money I want to study how to cook because I love food. Or I can study law because I love to debate and defend what I believed. I want to travel around the world and meet new people or just anything that you want to learn that will make you a better person.

Luxury Fund: 10%
All work and no play makes a dull boy right? I know that no matter how we saved, there’s something inside all of us to buy something we really, really want. Be it a vacation, a car, gadget or a watch or just anything you put it in here. You deserve it.

Investments: 20%
Investments take many different forms. Some are more riskier than others, some are good and some are bad. Investments come in forms of stocks, bonds, mutual funds, gold, real estate. This can also be a business idea that you want to venture to or franchises that you would like to acquire.

Emergency Fund: 10%
During one seminar that I attended, a man that I spoke with told me that accountants keeps 10% of the company’s revenue for emergency. For example if the company needs additional budget for projects like company outings, training or anything that additional funding was needed. I thought if companies adopt this practice because it works, why don’t we? So this fund is for emergencies or “emergency gimiks” or anything else that needs emergency funding.

Tithes: 10%
Once I attended a worship with LOJ or “Light of Jesus” and they tackle the topic of giving tithes or giving 10% of your income to the church, charity or community. Maybe you’re not that religious or maybe you don’t believe such things but I still recommend giving at least 10%. It hurts I know, but the feeling of giving is something you’ll never forget.

Step Three: Take Action

Of course, all this reading and studying about money is useless we act on it and test it ourselves. Ideas are just ideas until someone acts on it. In school, we were taught and have an exam but in life we get our exams first and then we learn. I too, before learning about investments have made some mistakes before I understand it. I lost some money but the lessons learned are so valuable that I still practice it. I know it’s scary but we can do it.

Step Four:  Reduce your debt to zero.

I highly recommend this. Before saving and investing we need to pay our debt first. Why? Because the interests from our debts will not stop growing unless we pay for it. For example, credit cards offer a “small” interest rate of 3.5% per month right? If we don’t pay it up in a year it will be 12 X 3.5% = 42%. That’s why I don’t want long term loans unless the property that I bought is income generating. So pay your debts first or it will grow so big, that it will eat all your savings and investments.

Step Five: Buy real assets.

Most of the time, people confused assets from liabilities. For example, many thought that a house is an asset; it is not, unless someone rent it from you. Some buy cars thinking of it as an asset but once you take it outside of the company building its value depreciates and taxes and oil change, maintenance will really cost you. Others buy cool gadgets like mobile phones but it immediately depreciates in value. So buy real assets and investments that generate money for you.

Step Six: Live below your means.

I've learned about this in an article in Yahoo that many millionaires and billionaires practice. Warren Buffet one of the richest man in the world encourage practicing this. He discourages having many credit cards and buying unnecessary things. So regardless on having a good salary or not, live below your means. If you have a Php 16,000 salary, don’t go to a spending spree and buy all you want. Instead of eating on an expensive restaurant go to a fast food or to an inexpensive one or just buy a voucher from group buying sites. If you’re going on a someplace near don’t take a cab and just walk, it’s good for your health.  Don’t be a show off because people already know who you are.

Step Seven: Learn to share and bless others.

What is the worth of your wealth without sharing it with others? How sad is a lonely rich man. History tells us of tales of kings and the rich people that dies a lonely death because of their greed. As they all say, money is not evil it’s the love of money that’s evil. Money is just a tool, we can either use it to share and bless other people or be blinded by our greed and be hated by all.