Posted: 02 Apr 2008 03:12 AM CDT
Flickr! Photo by Panzergrenadier.
A commercial bank’s view of financial freedom
A good friend of mine who shares similar views on financial freedom flagged this advertisement by Citibank to me recently. The bank is asking its clients to update their income records as being the first step to enjoying greater financial freedom. Citibank sees financial freedom as,
Getting increased credit for all your needs and desires…
This is diametrically opposite what I share and advocate about financial freedom. If you truly wish to be financially free, getting yourself a higher credit limit doesn’t help you achieve it unless you are able to leverage on the credit to invest in something that generates higher returns than your interest. But with unsecured credit interest rates going from 12% to 24% per annum, it would be difficult for would-be Warren Buffet style investors to achieve that type of performance in any asset class consistently and without risking their entire capital!
Is all debt bad?
Debt is not good or bad. When you buy your home, you need to get a loan from HDB or the bank because not many of us have hundreds of thousands of dollars lying around to be used at one shot to the HDB or property developer. Hence, we need to pay 10-20% of the cost and use financing to help even out the cash flows. We borrow using our homes as collateral and pay over 10, 20 or even 30 years for our purchase. Some people call this “good debt”. To me, it is a form of debt that provides you with a roof over your head and to some extent helps you save on home rental expenses.
The issue comes with unsecured short-term credit. Credit has its uses. I believe when you use credit for consumption goods, you violate one of the fundamental principles of being financially free, i.e. to delay present wants for future needs.
One of the personal finance books I’ve read, “The Millionnaire Next Door” shares with us that the real millionnaires typically eschew or avoid consumer credit. In Singapore, the banks can only loan you 2 months of your income as unsecured credit. If you are unable to save up to have at least 2 months of your income on standby, then you are not yet close to living within your means.
Having the ability to obtain increased credit is just that. It has nothing to do with financial freedom. In fact, increased credit allows you to live beyond your means in the short-term with the risks of you getting way over your head if you do not pay off the bills charged to your credit cards promptly.
Developing your own ideas on financial freedom
The term financial freedom means many things to many people. To Citibank, it means giving you the credit to buy to your heart’s desire. To you and I, it should mean having sufficient passive income that covers our living expenses so that we can choose not to work for a living.
You have to decide which definition of financial freedom is right for you. Is the right to obtain credit to live beyond your means your path towards “financial freedom”? Or is it the ability to live within your means, to save and invest and to grow your means?
You decide the path to take in this journey towards financial freedom.
Be well and prosper.