Financial Freedom is the holy grail of Financial Planning. It is the final goal of the whole exercise; to develop a stream of passive income to sustain our lifestyles. The whole idea sounds so good... We can retire and live on dividends, interest and rentals for the rest of our lives.
The way to achieve it is actually quite easy to quantify. Let's work backwards. Let's say you need RM5,000 a month to pay for your lifestyle. This is RM60,000 a year. At a rate of return of, say, 6%, you will need RM1,000,000 in capital to generate this amount of income.
Now, how do we get the RM1,000,000 in the first place? You need to save RM1,500 a month at a rate of return of 10% for 20 years. If you are 30 years old, the idea of becoming a guaranteed millionaire at 50 shouldn't sound too bad. After all, if you don't do this, what are the chances that you will get a million bucks in any other way?
And yet, not many people are willing to do what it takes to achieve this. At first, I thought that it may be due to the lack of discipline or lack of willpower etc. But now I think that human psychology is not that straight forward. It is not so simple, not so black and white.
Why would someone be willing to spend RM1,500 per month to pay for a car, but not be willing to spend RM1,500 a month to pay for their future financial security?
The answer is: That person prefers the car to financial freedom. Having a good car now is more important than having financial freedom later.
It is simply a matter of preference, not willpower. You don't need willpower for something you don't want.
Now, why would someone prefer a depreciating motor vehicle compared to an income-generating slush fund?
I think deep down, the idea of financial freedom actually scares us. We may be very keen to make quick bucks here and there, butreal financial security is a totally different thing...
For example, let's say you can have RM20 million now. An amount like this can easily generate returns in excess of RM1 million per year. You won't have to work another day in your life.
But if you are not working, what would you be doing? Watching DVDs? Playing games? Golfing? Visiting KTVs and spas? Shopping? Buying LVs? Touring the world?
Would that be fun? Of course it would be fun if you did it once in a while. But would it be fun if you did it for the rest of your life?
You won't be needed anymore. Your decisions won't matter. Your only decisions would be what to eat and where to shop. No one would be asking for your opinion on things like they used to at the office. You won't be involved in projects that matter. Even if you participate in some social charity projects, not doing a job out of necessity is just not the same.
You would have lost your purpose in life if your only purpose is to eat, sleep, and be happy. Nothing you do would actually matter to anyone and people would come to you for the sole purpose of getting some money from you.
There would be nothing to do that really NEEDS doing. Everything is an option which you could choose NOT to do. Would life be meaningful then?
I think for the majority of people, it wouldn't. That's why they subconsciously refrain from taking the steps to financial freedom although their mouths may claim to want financial freedom. It actually is quite low on the list of priorities.
Freedom from financial need...does it cut us off from a purposeful life too?
For a young person who is still productive, who still has ambitions and goals to achieve...are these goals purely monetary? Or do they also want to achieve fame and leave a social legacy?
I have come to notice that for many, fame and recognition is a much bigger motivator than money. Money is just our tool to buy fame. That is why people are willing to exchange wads of cash for a flashy car. That is why they are willing to commit to credit card debt to buy things which feed their social needs at the expense of committing to a savings program.
Financial Freedom may sound like the ultimate dream. But it actually is not.
It is not a lack of discipline or stupidity which causes people not to make the sacrifices to achieve financial freedom. It is because deep down, it's not what they really want.
Therefore, financial planning shouldn't be done on the assumption that everyone wants financial freedom. Some people may sacrifice a little to create an emergency reserve, some may want to invest a bit for the thrill and exhilaration, and some may prefer short term cash management just for the pleasure of squeezing some modest returns out of their cash in hand. We all have different tastes.
Every plan must be based on an objective. You can't have a good plan if you get the purpose of the plan wrong in the first place.