As for us, make sure we are all understand about it, before  reach that level. You will get there faster and the trip is very enjoyable. Check it out below. Plug-in your headset and adjust the volume to your comfortable level. Play it back and forth if you need to, it’s not long just 1.5 minutes! Some further nuggets and summary are below.

Wealth: not really like what you think

Wealthy is a feeling of abundance and full of gratitude, it is not a condition of having much money. And no amount of money in the world will give you wealthiness.  Because wealth is a product of the mind

The statement above is very important, because it allows everybody to be wealthy and happy, right here, right now ! So, if you can still give to people with whatever you have and still feeling great about it, not living in scarcity although you don’t have that much, being a giver not taker, then you are wealthy.

Mahatma Gandhi also telling us the same thing “Happiness is when what you think, what you say and what you do are in harmony” – In other words, manage your expectation -or- live a life within your means.

But only when you feel wealthy, you can feel the true meaning of happiness. So, wealth is the key to happiness.

People with so much money, should have been wealthy, but in reality they are not. Why? Because they are chasing ghost, they don’t have definitive goal in their life and they merely stacking money without feel the gratitude and fullfilled.

Financial Freedom

Your ultimate financial goal in your life should be to achieve “Financial Freedom/Independence”. This is a nice situation where you have enough and sufficient money from your passive income and saving, so you don’t need to work any more. Well, you might be still want to work because you got bored at home, but not because you need the money. Don’t you want this ?

Read this for further detail about this.

Have both: Wealth and Financial Freedom – Nothing Feel Like it!

Achieving financial freedom is much harder than achieving wealth. Within today, reset all of your limiting belief, open your mind, feel the gratitude and abundance, then you can be wealthy and happy. But to achieve financial freedom, probably you will need another 10 years.

So, it’s up to you to go along that trip to financial freedom with wealth and happiness, or with angry , grumpiness, suffering and whinges ?

I guess the choice is clear: be wealthy and happy and enjoy the journey ! There will be no feeling like it.

Investing is like Planting Money

Prerequisite of Investing

1. Clear Up Your Bad Debt first.
   When you start investing, although depending of the strategy you use, expect a good year to be the one with 10%-15% of return. Maybe more when you become experienced. But those credit card , store card or personal loan can easily charge interest rate at around 20% level. So, if you have this kind of debt, doing investing to produce 10%-15% will not make sense as by just paying off these debts, you can consider yourself achieving result of 20% return as you don’t have to pay that interest money.
2. Achieve Your Level of Financial Protection second.
   After clear up your bad debt, before doing investing, you need to get yourself to Financial Protection stage. Financial Protection is a situation where you can have emergency money in the bank to cover 6 months of your living cost without doing any work.  Emergency funds has more priority than investing as it will provide you with peace of mind and more importantly to make sure every investment decision decided not in rush or desperate condition.
   Having enough emergency fund for you and your direct family will give you solid foundation of making good financial decision. So, before aiming to do any investing, a step before is to concentrate to accumulate enough emergency fund for a rainy day by achieving financial protection stage.
3. Have sufficient capital. Don’t start investing with too small capital.
   While investing doesn’t really need too much money to give you handsome return, there is certain threshold that you need to pass before even considering it. Depending on the strategy, generally you will need at least maybe around $10,000 to start simple investing of buying stock/share for example. Any amount less than that, the profit that you will get will be significantly less to cover the cost of investing. This will send a wrong message to your subconscious: that investing is not doing that much and the risk is then you decide not to do any investing at all.
4. You need to know what you are doing.
   Investing although sounds easy can be very tricky. You can ask those victims of scam investment scheme. Most of them didn’t really have a clue what they were investing on. This is really the problem. People fall by the good sales pitch of marketing people of some scheme of managed investment without really knowing the gist of the investment itself, in particular the real risk and potential reward. I don’t say managed investment is bad, but my point is you need to know exactly what it is. Ask a friend who knows and can be trusted (who doesn’t have any financial interest on the investment – neutral view) or just learn it yourself. Internet should provide you with adequate material. Do check the discussion forum and scam-fighting website to double check the intended managed investment scheme. But the best kind of investment, in my opinion,  is if you can do it yourself independently and you know what you are doing. Not only save you the fee, you can outperform the return and have the invaluable gift: the expertise of investing.

