If you fail to plan, you plan to fail
The building you see above is not built without the contributions from various parties. Before the contractors can lay the foundation and start building the structure floor by floor, window by window, the architecture plans and designs have to be established. In it are details such as how tall would the new building be and how much gross floor area it would have. So how is the Bahrain Financial Centre related to financial freedom?
Setting targets for financial freedom
Before the first pile is driven into the ground, a target would have been set and a blueprint or design in how to achieve it would have to be established. This is where it relates to you who are reading this blog. How do you even start to decide what is your target towards financial freedom. Let Panzer walk you through how you can set a plan towards financial freedom. You can continue to refine, revise and retune your plan according to changes in your life and family situation but the major milestones and targets should be reasonably firm.
I have advocated based on the books I have read, the blogs I have visited and the conversations that I have had that TRUE financial freedom only comes when your passive income exceeds your living expenses.
Thus, as a simple formula, [a] financial freedom = [b] passive income > [c] living expenses.
In order for you to know how much passive income you need, you realise you need to ascertain what is your living expenses.
Establishing your living expenses
This is easier than it sounds. You could take the Excel approach to develop a monthly expenses worksheet that tracks your expenditure by various categories. That is one way. The easier way would be this. At the beginning of each month, capture what is the balances on ALL your bank accounts and CPF accounts, let’s call this opening balance. Total this up. At the end of the month, capture the same balances and total them up, let’s call this the ending balance. Take the ending balance less the opening balance. Then take this figure and subtract your income, dividends, interest, windfalls as well as CPF contributions. What is left is your monthly living expenses.
If the figure is positive your living expenses is less than your income, i.e. you are living within your means. If the figure is negative, you are living beyond your means!
The degree of precision is up to you. For me, I compute my living expenses based on totalling up individual expenses both known and estimated. I tend to estimate higher expenses to provide a buffer.
Establish the amount of passive income needed
Once you have established your living expenses, the amount of passive income needed has to be higher than what you have. Thus you can see a frugal lifestyle helps you establish a lower target for passive income. Let’s say you determined that you can live on say, $3,000 a month. Hence, for you to be financially free, you need to make $3,000 a month of $36,000 a year WITHOUT WORKING FOR IT. How do you do this? You can either grow your investment capital to $360,000 and look for an investment that pays you 10% per annum. Alternatively, if you can only find an investment that pays 5%, you would need an investment capital of $720,000 and so on.
If you look at the big picture, it is NOT complicated. The complicated part is firstly, establishing a lifestyle that is simple and yet meets your needs and allows you and your family to be happy. The other part that is complicated is searching for that investment that yields a high enough return so that your investment capital is not such a large amount that you are unable to accumulate it in your lifetime.
Financial freedom is not some esoteric concept that only a few wise men know. Everyone can find out about it. The challenge is to put into place a practical approach to achieve it in our lifetimes.
What is your own personal plan towards financial freedom?
What level of income are you able to survive on?
Post your comments and give it a go! I will post the most interesting and thought-provoking reply over the weekend!
Be well and prosper.