Everyone wants to be financially free by a certain age, but what active steps are you taking to achieve that? And is investing an absolute necessity? Read on to find out if there are other ways aside from investing to reach financial freedom.
Being financially free is such a coveted status, yet it takes a great amount of discipline to achieve it. Whatever financial freedom means to you, reaching that stage would mean that your debts are settled, you have an ample pot of emergency funds and you’re able to sustain your lifestyle.
However, as inflation rates skyrocket and the standard of living increases, reaching financial freedom is getting increasingly difficult. Ask anyone and they would say the best route to success would be to start investing from a young age. But is it possible to attain financial freedom without investing?
We deep-dive into what financial freedom actually means, and how you can get there. We’ll leave you to decide whether investing is part of the equation.
What is financial freedom?
The term ‘financial freedom’ has been loosely thrown around these days, and it basically means having the financial capability to sustain and support your lifestyle without being employed. It’s a status that almost everyone wants to achieve, but everyone’s definition of financial freedom can be very different, and the age that they can attain that may vary.
For some, it would be to retire comfortably by relying on their retirement funds and living a simple life in their 70s and 80s — or it could simply mean being debt-free and growing their savings. But for others, it could mean generating sufficient passive income by their 30s to cover all expenses such that a main source of income wouldn’t be necessary. Others may also want to build a six- or seven-figure emergency fund so they can choose to stop working by 50.
Depending on your individual goals and situation, financial freedom may mean completely different things for you and the next person. But generally, it means you have sufficient passive income to cover future living expenses beyond your current lifestyle, buffering in inflation costs.
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How much do I need for retirement?
Since everyone’s definition of financial freedom is different, let’s just take the first scenario mentioned above — being able to retire and live a comfortable life.
According to a study in 2019 done by researchers from the Lee Kuan Yew School of Public Policy (LKYSPP) to determine the Minimum Income Standard (MIS) for the elderly in Singapore, an elderly person would need S$1,379 per month if they live alone, while an elderly couple living together would need S$2,351 per month.
Assuming they retire at Singapore’s retirement age of 63 (which will be raised on 1 July 2022) and live till Singapore’s median life expectancy of 86 for females in 2021, that will be 23 years of being unemployed. This means that elderly singles and couples will need about S$31,717 and S$54,073 per year to survive.
However, this is just the MIS, meaning that you will have to live a frugal and simple life, where you can’t really travel or spend much beyond necessities. These figures have also not taken into account the rate of inflation per year.
Do I need to invest to attain financial freedom?
So let’s get to the crux of the matter.
If you are willing to lead a simple lifestyle, then you probably would have enough savings accumulated throughout the years to sustain yourself without a regular income. However, not many are willing to lead this kind of lifestyle.
When people talk about retirement, it is usually accompanied by the idea of a more laid-back lifestyle, going on frequent overseas holidays, eating luxuriously and spending on material goods since your dependents (i.e. children) are most likely able to support themselves by then. Most individuals would want to spend their retirement years simply enjoying life after many decades of working.
In this case, income alone won’t earn you enough money to retire and lead a life of luxury. While you can bet your chances on a Toto grand prize, the chances are pretty slim.
So it seems like investing is the best way to generate income and multiply your wealth significantly. With a mix of safe investments and high-risk investments, you will be able to take advantage of the power of compounding and let your money grow with interest.
However, besides conventional investing, there are still other ways you can attain other aspects of financial freedom, though they may not be as effective.
Interested in investing? Compare the best brokerage accounts in Singapore to find the right one to kickstart your investing journey.
How to attain financial freedom aside from investing?
1. Clear debt
One of the steps to take to get closer to your financial freedom goal is to become debt-free. You won’t truly be financially free if you’re still struggling to clear your debts, right? The more you drag out your debt repayment, the more interest you’ll have to pay. If your finances allow for it, prioritise clearing off your debts and put any large purchases on the backburner for the time being.
