Why are you not financially independent? : Part 3

This is part 2 of a series. Read the earlier parts of the series here first. 1 2

In the previous section, we focussed more on the external factors of why its not that easy becoming financially independent. In this section, we shall discuss more on internal factors.

One of the most common problems in our society nowadays is the issue of money management. Unfortunately, our education system, in Singapore and all around the world, focus heavily on technical education. Technical education is definitely a necessity; It drives companies, helps you get employed, and in short, providing a living. However, this has proven to be uneffective in the development of a person.

As such, life skills such as goal setting, personal development, social skills, and money management are all rarely taught in schools. While it can be argued if formal education should be responsible for teaching such skills, one must remember there used to be a time where children didn't have to study so much, allowing creative exploration, which in turns builds life skills.

One dominant consequence from this is instant gratification. People and organisations are all looking for the magical 'quick fix'.

Fat and want to lose weight? -> Take weight loss products, don't bother exercising though.. its a waste of time.

School ranking lousy? -> Drop 'non value-added' activities, cram more study sessions and generate hoards of people with no passion for education .

Not enough money? -> Spend all your money on lottery, don't bother about the personal development books, or learning more on improving your skills.

Splurges, smoking, drinking, luxury products. Most of the time, all these are instant gratification. Gratification to temporarily satisfy a underlying need. However, instant gratification does not solve problems. It will eventually pass, and you are back to square one. We have become a society that lives in the present. Taking on too much consumer debt and living a lifestyle of consumption.

The solution to all these is actually very simple. Choose delayed gratification. Instead of spending all your money now, choose to invest a bit in the future. You would most likely be able to purchase more of the same thing next time if you really want to. The other benefit is that you develop more will power. In the end, you will realised some of the things are momentary impulses. They will pass.

That brings us to the topic of money management. Money management in short, is to allocate your money so that you are more in control of any expenses, savings and debt. In itself, money management is a huge topic. Mountains of books have been written about the topic, and I seriously recommend everybody to get at least one.

In a nutshell, don't spend all your money now. Most people are actually spending more than they should. Just because you earn $3000 doesn't mean you've gotta spend $3000. In fact, its recommended that you save between 10-30%. Out of this, 10% should be in passive savings(i.e banks, low-risk funds, in short, things that don't require you to think too much), the rest should be into active investments. Active investments can be stocks, funds, or even a business.

Just a conservative example,
Lets say you manage to save $500 a month, into an instrument that gives you 10% returns annually. 20 years later, this turns into $343,650. Of course, thats really very conservative. As I mentioned earlier you should save about 30% of your gross income. That would mean $900 for a person earning $3000. And of course, most people do get pay rises in their lifetime. So the contribution amount should increase.

This topic is a pretty dry one, simply because there are so many other more alluring distractions in life. But definitely, it is one of the more important topics everybody should deal with in their life.(Preferably as early as possible in life)

Action: Change your approach to money. Save first then spend. Read books.

Recommended reading list:
Richest Man in Babylon - George S Clason

Why you're dumb, sick & broke. And how to get smart, healthy & rich - Randy Gage

We'll next look at the sea of drifters ;-)

Stay Tuned!