Five elements to achieve financial freedom

2008/10/05

Business: Five elements to achieve financial freedom
By : Yap Ming Hui


WHEN you ask people what is financial freedom to them, chances are that you are going to get different answers. Some may say that financial freedom means having RM1 million in the bank. Some may say it means no more debts and loans. Some say it means having enough money to do whatever you like.

I define financial freedom as a controlled financial position, whereby there are sufficient financial resources to meet your needs and wants at any time and in any circumstances.

The amount required to achieve financial freedom will vary from one person to another. For someone who has less needs and wants, he will require less money to achieve his financial freedom. For someone who has more needs and wants, he will require more financial resources.


For example, a multi-millionaire may not have financial freedom yet if his needs and wants are more than what his financial resources can meet.


Five essential elements of financial freedom


To achieve financial freedom, I believe one has to understand and manage the five essential elements of financial freedom effectively. Let's do a quiz to see how much do you understand the following essential elements that I share.


- Spending


Spending is one of the five essential elements of financial freedom. Unless and until you understand the impact of your spending to your achievement of financial freedom, it is unlikely you will achieve it. The more we spend, the less we save. The more we spend, the more money we need to maintain our life style in retirement years. Based on the definition of financial freedom, your spending level measures your needs and wants.


- Inflation

Inflation is another essential element that will make or break your financial freedom planning as it will not only deplete your accumulated capital, it also reduces your purchasing power. This is one of the most challenging elements to understand and manage because it is intangible and difficult to see. You can only feel it over an extended period of time.


- Return on investment


Despite the negative effect of spending and inflation, one can count compound interest to help achieve financial freedom. The higher the return on investment (ROI) rate, one can achieve, the better he can make his wealth works for him. As far as achieving financial freedom is concerned, we are not talking about ROI in isolation. It is not that you have a choice as to what ROI you want. If you don't achieve certain ROI for your money, your effort to achieve financial freedom will be very much discounted by the impact of inflation and spending.


- Time


Time is another essential element for you to consider and integrate in your financial freedom planning. We need to know the time when our financial needs and wants appear. For example, at which year will you need to finance your first child's tertiary education. We also need to know the time horizon that you have to accumulate your financial resources. Only then, you are able to structure your investment properly to achieve your funding target.


- Saving


The more we save, the less ROI we need in order to achieve the same accumulation target. For example, if you can save RM16,000 per year, you will need an annual ROI of 18.3 per cent to accumulate RM1 million in 15 years time. However, if you can save RM36,000 per year, you only need to achieve an annual ROI of 8.3 per cent.


Applying the five essential elements to your life


After examining the five essential elements of financial freedom, you will find that the five elements are closely related and inter-connected. One element will affect another. For example, how much you spend will affect how much you save. How much time horizon you have will affect the ROI you need to achieve an accumulation target. Therefore, you need to understand the combined result of these five elements.


Each one of us will have our own financial freedom target. Therefore, each one of us will also have our own code for our financial freedom. We need to find out what combination of spending, ROI, inflation, time and saving is the right code to achieve our own financial freedom.


Have you found out what is your code to your financial freedom? If you haven't, you better start now before it is too late. By then, without the essential element of time, it is going to be very difficult, if not impossible, to achieve your financial freedom.


* Yap Ming Hui is the managing director of Whitman Independent Advisors Sdn Bhd, the first multi-client family office in Malaysia

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