The importance of a positive financial attitude, for instance, being willing to save, in fact does more to prevent financial problems. A great deal can, therefore, be done by working on improving people’s financial attitudes. However, some events, such as the global pandemic of COVID-19 that started in 2020 and the Ukrainian crisis, had a negative impact on the global economy, therefore, negative impact on the households.
The COVID-19 pandemic saw massive investment around the world. For instance, in 2021, investors invested a record of 900 billion USD into Exchanged Traded Funds ETFs alone, nearly double what they invested in all of 2020. These increases investments led researchers to project that the global wealth to rise by 39 percent over the next five years, it may reach to 583 trillion USD by 2025. Low and middle-income countries are responsible for 42 percent of the growth, although they account for just 33 percent of wealth in 2020. The number of wealthier people will also grow markedly over the next five years, predicted to be reaching 84 million wealthier.
An individual who becomes wealthier has a positive financial mindset when it comes to creating wealth. Anyone seeking financial freedom must carry a positive financial mindset, and must therefore behave according to what he want to achieve. To accumulate wealth, reframing his story to a weather’s mindset is essential for success, as wealthy people think differently. How to achieve financial freedom can’t be a passing phase in life, it takes work and commitment. And its takes for some to change particularly their financial behaviors. Following are few steps if embraced, not only will your financial lives improve dramatically, but they will also lead us to financial freedom.
1. Different sources of income
It is proven to be true that, to accumulate wealth, those seeking to be financial independent from zero must have at least two source of income. The following examples are the most common types of income sources:
• Earned Income: considered to be sustainable income, or salary, from a job. It is also considered to be most people’s primary source of income. The earned income is easy to understand and is considered to be an easier source of income for the majority of the people.
• Business Income: income as a result of owning a business, which either produces and sells product or provides a service.
• Interest Income: income generated when an investor lends capital to a borrower. The interest income represents a certificate of deposit CD, Peer to Peer P2P lending, real estate crowdfunding, funding fix-and-flip debt deals, or simply liquidity in a savings account.
• Dividend Income: the financial interests received as a result of an investor owning shares in a company.
• Rental Income: achieved as a result of an investor owning a property and renting it out. Probably the most common form of rental income is owning a rental property, such as a multifamily apartment building, business or office premises.
• Capital Gains: this earned when an investor sell an investment, such as stocks.
• Royalties or Licensing: this occurs when an investor creates a product, idea, or process, and lets others use it in exchange for a small fee.
Individuals who are employees and have a sustainable salary can have another source of income, for instance, by owning stocks, bonds, real estate, or business.
2. Building up emergency savings
Everyone must aim to have some emergency saving, probably in an easily accessible savings account, to provide a financial safety in case of any emergency. Individuals should be saving a salary of between three to six months’ worth of essential expenses in an easy access account. Essential expenses should be enough at less to pay for some expenses, such as loans, housing costs, food, and important bills.
The emergency fund can be used, for instance, when unforeseen circumstances strike. The fund can be built by using automatic contributions to grow saving and reinforce the habit of saving income. Even if the contributions are small, this fund can be used against risky situations in which an individual is likely to be forced, when in an emergency, to borrow at high-interest rates or possibly find himself unable to pay his bills on time.
This emergency fund could also become general savings contributions to strengthen financial security in the event of a job loss. Importantly, the individual can use the saved income to invest in a sudden investment opportunity, for example, when stocks suddenly drop significantly, creating a sudden investment opportunity.
3. Tracking spending
It is difficult, if not impossible, to achieve financial freedom without a plan to apply a restriction on spending. Individuals seeking a path to financial independence must determine a short-term, medium-term and long-term financial goal, and then create a plan to meet those goals. These steps are considered to be essential for achieving financial freedom. Also, for those who have a family, they must encourage the partner or spouse to be on board and have the same financial goals in mind.
Marrying a spouse who can support you in achieving your financial goals may be critical to achieving financial freedom. Two minds in building wealth are better than one, so having a spouse who shares your dreams and stands by your side to spur you on to reaching your goal will always be an advantage. Knowing that you have a partner to lean on in times of turmoil and challenges is vital to building a successful legacy of wealth.
Choosing a wrong spouse could be disastrous. For instance, divorce may consume around 75 percent of personal net worth. Apart from the financial values, divorce can take your emotional balance, leaving you uninspired to take on personal goals, dreams, and aspirations. The distraction of an unhappy home will take its toll on both your wellbeing and finance.
Should we lead a divorce, for instance, to decide our future? The answer is no; it is up to individuals to decide on their achieving purposes, not spouses. Several successful investors, such as Elon Musk, have divorced several times, but they have achieved their financial goals.
It is important for an individual to track spending each month in order to have a good chance for a personal spending habits, have room for improvement. Better financial management, which is the first step to accumulate wealth, starts with spending awareness. An individual can use a traditional way on paper or financial management app like Money Track, which used by financial institutions, to track spending across categories and monitor how much he or she is spending on non-essentials such as dining, entertainment, and even daily coffee.
4. Create a realistic budget
When individuals operate their finance life without a budget, they can’t control their spending habit. Even if they might have a general idea about how much they can spend each month, without hard, accurate numbers, it’s easy to lose control of spending habits.