The risk without them

Why you do need those 4 prerequisites fulfilled first? The short answer will be : to make sure your investment experience is a good investing.

Imagine if you invest your mortgage money to buy some investment, say buying stock. You will put unrealistic expectation to your “investing’ activity” to give you profit before the end of the month, otherwise you cannot pay your mortgage next month. Well, this is not investing..this is called “Gambling“.

The psychology effect is even more devastating by doing that, you will be telling friend that you have done “investing” and “it doesn’t work” and “it cost me money”, etc… And deep down there on your sub-conscious,  you think what you said above is the way ot should be. And the long result, you will never achive a successful investing because of this false premises. So, DON’t DO IT !

So, make sure do 4 items above before starting your investing. Or at least catch up to have it fulfilled while you still do the investing.

Investing: money work for money

1. You will enjoy additional income as passive income.
   Usually you exchange your time with money. At your specific level, the more time spent to work, the more money you earn. With passive income, your money works for you. Your effort (read: time) is not proportional with the income.
2. The pension from government will never be enough and you don’t want miserable retirement.
   Remember the life expectancy is increasing due to advancement in health technology, population is exploding, hence no government will be able to fund all pensioner.
3. You make sure that your family and all the love ones will never ever be struggling ever again financially.
4. You may sack your boss. You don’t need any job anymore.
   If you still work, that’s because you want it, not because you need to
5. You can make a lot of traveling and holiday around the world whenever you want.
6. You can help your favorite charity or even start your own charity and make a significant contribution to community.
   Work up your legacy in whatever your cause is…
7. Live the lifestyle beyond your imagination

Unless you win a lottery or your parent (or somebody else) are filthy rich and you inherited all their money, investing is your only way to achieve financial freedom.

Your first step to start your investing journey is to define the level of money you need. Just click here to read more detail.

Yes, it will require money to invest. This is what I call “seed money” or “capital”. How to get this money? Read this article: 8 Ways to Get Money for Investing

Remember, before you embark you investing journey, you need to achieve Level-1- Financial Protection first. With this your investing is accompanied by peace of mind. So, my suggestion, try to do as much saving as possible to get to Level 1 while at the same time you sharpen your investing skill.

Happy Investing!

Capital For Investing

1. Savings.
   You need to be able to make a saving from your current income. It does not matter how much it is: 10%, 5%, 2% or even 1%. You set yourself the level of saving and stick with it. Once you’re comfortable, increase the percentage. If you cannot save, there is very little hope that you can be successful in investing.
2. Selling.
   Quick easy way to get some extra money is to sell something from your household that no longer needed but still sale-able. For example: those old toys in garage, spare TV in bedroom, that unwanted gift from friend, your stamp collection, etc… You can make a garage sale or simply sell it on online auction such Ebay. It may be not much, but you could easily score some decent amount of money as well.
3. Tax Minimization.
   Claim all benefit, deduction or tax offset that can be legally achieved from your tax system in your country. Usually tax law is very complicated matter and can easily change over time, hence if you usually do your own tax, try to hire a good accountant to make sure a tax minimization.
4. Increasing Income.
   Try to increase your income by creating value to your employer. Hence you can talk to them and negotiate a pay rise. Or maybe change your job to a better paying one. Take a course that can enhance your salary. But once you can increase your salary, do not change your lifestyle as yet, put all the increase to your ‘investing bucket’ first.
5. Other People Money (OPM).
   This refers to bank or other financial institution. Have you ever think about getting personal loan to invest ? Maybe it’s time. Remember for most country if you borrow money to do investing, the interest that you pay might be tax deductible (reducing your tax) – so you’re end up with cheap loan – check with your accountant.
6. Using Equity.
   This is what refer as creating money from thin air, just like a magic. If you have your own house or property, have it re-valued. If the value is higher than the current mortgage, you can take this ‘equity’ and the bank will give you cash as a loan with no additional security.
7. Using Parent’s/Somebody else’s Equity.
   This is basically the same as action 6, but the property belong to your parent or somebody else that trust you and can give you long term ‘loan’ in the form of their equity for you.
8. Manage Superannuation (Australia) / 401k account (U.S.) / retirement saving scheme.
   This action is highly depended with the current law in your country. In Australia, every employer need to contribute 9% of the payment to a retirement saving scheme called ’superannuation’. If you work long enough and your superannuation have substantial money, you can have it managed by yourself. Although there are some legal cost, but you avoid the fee from your superannuation company and you can do better investing that produce better return for your own super.

