Saturday, October 4, 2008

The First Step of Financial Freedom

The very first step of any financial freedom journey needs to begin with this basic principle. This basic principle is spending less than you earn. Without obeying this basic principle, one can never be financially free even if one strikes the lottery or receives an inheritance. In this world, there are only 4 types of people:

People Living Above their Means

This is the kind of person who spends way above what they earn. They spend so much that they are probably in some kind of serious debt which they will never be able to repay as they are spending alot more than they are earning consistently each month.

People Living At their Means

This is the kind of person who spends every single cent he has. The time of the month that he looks forward to the most is payday. His bank account is close to zero as payday draws nearer.

People Living Within their Means

This is the person who probably spends less than they earn so that they have enough to set aside either for savings or for buying something that they really like. The amount they save though is not alot (less than 10 percent) as they are willing to live up the lifestyle expectations that they deem they are entitled to.

People Living Below their Means

This is the frugal person who could well afford a new car but would rather buy a second or third hand car. He could easily afford dining in at fancy restaurants each day but would be content with a simple home cooked meal at home. He could fly off to exotic holidays every year but would be content just taking a road trip to a nearby neighboring country or better still, just lazing at home. He is in other words content with what he has and sees no need to spend more so as to live up to the rest of the world's expectation. He can afford it but chooses to save up his money for other purposes.

Which one of these categories do you belong to?

The key idea then to financial freedom is having a budgeting system. The problem with people without a budget is that they are often saving what is left at the end of the month. Well, if you do not have a budgeting system, then a simple alternative is to always always "pay yourself first".

What does "pay yourself first" mean? It means basically to set aside a portion of your income for savings or investments. It could be 10% or 20% or whatever you are comfortable with. Once payday arrives, simply throw that money aside into another bank account or invest it through a regular savings account so that you will never spend that money at all.

2 comments:

  1. My family belongs to the Living below their means type.

    I'm lucky I was brought up as such. I always think a lot when it comes to whether you should buy a ferrari or a hyundai...

    and finally... it makes better sense to buy a hyundai as the money spend on a car can be put to better use in investments or other quality of life investments like trips with the family.

    ReplyDelete
  2. Thanks for your comments. You have a nice blog there!

    ReplyDelete

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