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The road to financial freedom: How to feel more confident about your money

24 October 2022

6 minutes read

Save and invest Plan Well How to

How do you picture your retirement? (Credit: Getty Images)

Everyone has their own definition of financial freedom, depending on their personal goals. For some, it means having enough savings, investments and cash on hand to afford the lifestyle they want for themselves and their family. For others, it also means allowing themselves to retire or work at any job without having to earn a steady salary.

There are many ways to achieve financial freedom. One way to do it is using the 50/30/20 budget rule, dividing your income into 3 categories: 50 per cent for needs, 30 per cent for wants and 20 per cent for savings and paying your debts.

That said, if you do a quick search on financial freedom online, you're likely to come across the acronym FIRE. This stands for "financial independence, retire early." However, FIRE's philosophy on mindful spending comes with a challenging task. Instead of the basic rule of allotting 20 per cent of your after-tax income to savings, FIRE recommends setting aside 50 per cent to 70 per cent of your income – a mind-blowing percentage for many of us.

How to be closer to your financial freedom

If your income makes it tough to follow FIRE's saving scheme, that's okay. But it's good to embrace the financial discipline it espouses, even if you can only set aside US$50 each month.

To bring yourself closer to financial independence, try this road map – a practical and realistic guide to help you spend, save and invest money smartly.

1. Clear your debts

Before getting a bank loan for your small business, consider your ability to repay it. (Credit: Getty Images)

An uptick in your savings will be difficult if you do not have a plan to pay off your debts. The No. 1 rule is this: focus on high-interest loans first. Find out how you can settle these debts by negotiating directly with your creditors or consulting with a reputable debt relief company.

If your credit card bill is high, do not get another card until the original one is paid off. Always pay the full amount due, as opposed to the minimum. This will help you avoid additional charges.

Also, be careful about borrowing from an individual or a company to pay off your debts. These loans can often come with high interest rates or fees you might not be able to afford in the future.

2. Automate your savings

One of the wealthiest people in the world, investor and philanthropist Warren Buffet, shares this advice: "Don't save what is left after spending; spend what is left after saving."

Start with a small, manageable amount each month. To safeguard against the temptation to use it for living expenses, set up your bank account to make an automatic deduction or transfer of this amount to a savings account. Make it a time deposit or a similar product, so you can't access the money until a specified date.

3. Build your emergency fund

Whether you are the family breadwinner or not, you need an emergency fund to cover anything unplanned – such as personal injury, home or car repair or job loss.

How much do you need to set aside? One rule of thumb is to have enough to cover six to twelve months of your living expenses. If that's too steep, start by building up at least US$2,000 or whatever amount you can afford to save. An unexpected cash windfall, like a bonus at work, is an excellent way to build your emergency fund faster.

It's advisable to put your emergency fund in a separate bank account, like a savings account that rewards you with bonus interest if you don't make any withdrawals.

4. Find an insurance plan that covers healthcare

Find health insurance with a comprehensive healthcare network. (Credit: Getty Images)

Remember, your immune system declines as you age, but healthcare costs keep rising.

Look into medical protection insurance with pre- and post-hospitalisation benefits. Opt for a plan that reimburses medical expenses such as surgery, an ICU stay and medical check-ups.

But if you're seeking more preventive care, check out AIA Vitality, one of the most comprehensive wellness programmes on the market. In addition to medical protection, it also covers financial health with exclusive insurance benefits that you can enjoy on selected AIA plans and riders.

5. Prepare for retirement by investing

Financial freedom can help you retire early or give you the choice to do what you want, worry-free. (Credit: Getty Images)

Warren Buffet defines investing as, "transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power in the future."

Where do you start? Right now, you actually have one asset already: your savings on deposit. But think of how much your savings have grown in the last year. It's probably not a large increase, especially with the low-interest rates of banks. While cash is the safest investment in terms of risk, it has the lowest return. Well-chosen productive assets like common stocks and property are the most logical prospects that deliver superior returns.

Yes, you can lose money with stocks and bonds, but a diverse investment portfolio can help reduce that risk. If one investment doesn't earn, the others can make up for the loss, at least in theory. You must ask yourself how much you're willing to lose to gain more. That's why an investment risk profile is a key part of determining the asset allocation in your investment portfolio. Please consult with a financial advisor before making decisions.

6. Find multiple ways to increase your earnings

If you currently have one income stream – your job or a small business – you might want to look for ways to earn extra money, such as starting a side hustle or generating income from a beloved hobby. For example, if your travel photos or videos keep getting noticed on social media, you could consider selling or licensing them to a stock image agency.

While those activities require a lot of time and effort, your investment portfolio is a form of passive income – you're earning while you sleep. Real estate is an excellent example of passive income, but rental income does not have the stability of a full-time job unless you're renting out several properties. Also, bear in mind that the upkeep of a property can be expensive and may require ongoing investment.

Take a look at AIA savings products that provide a monthly income from ages 55, 60 or 65 for 15 or 20 years with the potential to receive dividends. Some policies let you choose how much monthly payment you want to receive and the age to begin receiving it (from as early as age 50).

There is no time like the present to ask yourself what you want your future to look like. Does it involve early retirement? Does it include the kind of financial freedom where you can afford your needs and wants and still have money in the bank without working? Does it encompass your peace of mind? Practising healthy financial habits is the key to getting you there.

You can achieve financial independence with a solid money management foundation. Watch as finance experts Anna Haotanto and Lachlan Campbell of the AIA Voices community share tips you can do today to achieve financial wellness in the future.

AIA Voices is a community of influential and educational voices from around Asia to talk about life, health and wellness. A platform to educate, motivate and inspire people to make positive behavioural changes on their health and wellness journey. Providing an opportunity for communities across Asia to connect, collaborate, and learn from each other. Designed to drive AIA One Billion, our ambition to engage a billion people to live Healthier, Longer, Better Lives by 2030.

References:

Carol Loomis, Penguin Group (USA) Incorporated. 2012. Tap Dancing to Work: Warren Buffett on Practically Everything, 1966-2012. [offline]

Moneysense. 2018. Buying a Property: How Much Can You Afford? [online] [Accessed on 30 May 2022]

Moneysense. 2018. Managing a Debt: You Can Do. [online] [Accessed on 30 May 2022]

AIA. Retirement Calculator. [online] [Accessed 30 on May 2022]

AIA. AIA Retirement Saver IV. [online] [Accessed on 30 May 2022]

AIA. Savings. [online] [Accessed on 30 May 2022]

AIA. AIA Vitality Healthshield Gold Max. [online] [Accessed on 30 May 2022]

Disclaimer:

This is general information only and is not intended as financial, medical, health, nutritional or other advice. You should obtain professional advice from a financial adviser, or medical or health practitioner in relation to your own personal circumstances.