You can do 1 or 2 or all of the actions above to get you started investing. All is up to you. Remember knowledge is not power, but your action is.

I also really encourage you to obtain the reference book below to get more clear understanding. Especially the fact that it will not cost you any money. There are a lot of content that can be absorbed from the book to kickstart your investing journey. Feel free to proof me wrong once you read the book.

Reference: “What I Didn’t Learn AT School But Wish I Had” by Jamie McIntyre. The digital version of this book can be obtain legally and free of charge by clicking here.

No longer relevant…

Knowledge is not power!

Only some know that this phrase “Knowledge is Power” was made popular by British philosopher, Sir Francis Bacon from 16th century [1. From "Scientia potentia est" (latin) - see http://en.wikipedia.org/wiki/Knowledge_is_power]. And as we know, around that time, the human race still in the middle of so called “Scientific Revolution” where basically we were still confuse about a lot of thing. For example: we were not sure at that time whether earth is round or flat. Hence, just to know something at that time, someone would become considered powerful.

These days, with the current information technology, we are living in the abundance of information. If you ever want to know about virtually anything at all, just go to a library or even online, type your keyword in Google or other search engines and voila… there is your knowledge in less than a blink. Do you feel more powerful after reading it ? You should not…

There is too much information that can be seized by you on any particular topic in life. Getting the information is easy, but the more challenging task is to filter that information which one is really needed, which one is not necessary or simply just too much.

The Danger of Information Overload

As a matter a fact, we are all in the danger of “information overload” where there are too many knowledge about one particular thing, so many that some are slightly different from the other or even some are contradict each others and we are the one left in wonder – confuse and don’t know what to do. For example: you might read an article about “investing in stock market is risky” then you will also read about “investing in stock market outperform all other investment vehicle”. So, which one is true ? Both side show their evidence, you might see some real people losing money from stock market, but yet you also see some people make a handsome profit from stock market.

The real danger of “information overload” is to make us doing nothing. We will procrastinate and justify the reason because we still need more information (hence keep reading / studying / searching for the holy grail of the subject without end). Read How to Overcome Information Overload if you’re interested.

Knowledge is just Potential Power.
In-context ACTION is the POWER!

So it does not matter if you know a lot of thing, as long as you don’t make the knowledge into ACTION that knowledge will not become power. But as soon as you TAKE ACTION based on that sound knowledge, then you will immediately see the power of the knowledge being unleashed and result will come up very soon after. Buf course the knowledge itself is really crucial, without it you don’t even have the potential. But having it is not everything.

Get the result with in-context Action!

Let see an example: say you have all the knowledge about making money from stock market. But without taking the action to open an account and take that real trade, your knowledge is just simply knowledge… nothing more. But once action is taken, that knowledge become a power, you start getting real money, you start getting real experience about the market that is not mentioned or can be explained on the material that you read. The knowledge become real and via an action the knowledge then become the power that you after.