Budgeting is important, as it keeps individuals on track when they are trying to achieve financial goals. In order to achieve a goal, individuals need to stick to a plan and stay focused on a clearly defined process, and that’s where having a budget is so important. Through a budget, he can reverse engineer his goals and develop a clearly defined process to achieve them. Most importantly, one of the best ways to combat financial overwhelm is to live life on a budget. By doing so, individuals never spend beyond their means, and will always be well-prepared for unexpected expenses.
As illustrated earlier, the path to better finances starts with changing an individual’s own financial habits. Some of these changes will be easier than others, but if the individual stays committed to this transformation, he will end up with great financial management skills that will serve throughout his life, and in the meantime, will gain more financial benefits. Therefore, it is important to use a weekly or monthly spending habits, to set a realistic budget that can be achieved. There’s possibility for individual to set a strict budget based on drastic changes, such as never eating out and scraping on buying nonessential items. More importantly, create a budget that works with lifestyle and spending habits, which can be achievable.
A well-controlled monthly budget can be seen as a way to encourage better habits, such as cooking at home more often, but giving yourself a realistic shot at meeting this budget. Though hard to believe, it’s true that the secret for wealthier people to achieve their financial goal is by following a budget. The biggest secret on how to accumulate wealth and stay financially independent is for an individual to spend less than he generates.
5. Reducing recurring charges
Individuals can check on whether they are subscribe to unnecessary services. Often, it’s easy to forget about monthly subscriptions to streaming services and mobile apps that charge some people’s bank account even when they don’t regularly use these services. Reviewing spending on unnecessary charges, and considering canceling unnecessary subscriptions or reducing a cell phone bill to hold onto more financial gains each month, are both recommended practices.
Each month, some may unknowingly pay for unnecessary expenses, such as pricey subscription services, loan interests, financial commissions, and extra insurance. Individual approaching the way of financial freedom must take stock of spending habits and avoid them where necessary. Making extra room in a budget can help individuals reach other financial goals, such as saving for retirement or buying a first home.
The first investment you can make is to begin to paying off all existing loans to avoid interest, credit cards, or whatever debt you have. For instance, if you have a loan with a 7 percent late payment interest rate, if you pay off that loan or make a repayment on time, you would be saving seven percent every month, that’s your immediate return, which is safer than investing in a stock, cryptocurrency, or real estate. As the interest on the credit cards considered to be higher interest rate, there’s an even greater benefit in getting them paid first. Just be aware that the 18, 20 or 30 percent you’re paying in credit card debt is going to cost more than you could ever earn on many investments.
Cutting unnecessary spending can go even further; for instance, sometimes the best thing you can do is turn down a family member asking for a loan or a handout. If helping out a friend or loved one is pushing you into debt or derailing your financial goals, offer non-financial support. Of course, individuals sometimes have an obligation to help and support financially, but this can only be in some critical cases.
Avoiding debts in the first place is for the interest of an individual seeking financial freedom. But, if an individual already has involved in the loan, then loan repayments is essential to the financial freedom. A small step to avoid paying extra interest, such as paying bills on time, is an easy way to manage and save wisely, and it comes with excellent benefits, such as avoiding late fees and prioritizing essential spending. A strong on-time payment credit record can also lift credit scores and improve interest rates.
Paying down debt, especially high-interest debt, is often a good move. However, some debt products, such as student loan debt, mortgage debt, or business debt, may yield a worthwhile return and ultimately benefit financial life.
6. Start an investment strategy
Even if a financial ability to invest by an individual is limited, he can start to save by establishing investment accounts and contributing a small capital to the account from the income, to generate more cash flow for future investment. However, we recommend that an individual shouldn’t invest in the market without knowing the basics of investment. Being very selective and cautious about where to invest the saved income is the key to success.
Before you start building up your wealth, it’s important to identify and understand the true goal of investing, as well as the process needed to reach that goal. Before you invest capital in the market, you need to have a clear plan of what you want to accomplish and how you are going to implement the plan. This is where creating an investment plan is needed.
The best investment plan is one that is customized to a person’s own lifestyle. Some may want to invest to accumulate wealth for retirement, their children’s future, or to become wealthier. However, you can follow the general steps below in order to set yourself up on the path to success:
1. Individuals seeking an opportunity to invest must first evaluate their own current financial standing to understand how much risk they can afford.
2. Determine investment goals and how long it will take to realistically achieve them.
3. Figure out which types of investments and strategies are the best way to get to where you want to be.
Before investing, individuals must determine whether a specific investment can be a profitable by comparing the potential return with, for instance, the current risk-free rate of return on government bonds. For instance, in 2016 in the United States, the ten-year government bank bond yield was at about 3 percent. And in the Philippines, an investor can earn a return after tax of seven percent on government bonds. And the Philippines, government bonds have never defaulted and are a better risk than many European countries’ governments and banks.
The investment an individual want to approach should have a substantially better return than three percent in the United States or seven percent in the Philippines bonds, in order to justify investing. Otherwise, it’s in the best interest of an individual to invest in bonds, rather than any investment opportunity that wouldn’t generate higher profits than the bonds.
To learn more about how to accumulate wealth, you can purchase THE FIRST INVESTOR book and receive a discount by clicking on The First Investor.