How To Get Financial Freedom?
Windowofworld.com – Financial freedom eludes so many people these days who by all logical conclusions and observations should have obtained it. Its commonly cited as one of the most important and sought after goals in life and yet is rarely attained. This article does not attempt to give you a magic formula for success but I do share with you the choices that made a difference to me and can, if you choose put you well on the path to freedom.
You can choose to spend some or all of your money on consumption items. These include food, entertainment, holidays, housing, motor cars, hobbies, and so on. These are things we need to live on a day-to-day basis. They also consist of items that service the things we want and so improve lifestyle.
You can choose to spend some or all of your money on investment items such as revenue producing real estate, shares, interest bearing deposits, businesses that produce revenue, etc.
Consumption or investment
Two important factors need to be understood about the simple concepts of consumption and investment.
The first factor is that spending on consumption items results in reducing the total value of your assets (net worth). Spending on investment items aims to increase your net worth. The second factor is that you have choice. You can choose between spending on consumption or investment items.
Of course, the best spending patterns are those that aim to attain a balance between spending on consumption and investment items.
Choosing consumption or investment
You now know the difference between consumption and investment spending and that you can choose between the two.
All you need to do is to think before you spend. Consumption spending can contribute to your lifestyle (driving a new car is fun, even if it was bought on credit and has created a liability of three to five years of payments). Investment spending provides income and wealth.
Shades of Gray
There is, of course, some spending that is not clearly defined as consumption or investment. Buying your own home is considered by many to be an investment. It isnt! The purchase usually is financed and the repayments are a liability. The upkeep of a house costs money. There are rates and taxes payable on it. You do not get any revenue from it. If you plan to sell it in a few years to make a profit on its increased value, then it may be an investment. However if you have to buy another house to live in are you really any better off?
Investment spending is necessary for building wealth
In order to build wealth, some investment spending is necessary. The more that goes into investment spending, the bigger and quicker your wealth will grow. However, if too much goes into investment spending, and not enough into consumption, then lifestyle can become meagre. But you can choose.
Accumulated over time
Most people are not born rich. True, some have inherited wealth, but may not value it as a result. Some win fortunes in the lottery, but ironically, perhaps because they don’t work for it, or are unfamiliar with it, can end up wasting temporary wealth.
Everyone, however, has one thing in common. The same amount of time passed for each of us, and at the same speed. How you use your time matters.
Imagine that at 21, you invested $ 1,000 at an average annual rate of return of 10%, and then by the time you reached 65, you would have raised over $ 70,000 doing nothing.
If at 21, you invested $ 1,000 at an average annual rate of return of 10%, and each month invested an additional $ 100, then by the time you reached 65, you would be a millionaire, doing nothing.
If you don’t do both, the same time will pass, and you won’t accumulate any wealth.
These investment examples, on purpose, use the amount of money most people can afford, and if spent on investment, rather than consumption, may not be overlooked.
When it comes to investing, time is on your side.
Of course, you may not be 21 again and you may want to accumulate wealth faster. This is made possible by increasing the amount invested, and the annual rate of return. It is not possible to accumulate significant wealth (millions) in a systematic manner regardless of several years (say 5 to 10). If you are trying to make more money in less time, then your goals may not be realistic. Maybe a lottery ticket, good luck, and a good amount of luck can produce the results you want, but don’t hold your breath waiting.
The power of compounding
In the example above there are additional factors at work. All returns are reinvested and participate in getting the same rate of return as the initial investment. No return on investment is withdrawn and spent on consumer goods.