One important note here is that the action should be the one “in-context” means relevant with your goal and the context of the knowledge. For example: although you know the strategy in investing in stock market, you just simply take a gut feeling to buy or sell against your trading plan. Here, action is taken, but out of context. Even if it is successful, you will not see the realization of your knowledge into power. Simply because the action is not “in-context”.

One other simple analogy: say you have a lot of money in your hands and you are now really hungry and your goal is to have your favorite dishes for dinner. But unless you take action, you can have all the money in the world, but your goal will not be realized. Many action can be done: go to supermarket, buy all the ingredients and cook it (or have someone cook it) -or- call a restaurant to have it delivered -or- go to the restaurant and order it there, etc. All of them are what considered ‘in-context actions’ – all of them make you getting closer to your goal.

So, from now on, remember that knowledge is just potential power, in-context action is the power !

The real danger of information overload is that you become procrastinated and end up doing nothing. This is quite ironic. You want to do something new about a subject. Of course you need to have some knowledge to start your new subject. But after you have too many of that knowledge you become paralyzed and still cannot do something about your new subject.

Information Overload

For example: you want to learn “how to invest in stock market”. Then you go research on the internet or library to gain some knowledge about investing in stock market. After reading various articles , books, reviews, forums, testimonials, etc you found out there are practically hundreds and hundreds of strategies how to invest in stock market. Not only that, you also found that “investing in stock market is risky”. But additionally, you also convince that “investing in stock market outperforms all other investment vehicle”. At this point you will see yourself in “information overload” situation where you don’t know what to do next despite the abundance of the information… And the chances are that you just do nothing.

How to Overcome Information Overload

1. Know your goal or objective.
   Set a tangible goal or objective preferably writing (put it on your agenda, diary or PDA). For example: you want to know “how to invest in stock market”, then you need to set your objective such as ‘to get $200 per month extra income’
2. Only get information from reliable sources.
   You need to be sure that the information is trustworthy and relevant. For example: you cannot seek information about investing in stock market from property investor. If you don’t know whether the information is good or not, trust your gut – but stick with it. Or find something else until you feel that it’s good enough for you.
3. Gather your information only up to you are able to take action for your goal/objective.
   Do not over learning. Although you still need to consider wide aspect of your new subject, just gather the information only enough for you to take any real action. For example: just choose 1 strategy among hundreds to invest in stock market then learn what it takes to do it, e.g: what type of account at what broker, how much is the minimum capital, what the maximum risk and maximum reward, what is the cost etc.
4. Take action.
   This is the most important thing: take the real action. For example: open that account and fund it, take the paper trading to practice and then place that real ‘buy order’ to your broker.
5. Only if more information needed, go back to no (3) otherwise just keep the action until you achieve your goal.

In other words…

Use the all the information “as you go”. I call it “task oriented”. So, you just try to complete a task and along that line you find only information relevant to that task. Of course you need to see the ‘big picture’ first, i.e: to have that goal set, know the risk and reward and believe that information you use is trustworthy.

With this way, not only you learn something new, but as soon as you know that new information, you actually have done it. Of course, the result could be good or bad, and some mistakes – small or big – can be made along the way. But that’s part of the learning and you will be much better off compare to the other person who just gather the information without doing anything at all, because knowledge is NOT power, action is!

Mindset Toward Money

Since you want to be successful with investing, then you need to have the investor mindset. But at the same time, you also need to avoid the “pensioner mindset”.

We will explore these 2 totally different mindsets. The “pensioner” mindset versus the Investor mindset (or often also dubbed as “millionaire” mindset – as most of the millionaire, excluding the one just win the lottery or inherited wealth, would have this mindset). Let us begin…

The Pensioner Mindset

Now, before all the retiree in the world got angry to me, let me explain what I mean. The “pensioner mindset” refers mainly to a believe that once you reach pension age, then the government/state have to look after you. It’s sad but true, most of the pensioner will agree to that believe. How about you ?  Yes, you are retired, but you can be a “self funded retiree” not “pensioner”. Remember “pensioner” means a person that receive periodic payment from government.

