Saturday, December 1, 2007

What is Financial Freedom?

What is Financial Freedom?
To me, Financial Freedom is when you earn enough that you are able to live a comfortable life. Everyone has different definitions of "Comfortable Life". Some people want to own luxurious car and house. Some people want to have more than $ 1 million of cash and asset. Some people would like to earn enough so that they can do something else that they like which need some fundings (eg: George Soros). His initial intention to establish his own private investment company was to earn enough money to support himself as an author and philosopher (please see under Move to United States in Wikipedia). Some people simply want to become Financial Freedom because they think that this is the only way of living.

As per Wikipedia definition of Financial Freedom, Financial Freedom describes a well-planned lifestyle where one no longer is required to work for income to cover their expenses. It also states some popular routes to achieve Financial Freedom are Real Estate Investment, Internet Marketing, Trading and Owning a Business System. Out of these 4 routes, some of them might need a large amount of initial capital to kick start. One might has higher risk compare to the other.

My opinion on the popular routes to achieve Financial Freedom:-

1. Real Estate Investment
Basically, it is about buying properties not for own use but lease or rent out the properties for a good rental. People who invest properties normally do not have enough money to actually buy them. They have to pay the down payment for the property and get a loan from bank or lending institution to pay for the rest. Then in future, they slowly pay the loan (including the interest) back to bank.

Example 1 (no down payment) :
A house is selling at $200k
Down payment : 0%, $0k
Loan: 100%, $200k
Interest rate: 5.75%

Monthly payment: $1167.15 (for 30 years)

Example 2 (10% down payment) :
A house is selling at $ 200k
Down payment : 10%, $20k
Loan: 90%, $180k
Interest rate: 5.75%

Monthly payment: $1050.43 (for 30 years)

Normally people, who invest in properties, have the thought that they are able to rent out their properties. The owner of the house in example 1 and 2 might want to rent out the house for $1400 per month, so that he/she are able to earn some money from the properties and after 30 years he/she can own the house while other people are helping him/her to pay for it.

However, it may be too optimistic to think like this as many things need to be considered before starting to invest in real estate (eg: location, price of the house and the likelihood to appreciate in future, interest rate, demand vs supply of the properties, terms and conditions of loan and more). Invest in real estate without a proper research will pay a high price as real estate is not liquid. You can not convert the real estate to cash overnight. Credit crunch is now happening in United States because financial institutions lend money to people who have bad credit. They invest the money in real estate and they are not able to pay the loan back. Thus, the loans turns to bad debt and most financial institutions are getting kill because of this. I will discuss this topic further in another post.

2. Internet Marketing
As contrast with real estate investment, internet marketing needs lower capital to kick start. With the easy access to The Internet nowadays, many new business models by using The Internet are mushrooming. Internet Marketing can be categorized into large-scale(run by a big organization) and small-scale (run by anyone from maybe 8 years old to 80 years old). eBay is one of the very successful large-scale Internet marketing websites. Although eBay is a large-scale Internet Marketing website now, it was all started from small-scale by Pierre Omidyar. The success of eBay makes him the 76th richest person in the world as of 2007. On the other hand, setting up a Small-scale Internet Marketing might need platform from large-scale Internet marketing website. For example, a trader in eBay. He buys/sells things on eBay.

Example of large-scale Internet Marketing Websites:
1.
Amazon.com- Marketing it products primarily books
2.
Google.com (Google Adwords)- Offering to advertise for some companies
3.
eBay - Offering a platform for people to trade among themselves

Examples of small-scale Internet Marketing:
1. Use eBay to buy low and sell high
2. Put on advertisement on your personal website/blog and earn money from each clicks on the advertisement (eg: Google Adsense). Please click on "Generate revenue from your site with Google Adsense" on the top right if you would like to register for Google Adsense"
3. Create a website/forum for a particular interest group (eg: anime - Naruto)

There are so many different ways to do Internet Marketing as The Internet offers unlimited of resources and it connects people from every part of the world. You just need to turn your brain on to think of a unique business model and start from there.

I found one interesting article on The Ten Keys to Success on eBay, this information might be useful for someone who wants to start learning how to do Internet Marketing on eBay.

Please be aware that there are some hoax Internet marketing websites especially the business model is Multi-level Marketing like or Pyramid Scheme like. Please do your own research on the web sites before joining them.

3. Trading
I believe that the term "Trading" here includes investing. If a person who has a high salary job (eg: $10k per month), after minus all the expenses ($7k), where should him put his excessive money ($3k)? Saving account ? fixed deposit account? Invest the money in Bonds/Stocks? People with low Financial Quotient(FQ) might put the money into saving account or fixed deposit account as he thinks that it is safer to do so. But the truth is putting the money into saving/fixed deposit has some risks(eg: inflation risk). If the saving account has interest rate of 1% per annum, the inflation on that year is 3.5%, he actually loses 2.5% of time value of money.

If you do not know what is inflation or what is time value of money, it is not too late to start learning from now. It is very important for everyone to understand these terms because we need to deal with money every day.

To achieve Financial Freedom, you will need to learn to make your money gains the compounding interest rather than putting money into saving account (eg: interest rate of 1 %) or fixed deposit
(eg: interest rate of 3.5 %). To make your money gains the compounding, there are many different ways. I shall discuss more in another post.

4. Owning a Business System
Other than the Internet Marketing that has been discussed, you might want to start up your own business to achieve Financial Freedom. But here, you need to invest a large capital and it takes some time before you can see a positive cash flow. A well plan of budgeting is very important to determine a success or a failure of your business.

Examples:
1. Open a restaurant
2. Setup a consulting firm
3. Open a business to sell products

In my opinion, out of the four
popular routes to achieve Financial Freedom, there are 2 routes which I think anyone can easily start off - Internet Marketing and Trading/Investing.

These 2 routes require very little capital to kick start but one needs to put some efforts and self disciplined in learning them before he can achieve Financial Freedom.

2 comments:

Jessica said...

Great post which summed up a lot of important points. Thank you.

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Invest4ff said...

Thanks for your comment