Various paths to financial freedom are all about what I believe saving, investing and wealth management at different levels of financial planning.
I’ll detail the options that many followed and the ones that many financial advisers made which hopefully will open your eyes to the options that you have.
Financial freedom eludes so many individuals these days who by all logical conclusions and observations should have received it. It’s generally cited as one of the most important and sought after goals in life and yet is rarely attained. This article does not try to give you a magic formula for success but I do share with you the options that made a difference to many individuals and can if you choose put you well on the paths to financial freedom.
Table of Contents
Various paths to financial freedom
Consumption
You can decide to spend some or all of your money on “consumption” items. These consumption include food, entertainment, holidays, housing, motor cars, hobbies, and so on. These are something we require to live on a day-to-day basis. They also consist of items that service the things we want and so enhance our lifestyle. But what you earn now, your consumption should be less than that.
Investment
You can decide to spend some or all of your money on investment items such as revenue-producing real estate, shares market, mutual funds, interest-bearing deposits, businesses that produce revenue, etc. that can build wealth over time. And one of the most popular paths to financial freedom.
Consumption or investment
Two important aspects need to be understood about the simple concepts of consumption and investment for paths to financial freedom.
The first element is that spending on “consumption” items results in reducing the total value of your assets (net worth). Spending on investment items aspires to increase your net worth. The second aspect is that you have an intention. You can decide between spending on consumption or investment items in your monthly income.
Of course, the best spending patterns are those that seek 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 select between the two.
All you require to do is to think before you spend. Consumption spending can contribute to your lifestyle (driving a new car is fun, actually if it was bought on credit and has created a liability of three to five years of payments). Investment spending provides passive income and wealth-building and good paths to financial freedom.
Shades of Grey
There is, of course, some spending that is not absolutely defined as consumption or investment. Buying your own home is believed by many to be an investment. It isn’t! The purchase normally is financed and the repayments are a liability. The maintenance of a house costs money. There are rates and taxes payable on it with the annual rate. You do not get any revenue from it if you decide to live. If you intend 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 actually any better off?
Investment spending is essential for building wealth
In order to build wealth, some investment spending is crucial. The more that goes into investment spending, the bigger and faster your wealth will grow. However, if too much goes into wealth-building investment spending, and not enough into consumption, then lifestyle can become insufficient. But you can determine, which one is better for you.
Accumulation over time
Most individuals are not born rich. Indeed, some inherit wealth but consequently may not appreciate it. A few win wealth in lotteries, but ironically, maybe because they have not worked for it, or are not used to it, could end up wasting the temporary riches.
Everyone, however, has one speciality in common. The same portion of time goes past for each of us, and at the same rate. How you employ that time is meaningful.
Suppose that at the age of 21, you invested $1,000 at an average annual rate of return of 10%, and then by the time you reach 65, you would have earned over $70,000 without doing anything else.
If at the age of 21, you invested $1,000 at an average annual rate of return of 10%, and each month invested an extra $100 in paths to financial freedom, then by the time you reach 65, you would be a millionaire, without doing anything else.
If you did neither of these specialities, then the same time would pass, and you would not have earned any wealth.
These paths to the financial freedom of investment, quite deliberately, use amounts of money that are affordable by most, and if spent on investment, preferably than consumption, would probably not be missed.
In terms of investing, time is the biggest factor
Of course, you may not be 21 anymore and you may wish to earn wealth at a faster rate. This is achievable by increasing the amount invested, and the annual rate of return. It is not feasible to systematically accumulate significant wealth (millions) without looking at a timeframe of several years (say 5 to 10). If you are attempting to make more money in less time, then your goals may not be realistic. Possibly a lottery ticket, crossed fingers and a large amount of luck could produce your desired consequence, but don’t hold your breath waiting.
The power of compounding
In the above paths to financial freedom, there is an additional aspect at work. The total return was reinvested and participated in earning the same rate of return as the original investment. None of the investment return was withdrawn and spent on consumption things. There are high chances these investments will grow more than anticipated due to the power of compounding.