Steps to Financial Freedom

Financial Freedom

As you know, Peter and I are trying to become Financially Free – which is to say, we want our passive and portfolio income to support our lifestyle of travel and day to day expenses. How, are we going to get there? Well, in this post, we try to provide the steps we are trying to take in order to reach Financial Independence.

You can emulate some of the steps that we are trying to do, but most of them are quite common sense but hard to wrap your heard around because it’s a mindset thing where you have to build habits to make it part of your day to day routine.

Steps to Financial Freedom:

Goals and Dreams
Goals and Dreams

Figure out why you want to be Financially Independent

Fine, you don’t want to go to work every single day at a cubicle anymore and I get that. However, you have to think deeper and ask yourself why you want to reach this goal. Our other article gives you a few pointers why you should reach it, but you’ve got to go through that exercise first before you proceed to the next steps.

Start with the end in mind and then go through the steps that you need to accomplish the end goal. You’ll find that you are working to reach a personal goal and thus the steps below will be easier for you to make sense of because you are not doing all these things just for the sake of doing it. You’re actually doing it because you want to do it. Yes, it can be partly a mindset thing.

 Save, Save, Save

Save more than you earn – seems simple, right? Wrong. When I was a fresh graduate and was doing my first job, I got a bit too trigger happy and was buying everything I could ever want. I blame that from the lack of personal finance lessons that I know. The thing is, sometimes you’ve got to make mistakes in order to learn, right? My biggest one would be going to Hong Kong with my mom and ended up having credit card debt because whoops I under budgeted.

Since then, I’ve gotten my finances in order and now aiming for more than a 50% savings rate from what I earn. Meaning I save 50% of my money after taxes — be it through automatic mutual fund investments or through a bank account that serves as a holding area for future investments, you’re slowly growing money for your future.

Saving can also be used for your day to day life: groceries? Buy what’s on sale. Travel? Buy airfare when it’s on sale too. Pay discounted prices for most of the things you need. Sometimes you won’t even need new things anyway. I have no problem buying clothes from Goodwill (or other thrift stores) even if it means they’re used. I get most of my designer stuff from there anyway.

Money, Money, Money
Money, Money, Money

Building Your Emergency Funds

So in the first section, we discussed savings. Where do you put your savings in? First off: emergency funds. I keep a 6-month stash of emergency funds in a readily available bank account (earning interest of course), which I can easily tap into if there is an emergency. It can be used not just for emergencies, but for job losses, or maybe a car.

You don’t have to keep 6 months in an emergency fund, some people opt to just have 3 months in there. I’m conservative so I keep 6 months but to each their own.

I would suggest that you guys build your emergency funds first before you delve into the next section which is:

Invest, Invest, Invest

You can earn money through your bank account’s interest of course, but if you want to earn more than the inflation rate (ie the cost of goods that go up), you’ve got to invest your money in either stocks, bonds, mutual funds, or even real estate. These may not be the only investment products that are available out there but they’re the ones I’m familiar with.

Peter and I invest in Vanguard mutual funds, holding shares of bonds, stocks, a mixture of both, and even Target retirement funds (for me). We picked these index funds because we don’t have to pick and choose stocks and bonds of our own. Let’s face it, picking stocks and bonds on your own requires a bit more time and effort than what I’m expected to do. And besides, working in a financial company, we have to go through compliance and other stuff to do that so no thanks.

Index funds are a great way to invest semi-passively. I contribute whenever I feel the market for a certain fund is down (i.e. I add more money from my bank account to my fund) just to bring my cost-averaging down too. I hold these funds because I can get dividends and capital gains distributions either monthly, quarterly, or yearly (certain funds pay out differently on different times of the year).  Investing in these types of financial products also has a lower expense ratio (the cost you pay for the fund managers for handling the funds) – which means more money for me.

Aside from portfolio investing, Peter and I dabble a bit in real estate investing. We bought our first house last year (albeit a townhouse), and it is income generating in a way that allows us to pay a certain percentage of our mortgage, but not all. Our house is still a liability but we lowered our costs by renting out our spare room. The reason why we bought a house is because the rent prices in the area we live in are currently skyrocketing, and even on a 15-year loan (which is a bit aggressive, I might admit), we are paying way less than the cost of renting a two-bedroom apartment.

We even bought another rental property in an amazing location and school district. We haven’t written about that one yet but we’ll probably do another post once everything is all settled. We mostly bought it because the deal was good, and we won’t be able to afford anything else in the area we bought it in. Besides, I got emotionally attached to the place because I find that it’s a location I can find myself living in too.

Financial Freedom
Financial Freedom

A Caveat

Now, we don’t want you to just go saving and investing money without knowing anything much right? As with anything in life, investing can take a bit of a risk. You may see these successful people on TV or hear them on the radio on how they made a few million in so and so months. Well, yes, they may be lucky in that sense, but the truth is not everyone can be that lucky.

You can lose some money by investing – higher risks gives you higher rewards, yes, but what should you do to at least protect yourself from losing money and at least preparing yourself? One word:

Studying.

But wait, I finished my university degree and went through all those years in school. Why do I need to study again?

Because you need to – you need to learn about investing, and go through the funds that you want to invest in and compare them as necessary. You don’t need a financial planner telling you exactly what funds to do for what other reason – you know yourself better than that and know more of how you tolerate risk. If you do your own due diligence and start researching – and there’s no better time than this information age to do that – then you will eventually start getting things.

This is why I’m dedicating a lot of time in trying to understand the real estate market & how to retire young & retire rich. By studying certain topics that I am actually interested in and not something I’m forced to do, I actually motivate myself to learn more, oh, and I just use my time and don’t spend much money in the effort of studying.

How do I do it?  Through the use of the local library. I borrow books from the library, which helps me save on trying to buy and source stuff from bookstores. I download free podcasts and listen to them in m spare time. I read blogs as well – there’s just a lot of information out there and unfortunately you have to weed out what’s bad content from what’s excellent content.

In Summary

There are many steps to reach Financial Independence, and I commend everyone who had managed to do it in their early 30s. Unfortunately for Peter and I, we got started in our early 30s, so we’re not due to reach our FI goal until our early 40s- but that still shaves a few years off the overall goal of everyone: retire at the age of 65.

In our 40s, we probably have a family, which means we probably won’t travel as much anymore (we’ll see) – but that doesn’t mean we can’t be FI and just chilling at home. But our point is – as long as you plan for your FI, adjust accordingly and keep your finances in check, you’ll slowly be on your path to it.

See you on the other side!

 

 

 

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