Monday, April 19, 2010

Four Factors that Affecting Your Route to Financial Freedom

In my previous post, “What does Financial Freedom mean to you?”, I have highlighted there are 4 factors need to be carefully considered when generating financial plan with clear vision. These 4 factors are:

Available resources: We need to know where we are now. This information can be obtained from our personal balance sheet. In balance sheet, we can clearly see what assets and liabilities we are holding as well as our net worth. Also, we need to look into our personal cash flow statement to understand our fund movement as well as cash availability. In other words, we are getting information about our financial strengths and weaknesses. Of course, what we need to do at this step is to enhance our strengths and overcome weaknesses with clear goal in mind.

Time: Without time, any financial plan will not work unless we strike lotteries. But what is the probability of winning is the point here. To achieve financial freedom through lotteries is just like betting your financial future. I believe the more practical and certain way on achieving financial freedom is utilize your money and time to work for you. The power of compounding effect will help you through time. For example, if you invest $100,000 in year 1 with annual return of 6% p.a., you will double your money in 12 years.

Inflation: You may refer to my previous post on “Inflation Rate”.

Return: With consideration of available resources, time and inflation, we should seek for the best rate of return on investment towards our goal – financial freedom. Please bear in mind the following truths:

More resources available means lower ROI is required and vice-versa
Longer investment time frame means lower ROI required and vice-versa
Lower inflation rate means lower ROI required and vice-versa

Therefore, the condition of previous three factors will directly affect our requirement on ROI. With consideration of all of the above, lower ROI requirement may translate into less pressure in life. You will be happier as you are confident that you are on the way towards financial freedom.

So, start to invest now. Start as early as possible. Let the time and compounding effect work for you. There is one last reminder I would like to give is that you should structure your investment that able to generate return that is higher than your personal inflation rate. Otherwise, achieving Financial Freedom will be quite impossible.

Good luck.