No, it’s not and it should not. It is your life, so be responsible and take care of yourself. If the government may has something for you as pensioner, then be gracious and accept it just as a token of appreciation of your contribution to the country not as your main life support. If you are now a pensioner and you rely fully on your government pension, then probably only little you can do, we cannot turn back in time because more effort need to be done on previous years. Don’t you know that the population is getting bigger and life expectancy is getting longer? Hence, sooner or later, there will be no government in the world that can afford to fully funded all pensioner. The pension money will getting smaller and smaller in percentage.

Again, of course,  not all pensioner adopt this kind mindset, but most of them do. But although it’s called “pensioner” mindset, this kind of mindset is already also adopted my much younger person who does not understand (yet) the importance of millionaire mindset.

The Investor Mindset / The Millionaire Mindset

This is the mindset that see all the problem as it is, not worse than it is and not better than it is. This mindset has nothing to do with ‘positive thinking’ or some sort. It is just see everything the way everything is. No pre-judgement. The persons who have this mindset usually is very familiar with the concept risk and reward. They know how to mitigate risk to minimum. If they don’t know, they will find out until they satisfied with the knowledge. And they take full responsibility of what they did. Their decision, their money, their responsibility.

Which one is which

Let see the differences

Yes, there are a lot of scam out there, but there is also genuine good opportunity. So, if it looks good, check it out first – who knows it’s the opportunity that you always waiting for.

Sounds familiar ? There is no such guarantee in life. In matter of fact, you yourself will not be able to guarantee that you will be still alive tomorrow. That’s how risky life is. So, in every opportunity, know the risk, know the reward. If it’s still okay, just do it !

Don’t you want a financial freedom where you don’t have to work anymore (and if you are working that’s because you want to and because you have to)? That’s not going to happen unless you act now to make it happen. The secret is investing. You need to invest and invest until you have reached your goal.

Money, age, and education are the common excuses for people with “pensioner mindset” to justify about NOT doing something. Stop making excuses! Make it happen!

Why? Because we want to achieve our goal sooner than later – while enjoying the journey. Without applying this concept, our journey to achieve the goal will become very slow or not even started and not too convenient. Slow because your profit is not maximized . Not convenient because this thing will bug you down.

And if these happened, the tendency is people will just loose the spirit, forget the goal and just give up.

Ownership – Owning

Merriam-Webster define “to own” as: to have or hold as property. If something is your own property then you are free to do whatever you want with it (with certain restriction as allowed by law, of course). You may use it, modify it, you may sell it, you may gift it to someone else, etc. And of course, your name will be on the title of ownership.

How to get an ownership? To get an ownership we need to buy it. We either can buy it outright (pay it off upfront) or with debt (pay it off over certain period of time). This is what we call: the cost of ownership.

For example:

• You want to buy $550,000 house. Then you can buy the house outright (if you are rich enough to have $550 grant sitting on your bank account) or get a home loan and pay it over 25 years. Either way, you are toward an ownership of the house.
• You need a car. Then you can buy it outright or take a car loan and pay it off for fixed interest rate over 5 years.

Control – Controlling

Merriam-Webster define “to control” as: to exercise restraining or directing influence over. If you have control over something, you pretty much can fully use it as if you own it, although with certain limitation.

Similar to ownership, we still need to pay some cost to get the control. This is what we will refer as the cost of controlling.

