Friday, July 18, 2008

Financial Intelligence - Part VIII

Financial Freedom!

The Aim
At the beginning of this series of posts, our sole aim has been to achieve financial freedom. So, you may be forgiven for asking - where is it all leading to? Ultimately, our aim is as indicated in the Diagram above. Although most of us may never achieve the luxury of sitting at home doing nothing but watching the dough roll in, it does no harm to strive to the summit of Financial Independence.

The Method
At its’ essence, Financial Freedom is about generating enough passive income to cover all your monthly expenses. To achieve this, we must increase our monthly passive income and reduce our monthly expenditures.

Reduce Expenditures
In the diagram above, most of us are currently at Stage 1. At this stage, our monthly salary is insufficient to cover the monthly expenses. In such a situation, cost cutting measures are necessary, so that one can break-even. Otherwise, one may resort to borrowing from banks and sink into a cesspool of loans and debts.

We have covered the methods to categorize the different classes of expenditures and how to reduce unnecessary expenses in earlier posts. By using common sense and discernment, it is definitely possible to reduce our monthly expenses and break-even as indicated in Stage 2.

Increase Monthly Investment Income
How does one obtain monthly passive investment income? We need something called ‘SAVINGS!’ That’s right. Once your monthly income exceeds your monthly expenditures, the difference is your savings which will result in an increase in your bank balance. In the Diagram, we are now in Stage 2.5, slowly climbing our way towards Financial Freedom.

With your savings, you can now generate monthly passive income by placing your savings into a Fixed Deposit to earn interest income. Alternatively, you can invest this money into the local stock market to earn higher returns. You can read more about investing in my Fundamentals and Basics of Investing topics, if you are interested.

The Outcome:
With the miracle of compounded interest, you may find yourself at Stage 3. Suddenly, you notice that your monthly investment income is more than your monthly expenses. Hallelujah! It’s time to sit back and relax! No more work and labor. Just some R&R whilst watching the dough roll in. :)

Conclusion:
Most of us may never achieve such rarified heights of financial freedom. Still, why not strive for the summit of independence? Even if one is unable to achieve absolute financial freedom, your efforts will result strong finances to enable you to weather the tough times ahead.

4 comments:

Finance Idiot

Hi Avatar, can you elaborate a bit on what is revenue stream and what is use for?

Thank you.

Avatar

Dear FI,

I'm going out on a limb here and assume you mean revenue stream = monthly investment income.

Do correct me if I'm wrong.

Revenue streams (for an average Joe like you and me) are streams of income that we generate.

Why, working on a 9 to 5 job is a revenue stream! If you have a part time job that pays, that's also a revenue stream.

The important here is that YOUR MONEY can generate revenue stream for you also, in the form of Fixed Deposit interest income. There are also investment in shares to consider.

Hope this is clear enough.

Rgds

drraman

hey avatar,thanks for adding my blog - http://free-blogger-help.blogspot.com/,added yours.

Avatar

Dear DrRaman,

No problems. Your blog is a useful resource for all of us.

Rgds

  © Blogger template 'Minimalist G' by Ourblogtemplates.com 2008

Back to TOP