The topic of financial independence is very important to everyone especially when we talk about money matters be it entrepreneur, employee, the rich,the poor and he middle class.A beggar would be happy to hear if he or she is taught how to fish.We cannot talk about financial independence without discussing net worth,Asset,liability.
We shall look at four basic principles to archieve financial freedom or independence to creat wealth.What is financial independence? Financial independence is the status of having enough income to pay one's living expenses for the rest of one's life without having to be employed or dependent on others.
Financial independence is not all about having enough money to cover cover all your desire living expenses but also being able to overcome your psychological fears to truely live free.Financial independence is the measure of your wealth which is your Net worth.
Net worth is simply financial valve of everything you own i.e your cash,all your investment such as stock ,bonds,the valve of your business,the valve of your residence, your car minus all your liabilities.
An asset is something that put money in your pocket whiles liability is something that takes money out of your pocket.To walk on the path of wealth creation you need to spend your life buying asset.When you study the cash -flow parttern of a wealthy person,his income is always earn from rental,interest, dividedand royalties.His expenses are taxes and probably mortgage payment.All his asset on the Balance Sheet correspond with income generated from his assets that is Real Estates,stocks,bonds, intellectual property and liabilities also goes with his expenses.
The four basic principles to archieve financially independence are ;Income,saving, investment and what we called simplification.
There are two types of income namely working income that is income we earned from active work where we receive paycheck.Working income means that you are investing your time and labour to earn money.
Passive income is money earned without you directly involved.You allow money to work for you.To be financially free,you need to earn money without working.You become financially free when your passive income exceed your expenditure.Having business working for you where you do not need to be personally involved for that business to operate and yield an income such as royalties from books, copyright, licensing your ideas called intellectual property and rental real Estates.
Saving is depositing or putting money in a bank
One can earn a lot of money but if one do not keep any of it,he or she will never creat wealth.Many people are fond of spending.Whatever money they have ,they spend.People prefer to choose immediate gratification over long- term balance.Onces you form a habit of saving consistently,then you move to the next stage and make your money grow through investment bearing in mind the time valve of money. If you adopt the principle of paying 10% tithe of your income if you are Christian,another 10% for saving for either long or short term investment and 50% saving into necessity account you are good to go.
Investment also put money away ,but in a risky venture ,such as buying shares in a listed or unlisted company.The deffernce between saving and investment is chances of losing money.You can also invest in risk free (low risk) instrument like treasury bill,fixed deposit, government bonds and mutual funds.
If your financial goal is a long term one ,then you can invest in shares listed on the stock exchange seeking expert advice like investment broker or financial analyst who knows the dynamics of the market trends.
If you are risk - averse invesstor,not willing to take too much risk, then you have to invest in risk free instrument.If you are speculative investor called risk lovers that is willing to take high risk to earn very high returns, then you have to go in for shares.However,if you are willing to take some risk but also want some security then, you go in for shares investment and risk free called risk neutral balance or " best of both world"
Let's look at some monthly investment and estimated returns based on hypothetical interest rate.When you invest 100 Ghana cedis monthly at average annual returns rate of 15% for 1year you accumulates1,280 Ghana cedis,if you 100 Ghana cedis for 5years ,you accumulate 8,633 Ghana cedis.
Again if you invest 200 Ghana cedis monthly at average annual returns rate at 17%,for 5years you will accumulates 18,981 Ghana cedis.
This principle means sacrificiing your immediate gratification at the expense of saving and investment.Buying things for immediate gratification is nothing more than a futile attempt to make up for dissatisfaction in life."Spending "money you don't have comes from "expending" emotions you do have.It extremely important to try and live simple lifestyle to cut down excessive spending in order to achieve your financial freedom to creat wealth.
When you go by this principles you archive financial independence.
Matthew 25:14 talks about the parable of talent .A man was traveling into far country and he called his savants ,and delivered unto them his goods.And unto one,he gave him 5 talents,to another he gave him 2 talents and to another he gave him 1 talent according to their ability.The one with 5 talents traded and he had 5 in return,and the one with 2 talents traded and he had 2 in returns and the one with 1 talent went and digged the earth and hid it.
This parable had great implications for financial independence.
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