There are 3 important aspects below that can be achieved by taking control (compare to taking ownership). These aspects are where the wealthy and riches really pay attention to and should do we. They are:

1. The cost of controlling can be significantly cheaper than the cost of ownership. So, the general idea between comparing ‘owning’ vs ‘controlling’ is how to get the full benefit of something with the least amount of cost to maximize profit. For example:
   • Instead of paying “principal and interest” loan for your own house (toward ownership), you choose to pay “interest only” loan. Read this property article: Why Not Paying Off Your Mortgage is Better For Investing for further detail. When you take “interest only” loan, your intention is just to control the property, there is no intention of paying it off.
   • Instead of paying your $100k share portfolio upfront, you choose to take 100% loan – capital protected margin lending which only cost you $700 per month instead of $100k upfront.
   • Instead of buying a car for your business, you rent it. Not only you got direct deduction, but also save resources and hassle in maintaining the operational of the car (service, repair, registration, insurance, etc) and concentrate on your core business instead.
2. Controlling can provide additional asset protection. If you own an asset, and something goes wrong and someone initiate a litigation against you (you being sued), then that assets will be safer from that litigation.
   For example: you put the family trust as the owner of your house instead of yourself. Hence is your business is in trouble, your house cannot be seized as it doesn’t belong to you.
3. Controlling can provide additional anonymity. If you own an asset, and you don’t want your competitor or other party knows directly that its belong to you, then you can choose having the asset registered under other entity while have full control over it.

So, because of these 3 factors – for smart investor – controlling is a better alternative compare to ownership.

What’s need to taken care of

As with anything else in life, we cannot just blindly applying something without assessing it properly. Some factors that you need in related to ‘Control vs Ownership’:

• By not paying off your asset, you will be constantly in debt (usually large one) which exposed you to additional risk. While eliminating this risk is not difficult, you need to consider this factor carefully. For example: big mortgage debt can be covered by life insurance/income protection insurance which allow you to still serve the loan if something unwanted happened. Another example: Downward movement in your 100% finance share portfolio can be protected by simply take the put option.
• You *have to* carefully optimizing and do your own calculation to determine that cost of controlling is significantly cheaper then cost of ownership that help you to maximize profit. The significant benefit will highly depended on whether negative gearing apply in your taxation law, your tax income bracket, the interest rate, the value of investment, credit history, among other things. Your specific circumstances may prohibit you reaping the maximum benefit. Check this first.
• Additional cost may be involved related to your asset protection structure. The usual way to achieve better asset protection is by creating legal entity as limited liability company or trust with company trustee. Creating this entity will involve setup cost, registration as well as more complex accounting requirement. They all will be translated to significant yearly cost. You need to weigh whether the benefit outweigh the cost based on your current situation. For example: if your business is not prone to litigation (low risk) probably it’s not worth it. Or if you just starting and the total asset in management is very small, maybe you can postpone this until your business/investing grows to certain level.

Conclusion

One of important keys to riches is understanding the concept of Control versus Ownership. By applying this concept to our wealth creation journey, we may be able to reaping the benefits explained above. Although certain consideration and care are needed – in long term – on the way to our success – we will generally better off choosing Control over Ownership.

Let start with 2 simple definitions of investing terms: -ksr_tr-ivbm

• “Investing” is simply activity of buying or selling an asset to produce either income or growth or both.
• “Asset” is good or services that can grow in value.

Buying a brand new car is definitely NOT an investing activities. Why ? Because the moment you drive the car outside the car dealer, probably it loses 20% of the value already. (Just try to sell it back to the dealer a week after). So this car is not an asset, hence not an investment.

But, if you own a very rare car which is classic and antique. This is probably an asset because as the time goes by you can sell it for more money.

Buying property to invest

In fact, usually your home mortgage is the single biggest liability that you ever have. Of course, there are things that we can do to make our home become income producing asset. We’ll discuss this later.

But if we buy other house (that we don;t live in it), then we rent it to somebody else, so that we not only received rent as income but also can enjoy the growth of the house. This is a good investing example.

The same thing with buying share. Although we could just buy and do nothing about it (a.k.a as BHP strategy – Buy-Hold and Pray) , it’s still investing, as the share can grow in value. Beside that, wwhile we are hold on to itm e may have received income from dividend once or twice a year (it’s up to the company)

Or you can buy a business, for example you buy a corner store near your place. That’s also an asset that give you income, hence it’s an investment.

