Towards financial independence

I recently went through another audio book, "Rich Dad, Poor Dad by Robert Kiyosaki". I managed to capture some salient financial planning concepts from this audio book. After learning from various sources (e.g. audio books and seminars - see my previous posts on financial planning), I found out that all financial planning concepts point to same thing, that is the goal of reaching financial independence. As such, all concepts on financial planning tie in with one another and there is no contradiction in concepts as all concepts help the person who practise these concepts to arrive at same goal of financial independence.

In this book "Rich Dad, Poor Dad", it explained the reason why most people do not reach financial freedom. This is because of simply one thing - their total monthly passive income do not exceed their total monthly expenses. Most people may know of this cold hard truth already, but how many know of ways in which one can arrive at financial freedom. In reaching financial freedom, it is not just the methods per say that one should practise but the one and most important thing is to have the correct attitude and mindset of financial freedom. Therefore, financial freedom all begins with the correct attitude and mindset of the individual.

According to the book, one can classify his/ her finances using an accounting language. This is not foreign to many trained investors who are adept at assessing financial statements of companies. Similar to the financial statements of a company, an individual's finances can also be classified into his income, expenses, assets, liabilities and cashflows. To arrive at financial freedom, one's cashflow must always be positive. I see an equivalence of this to the importance of having consistent positive cashflows for companies as well. A company that boast of consistent positive cashflows year after year has consistent profitable business model and has use for its cashflows in reinvesting in its business, other growth opportunities or providing dividends to its shareholders.

Is active income from a job a financially stable source of income?

Now, I shall discuss more based on what I learnt from the book on the different categories namely income, expenses, assets, liabilities and cashflows with regards to an individual's finances. Most people survive on paycheck to paycheck in order to have a recurring income. Once they stop working due to any reasons, their income stops as well. This is known as active income that comes only by working. When the person stops working, he becomes financially unstable since there is no more income and he still needs money for basic survival (e.g. food, clothing).

One cannot do without minimal survival needs (e.g. without food, one goes hungry and may lead to death.). Thus, the important question to ponder is whether a person is financially stable with a job afterall? By looking at the above proposition, it may seem not. If a person ceases to be working, his income also ceases. His whole financial state starts to crumble unless he has some emergency funds to tide him and his family over a period of time while he finds another job. Anyway, a person may still due to any possible reasons in his life cease to be working (e.g. due to illnesses, disability or old age), so active income is actually not a stable form of income afterall. If one don't work, sorry - no more income for him......I am not saying that working is a bad thing here. In fact, one should continue working and contributing to people around him. One does not live as a hermit and needs to coexist with other beings and work is an avenue for rich interaction between people. So, work is important. One should work hard and contribute to people around him. However, the reality is that many people do not just work for the meaning of working. People work because they need the renumeration behind the work. They need the paycheck and need it continuously all their life. How many can actually boast that they work only for the fun and enjoyment of working to contribute to peoples' lives?

Of course, there is nothing wrong with working for a living. It is decent to work for a living. The point I am raising here is the need to reexamine how one looks at active income. Active income is not a stable form of income. It is misleading to say that one is financially secure with a job. It is in fact not financially secure at all with a job. Break off the active income source (the income paying job) and there is no more income into a person's finances.

Income producing assets as financially stable sources of income

If active income is not the way to go to become financially stable, how does one gain stable income sources? He does it by passive income sources. Passive income sources are sources of income that do not require the individual's time and effort to produce the income. Such income are generated passively (e.g. rental from real estate, dividends and capital returns from stocks and other forms of investments, royalties from books, business income from businesses not requiring one's attention). According to the book, these types of passive income come from such income producing assets (e.g. real estate, stocks and other forms of investments, businesses). So, if active income is not financially stable at all, the financially stable sources of income would come from income producing assets. To be financially stable, one should thus seek to build up his income producing assets in his management of finances. This is also the way to make money work for oneself and not the other way whereby one works for money. One can see every dollar saved and invested into building income producing assets as accumulating more workers for oneself, so as to make money become one's worker (every dollar held in such income producing assets is like individual worker, so the more money held in such assets, the more workers one have working for himself).

I guess the above illustrations are not unknown to many people. The question is why many are still not able to save and invest in such assets to build their passive income sources. We have to examine the next category of expenses and liabilities.

Expenses and liabilities stem from desires not easy to grapple with

Not all people are alike. Everyone has his own desires and many of an individual's desires can be satisfied by his expenses and liabilities. Imagine the thrill of owning one's car or a condominium. All these big ticket items are a drain to one's finances. Any items that draws away income instead of producing income are considered as liabilities to an individual. Being tied down by monthly instalments for paying car loans and housing loans make such items as car and houses as liabilities instead of assets. Some may argue that houses are assets to an individual. According to the book, as long as the item is not generating any income at all, but instead drawing out income from oneself, it should be conservatively considered as liabilities on one's finances. So, the problem with not being able to reach financial freedom is because the average person keeps tying himself down with lots of liabilities and expenses (e.g. from all loans and incessant spending) and not being able to save and invest in owning income producing assets instead.

It all begins with the attitude

In conclusion, to reach financial freedom, one needs to have the correct attitude and mindset of looking at ways to save and invest to build sources of income producing assets (e.g. rental from real estate, dividends and capital returns from stocks and other forms of investments, royalties from books, business income from businesses not requiring one's attention). Do this and reduce on one's expenses and liabilities at same time. It is a matter of perservering and sooner or later, one will reach financial independence should his income producing assets be able to produce passive income enough to cover all his expenses and liabilities. By then, his monthly cashflows will become consistently positive without his effort in producing active income and he is thus financially free.

To reach this goal, it does not mean that all people should quit their paying jobs. Before one can own substantial income producing assets, he needs an income source from his job to fuel his investment in income producing assets. So, it is time to rethink carefully whether one is really financially stable with a paying job? Most people are caught by greed and fear and so keep to their jobs (fear of no income) and seek improvements in their jobs or keep changing jobs to better their active income source (greed of wanting to increase active income). However, all these may not be comparable to a more financially stable source of passive income from owning income producing assets (yes, the more of such assets the better).

A final word to clarify that I am not proposing that people should not work for a living. One should work diligently and there is nothing wrong with working hard for a living. Even if one is financially free, one should still work and contribute to other peoples' lives. It is a privilege to be able to contribute to other peoples' lives, be it using one's time or money.