Financial Freedom

Financial Freedom



Financial Freedom
Financial freedom eludes so many people these days who by all logical conclusions and observations should have obtained it .​
It’s 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.
Consumption
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.


Investment
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​ Grey
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 isn’t! 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.

Accumulation over time
Most people are not born rich .​
Certainly, some inherit wealth, but consequently may not appreciate it .​
a​ few win wealth in​ lotteries, but ironically, perhaps because they have not worked for it, or​ are not used to​ it, could end up squandering the temporary riches .​

Everyone, however, has one thing in​ common .​
The same amount of​ time goes past for each of​ us, and at​ the same rate .​
How you employ that time is​ significant.
Imagine 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 accumulated 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​ additional $100, then by the time you reach 65, you would be a​ millionaire, without doing anything else.
If you did neither of​ these things, then the same time would pass, and you would not have accumulated any wealth.

These examples of​ investment, quite deliberately, use amounts of​ money that are affordable by most, and if​ spent on investment, rather than consumption, would probably not be missed.

In terms of​ investing, time is​ on your side.
Of course, you may not be 21 any more and you may wish to​ accumulate wealth at​ a​ faster rate .​
This is​ possible by increasing the amount invested, and the annual rate of​ return .​
It is​ not possible to​ systematically accumulate significant wealth (millions) without looking at​ a​ timeframe of​ several years (say 5 to​ 10) .​
If you are trying to​ make more money in​ less time, then your objectives may not be realistic .​
Perhaps a​ lottery ticket, crossed fingers and large amount of​ luck could produce your desired result, but don’t hold your breath waiting.
The power of​ compounding
In the above examples there is​ an​ additional factor at​ work .​
The entire 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 items.




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