One thing to remember is: although you are buying asset, it is not guaranteed that you always make money of it. As there is always a “risk” attached to any investment. (Share can go down, Property can went bust, etc)  -  What you need do is, to manage that risk low enough to make overall investment producing profit for you.

Income vs Growth

What is the difference between income and growth:

• Growth: is the comparative value of the asset compared to the buying price. We don’t need to sell the asset to enjoy growth value, we just simply to re-value it.
  Example: we buy a house at the price of $300,000. 5 years later the price become $500,000. Then we are getting $200,000 of growth.
• Income: is the additional benefit (usually a cash flow) just by owning the asset.
  Example: just by owning share, you are entitled to received dividend money from the company.

Income producing asset vs Growth asset

Based on its characteristic of producing income or growth, each investment that we make through an asset can be classified as “Income producing asset‘ or ‘Growth asset‘. Each asset usually have a little bit of both, but we need to know what to expect in term of this aspect.

For examples:

• If you own a business, say a corner store or a restaurant, you will want this asset to become income producing asset (give you income on daily) rather than growth asset (expect someone to buy it on higher price)
• If you own a property, you will expect it to be growth asset rather than income producing asset. Because usually the money from the rent usually can only cover most part of the mortgage/ home loan (so you cannot enjoy this as income) but you expect the value of the property is growing so that you can sell it or re-value it at later date.
• If you short term share trading (say only a few days or weeks between buy and sell), you expect the asset to be growth asset. You don’t want to wait until the company distribute dividend before selling it.
• If you long term investor (say hold a share more than 1 year): you expect the share to be income producing asset and also growth asset.

Conclusion

So, we know now that if we want to do investing we need to acquire an asset. Then with that asset we either can get the income or the growth. Each assets will have different characteristic on producing the income or growth.

For example: if someone asks how much money need to have before considered financially independent? Person A say: “a lot of money”, Person B say: “$1 miilion per year passive income”. Which one is easier to visualize, an abstract definition from Person A or Person B?  Of course from person B.

Freedom with No Burden !

This step is absolutely crucial to start your financial freedom journey. Why? By having this milestone, your goal is no longer MOVING TARGET. It’s fixed and written black on white. You can put it on your file, paste it on your wall, etc and become your tangible goal. You are no longer shooting in the dark, you have real figure number as your target.

5 Levels Toward Financial Freedom

Toward Financial Freedom

There are 5 milestones that help you achieve financial freedom. You need to get to Level 1 before go to level 2 and vice versa. The levels are:

1. Level 1 – Financial Protection
2. Level 2 – Financial Security
3. Level 3 – Financial Independence
4. Level 4 – Financial Freedom
5. Level 5 – Absolute Financial Freedom

Level 1 – Financial Protection

Financial Protection is achieved one you have 6 months worth of cash to meet all basic needs to survive without anybody need to go to work. So, if something bad happened, you have full 6 months to back to your feet again but continue your life as it is. So, what you need to define your level is your monthly cost or overhead.

This include all basic living cost: food, clothes, transport, all bills, insurance, home maintenance, credit card repayment, mortgage, basic entertainment, etc. But no holiday, no saving or other major purchase included. Only everything that needed to continue ‘normal life’

Example: John and Jane requires in average $3000 per month to meet all basic living cost. Hence their level 1 – financial protection is 6 x $3000 = $18.000. So, once they have $18,000 in the bank, they can survive for 6 months without having to work but can still be able to live as normal.

Level 1 – Financial Protection for John and Jane is $18,000.

Do not put this money in term deposit or the like. Put it on your daily saving account or any account that accessible from your ATM card. You might consider have stack of cash from this money. This is pure for emergency only.

Level 2 – Financial Security

Financial Security is achieved once your investment can produce 12 months worth of all basic living cost. This is not your income from work, but only from your investment such as: profit from share market, profit from your investment business, interest from your term deposit, your rent income from your positive cash flow property, etc. This is a passive income that provide you with financial security

Example: With $3000 mothly cost, then John and Jane’s investment need to produce $3000 x 12 = $36,000 profit per year before they can get Level 2 – Financial Security status.

