Financial Freedom was a term I often heard and read about from Facebook and Twitter posts from people doing MLM Businesses, as well as online scammers who were always on the lookout for the next gullible person to lure into their get-rich quick schemes. The idea sounded great, and at the same time foreign to me. I didn’t even know how to achieve it since it wasn’t something that was taught in school, nor something I heard about from friends or family, or even in the news. I grew up not knowing how to manage my finances or even properly plan for my future.
It wasn’t until I attended a seminar by Randell Tiongson, organized by TRC (Truly Rich Club) in the UAE in 2015 that I actually got a clear picture of what Financial Freedom really means, and how one can actually achieve it. One does not simply achieve Financial Freedom or Independence by wishing it, or working 8-12 hours a day. In order to achieve financial independence, a person needs to have a proper Financial Plan.
A financial plan, as defined in Wikipedia, is a comprehensive evaluation of an individual’s current pay and future financial state by using current known variables to predict future income, asset values and withdrawal plans. In other words, a person needs to draft a financial roadmap based on his current status, and income and its future value to determine how he/she can achieve his/her financial goals. There’s a lot of things that need to be considered in order to achieve Financial Freedom or Independence, and it certainly does not include betting on the lottery, or getting into ponzi schemes just to get rich. There’s a proper way of doing it. It may take some people a while to achieve it, and perhaps only a short time for some depending on how well their finances are. Thankfully, for those of us who are just starting or looking to get started, Randell Tiongson wrote about the 5 No Non Sense steps for Personal Finance to guide us on our road to Financial Freedom.
Step 1. Improving Cash Flow.
For many of us, the main problem why we usually cannot save enough for a rainy day is because our salary is not enough. In some cases, one’s salary is enough, if not more, but the expenses tend to be a LOT higher than the actual income. What’s the solution? Manage the flow of money. A person cannot save money that he/she does not have. Our cash inflow should be higher than the outflow. Do not spend more than what you’re able to make. If you can’t afford it, don’t buy it. If your salary is not enough for your needs, then come up with a way to increase your income. Accept part-time jobs, sell stuff online, do freelance work, or sell some of your stuff that you don’t need.
Step 2. Getting out of Debt.
A lot of people get into the debt trap easily, and not a lot are able to get out unscathed. According to Gulf News, out of the 205 incarcerated Filipinos in Dubai, 15 or 7% are in jail due to non-payment or defaulting on their debt payments. In the Philippines, according to an article in the Philippine Daily Inquirer, millennials nowadays carry more debt than their older peers. Don’t be surprised if you see a group of young professionals huddled in one cubicle. They’re probably rushing to catch the latest seat sale or buying something that went on sale online. Personal Debt is becoming such a huge problem for many Filipinos that it actually overshadows their strict day to day financial discipline. Credit card debt is one of the biggest problems being faced by millennials and the “not so young” generation. There are a lot of ways to get out of debt, and avoid it. The easiest is to NOT get any more debts and make sure to pay off the existing ones, and the other one is to come up with a reasonable budget, and STICK to it! Being in Debt isn’t necessarily a bad thing. Even companies borrow money and have debts racking up to millions if not billions of pesos. It all depends on the purpose or the reason why a person borrowed money. There’s a Good Debt, and a Bad Debt- but I’ll be writing about it in another entry. Bottomline is, if a person is free from debt, he or she can do a lot of things with the extra cash, and enjoy a more stress-free life. After all, nobody likes to receive a paycheck and dread the fact that they will only take home less than a third or half because of loan payments.
Step 3. Setting up your Emergency Fund
If there’s anything that can quickly deplete your savings, or break your budget, it’s going to be an unplanned expense due to an emergency, or unforeseen event. Someone in the family got sick and needed financial assistance, car repair expense due to an accident, damage to the house due to rough weather, job loss etc. If any of these happen and you don’t have an Emergency Fund, either your savings get depleted real quickly, or you end up having to borrow money from someone or from the bank. Having an Emergency Fund allows you to pay for these unexpected events and still stick to your budget. An ideal Emergency Fund should be at least 3-6 months of your monthly expenses. By having an emergency fund, even if you lose your job, or get into a vehicular accident you can still manage with your budget without having to borrow money or sacrifice the allocated budget for your other needs.
Step 4. Getting Protected from Life’s Risk.
A lot of young people today shun the idea of getting insured. This is mainly because they don’t know the purpose, or they probably met with an insurance agent who was only concerned about selling an insurance policy without listening or understanding their needs, and current situation. One needs to understand that having a stable job now does not ensure that your family or dependents, or even you will have a secure financial future. The reason why we need to get insured is not because we expect to reap the benefits while we live, but because we need to make sure that those we leave behind will LIVE. Stories of people who used to earn huge sums but are now penniless afters years of being ill, or families who are now living in poverty after the sole bread winner died are not uncommon in the Philippines. The reason? They were not insured, or they didn’t get enough insurance. In some cases, you may have left a lot of assets behind, but because you did not have enough insurance coverage to pay for estate taxes, the ones you leave behind will still not be able to benefit from what you left behind for them. No matter how careful we try to be with our lifestyle, or how we go about with our daily lives, we can never predict when our time will come, or when a major accident will happen; and if we are not insured or not insured enough, those we leave behind will suffer.
Step 5. Investing in your Future
Warren Buffet said “Someone is sitting in the shade today because someone planted a tree a long time ago.” Simply put, to secure our financial future we need to start planting the seeds today so we can reap the benefits in the future. The earlier we get started, the better. When it comes to investing, it’s not a question of how much you want to start with, but how early you get started. TIME is your best friend and worst enemy when it comes to investing. The earlier you get started, the more time you have to grow your investment and the less risk you take. On the other hand, the less time you have, the bigger the risk you need to take in order for you to achieve your goals in a shorter amount of time. There are so many legitimate investment instruments available in the market today where one can invest their hard earned money and let it grow over time. The common misconception for most people is that only the rich can invest, or those with substantial disposable income. Nowadays, an individual can even invest indirectly in the Top Philippine Corporations for just PHP 1000 a month! That’s just the price of 4 movie tickets! We need to invest our money so it can grow at a much better rate and beat inflation. If you are only putting your all of your money in Time Deposits or Savings Accounts it will only lose its value over time due to inflation. The current inflation rate as of August 2017 is at 3.1%. Savings accounts only earn .25% interest every year. If you have money saved in the bank as a Time Deposit with an annual interest of 2%, it will take you 36 years to double that amount whereas if you have money invested with a compounded annual rate of 8%, you can double your money in 9 years! Not many Filipinos have investments. According to an article in the Philippine Daily Inquirer by Randell Tiongson, only 8% of the 100M plus Filipinos have some form of investment in Stocks, Mutual Funds or Insurance. If we are to secure our Financial Future, and that of our family, we need to start investing NOW. Do not wait for tomorrow.
There’s a lot more we need to do, and learn in order for us to achieve Financial Freedom, but by following the 5 Steps enumerated here as a guide we can all achieve a degree of Financial Wellness, and be on our way to becoming financially free.