FinLEAP (financial leap) your finances – Part 3: How to move towards financial freedom?
Over the last few weeks, the articles discussed the several financial stages and how to achieve financial security. You need to have 3-6 months emergency fund and saving of at least 20% of your income every month to be considered as financially secured. You can check out part 1 article here and part 2 article here. Once you have achieved financial security, the next step you need to do is to start moving towards financial freedom.
Financial freedom is achieved when your monthly passive income equals to or surpasses your monthly expenses. In that case, you will experience money flowing into your account despite the fact you do not work. Hence, the key to financial freedom is to get more passive income streams. It does not necessarily mean that you don’t need to do anything, it just means it requires very less effort for the incomes to come in.
If you think properly, if you have achieved financial security, you should have accumulated more and more monies every month. What are you going to do with these monies? If the money is sitting in the fixed deposit account, is the monthly interest sufficient to pay off your monthly expenses? If yes, then you are financially free. If not, what’s wrong? The amount you are currently saving is not enough! You need to spend less or earn more money to save in the fixed deposit account!
But with the current inflation rate, do you think you can catch up the speed? You can do a simple calculation whether the speed of saving can catch up the inflation rate. If you cannot earn and save money fast enough, you need to leverage – leverage on investment so that you can make money work for you instead of you working to get more money.
If you do not start investing when you need to, it could be too late to catch up with the inflation. Then, you need to work even harder to earn more in order to save more. That’s the reason we are stuck in the rat race.
In order to achieve financial freedom, you got to have passive income streams. What are the examples for passive investment income streams? First, dividends from stock investing. When we are investing in stock, we need to buy stocks that can give us sufficient dividends to pay off our monthly expenses. You can go to www.morningstar.com, under the “dividend” tab to check out the dividend yield for each stock.
In this example, you can see Apple stock is giving 6.25% average dividend for the last 5 years. If you are investing RM 100,000 in Apple stock, you get average RM 6,250 every year for the past 5 years. See, compared to fixed deposit, you get less than RM 2,000 a year considering current FD interest rate. If you invest in dividend stock, you probably need only half the capital to get the same income. By checking on the website, you will know which company will pay better dividend. Find those which can match your expectation of the return. Note that you only invest in dividend stocks when you have accumulated enough capital. If you still need more capital, then perhaps you should focus more on capital gain. Read this as well to know which investment strategy you need, capital gain or cash flow.
Second, rental income from properties. Recently, it is no longer easy to achieve positive cash flow from properties. Before you buy properties for passive income, ensure you survey the rental rate for the property you are going to buy by checking out on several property websites like www.propertyguru.com or www.iproperty.com.my. For room rental, you can check out www.ibilik.my or www.mudah.my. You also need to double check with the residents of the surrounding property to make sure those published rental rates on the websites are reliable. In most of the circumstances, those rental rates on the websites are overstated. If there is no positive cash flow, perhaps, you can consider investing in Real Estate Investment Trust available on the stock market exchange. Lesser hassle for you to manage the tenants and perhaps higher rental return.
Third, you can invest in unit trust funds that have higher distribution. You can check out the performance of the unit trust funds through my.morningstar.com/my. You must first register a free account to access more information. There is a fund screener on the website to allow you to check on the details of the funds.
Fourth, you can invest in start-up or Pre-IPO companies via equity crowd funding platform like www.mystartr.com. Some of the companies are giving out yearly dividends. This will form some passive incomes too. Do note that investing in these companies carry more risk than stocks or unit trust funds and you might not get the capital back if the company you invest in go insolvent at the end. So, do proper research before investing.
So, the above are the 4 ideas where you can get passive income streams. The key thing is to start buying investment assets that can bring you income.
Once your investment incomes are more, you will be able to break free from rat race. If you are still keeping your money in the bank, the interest will be too low and you need to keep working harder to accumulate bigger capital to make the interest sufficient to cater for your basic expenses. The longer you wait, the harder it becomes.
Watch the Youtube video here on this topic.
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