Level 2 – Financial Security for John and Jane is $36,000 per year passive income

What sort of investment can produce this kind of passive income ?

• Cash interest. With 5% interest from your term deposit, $100,000 deposit can produce $5k per year, hence to produce $36k per year, they need to have $720,000 in a bank.
• Share market strategy. With typical 15% return from share market strategy, $100,000 portfolio will produce $15,000 per year. Hence $36k can be achieved if they have $240,000 as their portfolio.
• If you own profitable business that can produce 20% of return, then $36k can be produced if you have invested $180,000.

Of course you can do combination from all of them. The higher the return, the less capital needed to achieve the goal.

Level 3 – Financial Independence

Financial Independence is achieve if the investment can produce profit equal to your combined annual salary / current earning. So, at this stage your total income is basically doubled. In other word, income from your investment have produce the same amount of money that you can get from salary or work.

Example: John and Jane have total combine annual salary of $90,000 per year. Then their investment income need to produce $90,000 as well before they can hold Level 3 – Financial Independence status.

Level 3 – Financial Independence for John and Jane is $90,000 per year passive income

Level 4 – Financial Freedom

To achieve Financial Freedom (Level 4), the investment / passive income need to produce not only whatever you get from Financial Independence, but also 12 months worth of all the cost needed to cover the living cost plus all lifestyle and luxury item. All from your investment income. So, at this stage you can cover all the living cost plus lifestyle cost just from passive income derived from your investment. You still have additional earning from your salary / work. But obviously you no longer have to work again.

This additional lifestyle/luxury item can be calculated using the interest payment as if we get a loan to get hold of that item. (i.e: controlling vs owning, see the article)

Example: John and Jane have 3 lifestyle items that they really want to have once they have financial freedom:

1. $200,000 boat. With 8% interest, the monthly repayment will be: 8% x $200k * 1/12 = $1334 per month
2. Charity $1000 per month
3. New house of $1.5 million. Monthly repayment: $10,000 per month assuming 8% interest
4. Total these 3 items above is $12,334 per month/$148008 per year plus $90,000 = $238,008

Level 4 – Financial Freedom for John and Jane is $12,334 per month passive income

Level 5 – Absolute Financial Freedom

Your investment income have absolutely covered all your expendentiure beyond your imagination. Absolutely everything that you can buy with money in the world. For quantitive sake, let say at least you have 3 times the amount from Level 4. Hence :

Level 5 – Absolute Financial Freedom for John and Jane is $37,002 per month passive income

The Capital

The capital needed is really depended to the return expected from the investment. Say if the return of investment of cash is 5%, share market is 15% and business investment is 20% and John and Jane decide to invest 20% of their money as cash, 50% as sharemarket investment and the rest is business investment, then the capital neede for each level is as follows:

To reach your ‘critical mass’ of capital the soonest, you need to use the power of compounding interest. That means you always invest back all the profit from one period to the next periode. i.e: $10k investment with 10% return will have $1k profit. All of this profit and capital (total $11k) is invested to the next period that yield $1.1k profit, and vice versa.

What’s Next

Now that you have understood the meaning of the 5 level above, it’s time for you to calculate your own number. Remember you just need 3 data: monthly cost, annual income and monthly cost for lifestyle/luxury item. Then just use “Toward Financial Freedom” to calculate and print your pledge.

Then you have taken your first step toward Financial Freedom. Congratulation !

Recommended Readings:
[1] “7 Habits of Highly Effective People” by Steven Covey
[2] “What I Didn’t Learn AT School But Wish I Had” by Jamie McIntyre. The digital version of this book can be obtain legally and free of charge by clicking here. Some minor modification to enhance the definition has been applied on this article but did not change the big picture of the understanding.