What is Financial Freedom ?

First of all, the terms Financial Freedom (FF) and Financial Independence (FI) are both commonly used. As far as I’m concerned these are interchangeable, but I will mostly stick with FF as it’s easiest to type!

I guess most people will have some pre-formed thoughts and opinions of FF. What it is, how do you know if you are or not, whether FF is a good thing, something to be despised, neither good nor bad, etc.

Here is my take on it :

I’m a Scott Pape (Barefoot) fan and he is always talking about buckets, so let me use the same approach here. To start off with let’s assume we have an Earning bucket and a Spending bucket. Hopefully if your basic finance and budgeting is in order, the former will be larger than the latter one. Therefore each month as you pour Earnings into the Spending bucket, there will be an overflow of water that needs to go somewhere else. Let’s call it Savings. This bucket is your bank account deposit, online saving account, term deposit etc. It’s a rainy day fund to provide for emergencies and other known expenditures that you’re saving up for in advance. So far we have three buckets – Earning, Spending and Saving. For many people this might be the end of it. But for those on a path towards FF, there should still be some additional water overflowing from the Savings bucket and looking for somewhere else to collect, which would be Investing. It looks something like this :

For those accountants out there, you would recognize this as a monthly Profit and Loss statement. This gives us a basic framework to start, but we need to add a further piece which is to split our Earnings bucket into two compartments – Active and Passive. Active earnings come directly from our own sweat, toil and keyboard tapping. Passive earnings flow in as returns from our investments (e.g. dividends on shares, interest on deposits, rent on investment property, etc). A further piece to add for the accountants is the Balance Sheet. This is a summary of all our Assets and Liabilities. Once again, hopefully if you basic financial skills are in place, Assets will exceed Liabilities and the difference between the two, your Net Worth, is a key measure that you will be looking to grow each year by year. Here is an updated picture with these new aspects included :

 

Thanks for your patience, finally we are getting to the point which is FF. In the above picture it’s clear this person is reliant on Active earnings in order to make this waterfall flow. But if you can imagine after some years the Investments will accumulate and start to generate more Passive earnings in their own right. Furthermore, hopefully with career progression, Active earnings will also increase, creating even more Investment growth. Eventually, a point might be reached where passive earnings become big enough to feed the entire waterfall, allowing our friend to finally put his feet up, sit back and admire this ongoing monthly process from the sideline. It is now driving itself and no longer depends on personal time, labour and effort. Equally our FF hero is no longer dependent on money, and has a free rein over his time to do what he pleases. The waterfall might be so abundant that it starts to spill over into a fifth bucket which we will call Giving.  This is how the picture might look now :

 

This is how I think about FF. And I intend to use these buckets as a structure for the various posts to come in the weeks ahead :

0.       Financial Freedom

1.       Earning

2.       Spending

3.       Saving

4.       Investing

5.       Giving

Please feel free to comment and share your views on FF. What does it mean to you, what would you do next, does it even matter really…..

What’s this blog about ?

I consider myself very fortunate.

I have a lovely wife and two beautiful kids. We are healthy and have basically everything we need. For the past 18 years I’ve enjoyed a great career working both in my home country and abroad. Before that, during my first 20 years I had a happy childhood and a good education. Now I find myself at the crossroads again, closing one life chapter and soon to open the next….

When I started my career all those years ago, I had a clear goal in mind which was to retire by the age of 35. In those days and with all my youthful confidence, I was adamant that work is merely a means to an end. No matter what you might say in the interview to get the job, the honest truth is that you are only there for the pay check. Come the future day when I have enough money to no longer need that pay check, I would just as soon be on the beach, golf course, etc.

Some 18 years later, it’s with a measure of pride that I am now reaching this goal. Despite being 3 years late versus the target, I won’t beat myself up too much since it’s also 27 years earlier than the standard retirement age.

There are some big changes and exciting times ahead for us. I recently gave notice to finish up my job, and we are planning to relocate to our hometown in the coming months to settle down near our families and spend more time with my wife and kids.

With this brief introduction out the way, let me now come to the question : What’s this blog about ?

My first idea is to reflect on the transition in life phases from “working” to “financial freedom” (FF). I see quite a few blogs about the journey to FF, and also by those who have achieved FF, but not so many at the point of transition. Logically it should be a happy time, but as with all major life changes I guess there will be some bumps in the path too. I look forward to reflecting on the experience here.

Secondly, I am starting to consider future projects/hobbies/pursuits for the next phase, and one area I have in mind is financial planning/advice. I’ve always had a keen interest in the world of money and lately I’m eager to pursue activities that directly help others and give something back. This blog is a way for me to explore further on this and test the water.

Thirdly, I have benefitted a lot over the years from the experience and kind advice of friends and colleagues. As I said at the outset, I feel very fortunate and hope through this blog I can in some small way return the favour. Please understand that I’m not an expert and in fact do not have any formal qualification in this field. I will be the first to admit that I have made many mistakes along the way too. But in the end I am reaching my goal and so at least in a practical sense, I hope this blog might benefit like-minded people who are working towards their own FF.

Further to the above three points, here are some additional intentions :

This blog is ….	This blog is not ….
Honest	Financial advice (please read the disclaimer)
Practical	Revealing the secrets to get rich quick
Anonymous (or Private from my perspective)	Explaining the basics of finance / investment

Thank you for reading this blog. I hope you find it useful and appreciate any comments. As today is 30^th December I’m sure many of you are pondering resolutions for 2015 and the years ahead. I wish you every success in pursuing your goals and most importantly to enjoy the journey along the way – FFA.