Depending on the type of debt that you have, you can use a bigger proportion of your income to clear a large chunk of debt in months when your expenses are lower, or when you get a big bonus. However, some debts like mortgage loans don’t allow you to change your monthly repayments.
Whatever the case, it doesn’t feel good to be in debt and it hinders your progress towards wealth building. If you have the opportunity to clear your debt faster, do it. It will save you the stress of being in debt and allow you to focus on building your wealth.
If you need help repaying your debt, you can consider a Debt Consolidation Plan (DCP) to make debt repayments way easier.
2. Build a solid emergency fund
After clearing all your debt, the next step is to build up your emergency fund of about three to six months of your expenses. Even as you’re clearing your debts, you should still have sufficient funds in your savings account that you should not touch at all, for times of emergency.
These could be instances where you lose your job unexpectedly, or when you or a family member is diagnosed with an illness that renders you unable to work. In less extreme scenarios, you might suddenly have to pay for urgent renovation because of mouldy walls or cracked tiles.
In such cases, your emergency funds will be able to tide you through without you having to rely entirely on your salary. Having a solid emergency fund will give you peace of mind knowing that you have a stash of funds ready to cushion any financial blow.
Start your emergency fund in a high-interest savings account now.
3. Be sufficiently insured
An aspect of being financially free also includes being adequately insured against any health issues or accidents.
Many may overlook the importance of insurance, especially plans like disability insurance or critical illness insurance, due to the mindset that they are still young. However, both disability and critical illness don’t discriminate and can happen to everyone.
Younger folks who are just starting out in their career would need the coverage even more, as the sudden onset of a diagnosis would mean wiping out their entire savings and even resorting to borrowing from others because of the hefty treatment costs. Even older individuals who have a six-figure emergency fund might also realise that they might not have enough to pay for their medical bills.
This is why being insured will help you safeguard your hard-earned money and cover most, if not all, your medical expenses. Certain plans also offer a payout upon diagnosis to cover any loss in income due to the medical condition.
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4. Budget your expenses
Being financially free means that you have a steady financial inflow to sustain your lifestyle. One way to achieve that is by cutting down on your expenses and adopting a frugal mindset to save as much as you can. The term ‘budgeting’ is widely used these days, but it is a lot easier said than done.
One way you can effectively budget is to track every expense that you make and categorise them into groups like ‘food’, ‘lifestyle’, ‘shopping’, etc so you know exactly where your money is going. You can easily download a budgeting app or an expense tracking app on your phone to help you monitor your expenses.
After tracking your expenses for a while, you’ll start to see patterns in your spending and look out for areas that you can cut down. Maybe you’re spending too much money on dining out, or maybe you’re overspending on Grab when you can just take public transport. Identifying these areas where you’re overspending will give you a clearer picture of your spending habits, and make it much easier for you to cut back on your expenditure.
5. Earn passive income
Last but not least, once you’ve settled the basics, you’ll want to earn a steady stream of passive income to accelerate your way to financial freedom.
If you’re still not comfortable with any forms of investing like stock-picking or dividend-investing, you can always look elsewhere for passive income. One option is a side hustle that you can take up in your free time or over the weekends. If you have any skills you can offer, you can consider giving classes for it, say, private tuition for Math or one-on-one music lessons. Or if you have a knack for handmade jewellery, you can always open an online store to sell your work.
Another way is to look into rental income which could hedge against inflation. If you have an extra room to spare and are willing to compromise on your living space, you earn a little extra money by renting out the spare room. Or if you’re willing to go to the extent of living with your parents or in-laws, you can free up your entire unit for rent. Bear in mind that this isn’t ideal for everyone, so be sure to go over the option with your family before committing to the decision.
Whatever you choose to do to earn passive income, the ideal scenario would be to earn enough to cover your monthly expenses completely. That way, you can save 100% of your main income each month, accelerating your rate of savings.
By Deborah Gan
A mahjong addict with an undying love for dogs, Deborah is always on the hunt for cheap deals because she is always broke. That is why she is attempting to be more financially savvy to be.. less broke.