Money BasicsManaging Money

Five steps for financial freedom

Who doesn’t love the idea of financial freedom? Imagine this: never having to work a regular 9-to-6 job to earn a paycheck and provide for yourself and your family. Instead, you’ll be spending your days focusing on what you really love to do.

Contrary to what many may think, this mindset isn’t reserved for older Filipinos entering their golden years. Age doesn’t define financial freedom–your savings and income do. And the road to financial freedom can be achieved at any age following these steps.

Build your income

In the beginning, your income will be largely limited to your paycheck. Like all people experiencing the first years of financial independence, you will need to trade time for money as your beginning participation in the economy. But this is not limited to your job. It could also be your side gigs–plying the trade you learn at your job for more economic benefits.

The goal then is to earn enough to be able to get into a habit of saving. You’ll naturally only make ends meet in the beginning, but as you climb up the ladder and progress in your career, your economic premium will increase--enabling you to build a habit of saving.

Get out of debt by avoiding more debt

If you don’t have any debts, try to keep it that way. However, let’s say that you absolutely need a loan for you to buy a house or a car for your family. This is understandable and for many people, even inevitable. What you can do is try to pay off your debts as soon as you can and avoid getting into more unnecessary debt. A few effective ways to do this include:

  • Paying your credit card balances in full- if you can’t afford an item or a service without a credit card and it’s not an emergency, don’t buy it. If you want to avoid the temptation, don’t apply for a credit card at all.

  • Living within your means- Prioritize your needs before your wants. If you get a pay raise at work, don’t use it as an excuse to increase your discretionary spending.

  • Keeping a strict budget- It’s okay to sometimes spend on non-essentials but limiting the amount you spend allows you to set aside more money for emergencies. Life is often filled with unexpected events (costly car repairs, medical expenses, etc.) and you want to be financially prepared when these happen--instead of going into debt because you don’t have emergency funds. Paying off all your debts before investing. Debts from banks and loan companies accumulate interest. It’s better to pay them sooner rather than later, when they become much more difficult to pay off.

Build your savings and emergency fund

Before you start investing, it’s highly recommended you build an emergency fund. An emergency fund is crucial in the event you become unemployed and find yourself having a hard time finding another job. It’s also helpful in case one of your sources of income falls through and your total income isn’t enough to fund your household’s expenses.

We recommend saving at least three to six months’ worth of your monthly expenses. What you are in fact doing, is investing in your peace of mind. Put this money in a savings account and do not touch it except for when emergencies arise. This fund should keep you and your household afloat while giving you enough time to find another source of income.

Begin to invest

Once you have secured your emergency fund and built enough capital you feel comfortable investing in, you can look at all the possible investment tools in the market. What you invest on depends on factors like how big your capital is, your risk tolerance, and whether you prefer long-term or short-term investments. Your options can include (but aren’t limited to):

  • Stocks
  • Treasury Bonds
  • Unit Investment Trust Funds
  • Mutual Funds
  • Time Deposits
  • Rental Properties
  • Opening a Side-Business

Ideally, you should be diversifying your investment portfolio. No form of investment is a hundred percent guaranteed, so diving into different types of investments can help offset the losses in case one of your other investments fall through.

Grow your investment past your income

Once you’ve delved into various investments, you’ll want to continue growing your portfolio until you reach the point your investments drive more income than your actual salary. This could take years, especially if you’ve opted for low-risk low-reward investments. However, if you have the patience or the risk tolerance for high-risk high-reward long-term investments, you could be growing your income at a much faster pace.

Once you’ve reached the point where your investments drive more income than your day job and you’ve set aside a significant amount in savings, you can finally retire and spend your days doing what you love. The passive income you receive from your investments should be more than enough to keep you and your family financially secure.

When you don’t need to work for money anymore, you’ll know you’ve made it to financial freedom. Spend your time growing your interests, doing what you love, spending time with family, and living each day to the fullest. Whether you get to do that in your late-thirties or in your later years depends on how far you’re willing to go to invest and achieve financial independence.