Liz Koh: Chasing financial freedom
The prospect of attaining financial freedom is a powerful motivator.
It's the reason people queue up at Lotto outlets, sign up for get rich quick schemes, and attempt to build empires.
Even those who despise money and wealth would admit that financial freedom no doubt allows you to gain more enjoyment from life. But is there really such a thing?
There is a big difference between being wealthy and being financially free.
Just ask anybody who owns a large asset such as a business or a farm.
Having a lot of money tied up in assets that require hard work for their value to be retained or that expose you to the risk of loss, is not financial freedom.
To be truly financially free means that you have sufficient income to achieve your life goals and the standard of living that you want without effort or the risk of loss.
If you have a high income and a high standard of living, but your income is earned by working, then you are not financially free as your income stops as soon as you stop working.
Similarly, if you own a large business that requires significant effort from yourself to keep it going, then you are not financially free.
If you are lucky enough to own substantial investment assets that produce income to maintain your lifestyle, there will still be effort and risk involved in managing those assets.
Financial freedom in its purest form is difficult to attain.
Financial freedom means different things to different people. For some people, it simply means freedom from debt.
Some people fear debt, often because their parents did or because debt makes them feel insecure.
The feeling of not owing money to any person or entity is liberating.
Once all debts are gone, you are free to use your money as you wish.
Having a goal of paying off all debts as quickly as possible is admirable.
However, such a goal can also be limiting, because wealth creation can happen much more quickly if money is borrowed for investment purposes. Debt is not always bad.
For another group of people, probably the majority of the population, financial freedom means being able to live a comfortable life, free of financial worry.
This group of people is comfortable with having debt, so long as the repayments are manageable.
These freedom seekers simply want to be able to do things like go shopping, eat out and have overseas holidays without having to worry about where the money is coming from.
There's another group of people for whom financial freedom is the ability to not have to work as much or at all.
These people are not lazy, in fact quite the opposite. They tend to be active people who have a variety of interests, who might be curious explorers of intellectual and artistic pursuits, perhaps wanting to travel the world, climb mountains, or help people less fortunate than themselves.
For these people, enjoyment of life is far away from the workplace.
Only a small minority of people set out to create significant wealth.
They are entrepreneurs who, ironically, are often not driven by a quest for financial freedom but by the satisfaction that comes from being successful.
They enjoy what they do, often becoming so absorbed in planning future deals that they forget to make the most of the present.
The pursuit of financial freedom has to start with a decision about what it means for you.
The more wealth you desire to create, the more financial risk you will need to take to achieve it.
It is just not possible to separate financial gain from financial risk, unless the gain is a windfall, such as an inheritance.
If it is freedom from debt you crave, then saving hard will do the trick.
If freedom from work is your motivation, it is likely you will need to take on financial risk through investing in property or businesses to get there, as saving alone is unlikely to generate the wealth you need.
For the majority, a comfortable life is the aim and this can be easily achieved by increasing the differential between income and outgoings, reducing debt and building up a decent amount of savings as a buffer for short term needs.
Financial freedom is whatever you want it to be. Whichever way you look at it, financial freedom is really just a state of mind.
Liz Koh is an Authorised Financial Adviser and author of Your Money Personality; Unlock the Secret to a Rich and Happy Life, Awa Press, 2008. The advice given here is general and does not constitute specific advice to any person. A disclosure statement can be obtained free of charge by calling 0800 273 847.