How Will You Become Financially Free?
In April, I ran a survey asking Frugal Pinoy readers “What is your #1 financial goal?”. Most of the answers were “financial freedom” or “to be financially free” or “financial independence”.
Image by jdhancock from Flickr
While almost everyone in the world wants that, we all define it differently. To reach this “financial freedom” or “financial independence” that we’re talking about, we need to know how to objectively quantify it. And this will depend on your definition.
To make it easier, think of your definition as a checklist. What financial goals much you reach before you become financially free? Here are some questions to consider:
- How much should you have in emergency funds to not worry about financial emergencies?
- How much should you have stashed away in retirement investments? How much is their historical average growth? Do you think you’ll have enough to live comfortably when you retire?
- How much should you be earning each month to fulfill all your financial obligations? How much do you need to live comfortably and pursue all your hobbies and other leisure activities?
- Do you have any debt? If so, have you developed a plan to repay all of your debt and stay debt-free?
- Which stage of personal finance are you in? Which stage do you want to be in within 6 months? A year? How do you plan to accomplish this?
Don’t be afraid of being as specific as possible. Include numbers such as: “I must have at least P120,000 in emergency fund savings” or “I should be earning an additional P20,000 monthly from my side business”. The more specific you are, the easier it will be to know the steps you have to take to reach these goals.
So let me ask you again, “What is your #1 goal that will help you reach financial freedom?” Answer the completely anonymous survey below to share even just one criteria of how you define financial freedom.
Read MoreAre You Part of the Sandwich Generation?
The photo above may look yummy, but once you get behind the metaphor it isn’t so appealing anymore.
What is the sandwich generation? Basically it’s the people who are financially caring for their retired parents while they are also financially providing for their children. In other words, they are financially “sandwiched” between two generations that can’t provide for themselves. It’s a relatively new term, which just made its way to the Merriam-Webster Dictionary in 2006. Though the term originated in the US, it’s a common phenomenon here as well.
But how does this happen?
Read MoreThe Stages of Personal Finance
When you say you want to be better at handling your money, what does that mean? The answer to this question depends on the person. It could mean early retirement, higher income, more savings, and a variety of other things. But is financial improvement merely a numbers game? What do you aim for if you’re unclear about how a certain lifestyle will cost? Surely there must be other ways to measure improvement.
Because of this, I prefer to think of financial growth in stages. It doesn’t include a specific net worth amount, nor a minimum income level. After all, there’s no such thing as “one size fits all” when it comes to personal finance. What exists instead are different psychological and emotional stages, and the numbers corresponding to them vary from person to person. What I’m measuring in this case is one’s sense of comfort, freedom, and security which, frankly, is more telling than the numbers themselves.
So what are the different stages of personal finance?
Stage Zero: Ignorance
Why start with zero and not the number 1? Well, because zero is what’s going on here. The idea of handling money hardly makes a blip on your radar. Not to sound too harsh, but stage zero is the stage where you are ignorant about money. That’s okay, everyone starts here.
While you may know about saving or investing, you’re not really doing them. You feel like you should save or at least do something about your money, but this thought soon disappears as you go back to your daily life. You don’t know how much your monthly expenses are, either. If you’re unlucky, you’re already in financial trouble but are vaguely aware of it. If you’re lucky enough to avoid trouble, this is mostly because of chance. Any minor event such as a toothache or “therapeutic shopping” is bound to rock your financial boat.
Stage One: Awareness and Action
Finally, you’ve realized that it’s time to take control of your finances! You start asking around, reading books, and learning all you can about how to do things right. Then, you actually do something with this new information.
If you have debt, you’re creating plans to reduce or eliminate it. At this point you are also forming new habits such as getting your spending under control and managing your money. If a lot of damage has already been done, you may be far from financial stability – but at least you’re taking steps towards it.
Stage Two: Stability
By this time your actions have paid off and you’re taking consistent measures to keep it that way. You have no debt, or if you do, it’s completely under your control. You have an emergency fund that is suited to your needs, and you’re on track when saving or investing for retirement. Your income is also consistent and you spend less than you earn. You may even be sleeping easier.
Stage Three: Freedom
In this stage, you’re earning passive income that’s equal to or greater than your living expenses. You don’t have to rely on your job to live. Where are you getting this passive income? It could be from a business that you’ve invested in but don’t personally run, stock dividends, or the sale of information products (such as ebooks). The only downside is that because of the high level of knowledge, time, or capital needed for this stage, not everyone ends up here.
What stage of personal finance are you in right now? What stage do you hope to be in by the end of the year?
Read MoreDay#25: Make a financial plan for your future.
This is Day #25 of “25 Days to Healthier Finances”, a series of blog posts where Frugal Pinoy readers and myself work on 1 task a day to make our financial lives better. Here’s today’s installment and the concluding article of the series:
Today’s Task: Make a financial plan for your future
Your ability to succeed financially for the rest of your life will partly fall on your ability to mitigate large, life-defining expenses. The more aware you are of your possible expenses while you’re still young, the better prepared you’ll be for them. Once you’re debt free and have reached your goals for your emergency fund, it’s time to think of the following things:
Read MoreDay#24: Write down your ideal income and expenses.
This is Day #24 of “25 Days to Healthier Finances”, a series of blog posts where Frugal Pinoy readers and myself work on 1 task a day to make our financial lives better. Please stay tuned for the final installment of this series, which will be up tomorrow. Here’s today’s installment:
In the income and expenses spreadsheet I use (which I also refer to as my budgeting spreadsheet, though that’s inaccurate), I include an extra sheet titled “Ideal”. This sheet contains my ideal expenses and income. While you don’t need to use a spreadsheet, I think it’s important that we all have a written record of our ideal income and expenses somewhere.
Today’s Task: Write down your ideal income and expenses.
The first thing to do is to grab a sheet of paper (or create a new document in your computer) and write down your ideal income. It’s not enough to write the amount itself, also note where the money will be coming from. How much will come from your job? A side business? Investments?
Read MoreHelp Iligan and CDO
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