Assets and liabilities
An asset puts money in your pocket. A liability takes money away from your pocket. The direction of the cash flow determines whether an item is an asset or liability, not the item itself. Your salary is your seed (capital), not your harvest (profit). If you consume your capital, you say goodbye to profit. It is your responsibility to convert your salary or primary income into another source of income. It is not how much you earn that determines how wealthy you become, but what you do with what you earn.
Structure of a solid financial freedom
In order to start constructing financial freedom, you have to spend less than you earn and invest the difference. If you consume all your income, you have nothing to build with. In order to save on a sustainable basis, you have to understand and practice the principle of ‘pay yourself first’. Paying yourself first essentially involves saving first before spending. Below are various financial plans towards a solid financial independence.
Financial security plan
The portfolio in this plan is made up of fixed income assets. Income here is in the form of interest. Examples include fixed deposits, treasury bills, commercial papers, bonds, annuities and so on. The risk here is almost zero and your principal is guaranteed. The income or interest is also fixed, though it may change at rollover or maturity. You can invest in the money market through your bank (discuss with your account officer) or finance house.
Financial growth plan
The purpose of this plan is to enhance your revenue so that you become richer and can afford better things in life. The portfolio in this plan is made up of assets that are considered valuable e.g., stocks, investment property, forex, etc. To invest in the stock market or any market at all, you need to study and understand that market first before you commit your money. You need more investment skills (and financial education) to succeed in this plan.
Financial abundance plan
The purpose of this plan is to live your dream, it is to become rich and help others. The portfolio in this plan is made up of assets that increase rapidly like start-up companies, commercial real estate developments and so on. Your small investment can grow to become worth hundreds of millions and even billions. This plan requires a high level of financial education and risk tolerance because the risks are very high.
One thing that all these plans have in common is that none of the income is from earned income or pensions. Your job is temporary. Your pension can get delayed. Pension funds can be depleted by a market crash or outright mismanagement through fraud or poor asset allocation. This means you have to channel your earned income into these plans. This referred to passive income, while allocating funds to these plans is called asset allocation. With a solid financial foundation, a viable financial independence is achievable. Then, you can choose what you really want to do with your life.
This is an extract from our student magazine, Pioneer. If you want to read more articles - click here.
By Olugbenga Mike Odunewu, MA Finance and Investment student