How Close Are You to Financial Freedom?
Most people want a sense of financial freedom. Ideally, money is something that allows us to live the life we want. Financial stress, on the other hand, can prevent us from living our best lives. Answering the following questions can give you an idea of how you’re doing.
What Does Financial Freedom Mean to You?
Financial freedom is a state of mind. While there are some objective measures one can look at to determine how well a person is doing financially, your definition of financial freedom may differ from your neighbor’s. Does being 100% debt-free make you feel powerful? Does owning your home give you a sense of security? Do you want to be able to spend on little luxuries (a cup of fancy coffee, a trip to the movies) without feeling guilty? Knowing what financial freedom means to you makes it less likely you’ll fall prey to making money choices based on the idea that “everyone else is doing it” and more likely that your choices will reflect your personal values.
How Much Debt Do You Have?
Debt isn’t all bad — you’ll likely need to take on some of it if you want to own a house, for example. But too much debt can make you feel like you’re working to earn a living for your creditors rather than yourself. You should aim for a debt-to-income ratio of 20 to 30 percent. It’s also important to be aware of how much you’re paying in interest. Credit cards typically come with high-interest rates, which means paying off the balance monthly is important as you take steps to financial freedom.
Are You Paying Your Bills on Time?
Being a grown-up means paying bills. If you’re not able to consistently pay bills when they’re due, it’s a sign that something is wrong in your financial life. If you’re often in a position where you have to decide what bills you can afford to pay, you need to either increase your income or decrease your spending. If you have the income to support your lifestyle but are still missing payments, you need to tweak your system so you aren’t paying late fees and penalties.
How Much Are You Saving?
People who enjoy financial freedom know to pay themselves first. Aim to save 20 to 25 percent of your income. If you’re a salaried employee under the age of 55, the CPF automatically deducts 20 percent of your paycheck from the first $6000 of your monthly income (if you receive bonuses, they’ll take a little more). However, if you’re self-employed, you’ll have to handle your savings yourself (with the exception of your 8 to 10.5% Medisave contribution).
Where Are Your Savings Going?
There are strict rules about what you’re allowed to spend money in your Ordinary Account on; primarily house payments and education. You also need to have money saved that you can access in case of an emergency.
The best place for this money is probably a savings account. It’s separate from your checking so you won’t accidentally spend it, but liquid enough that you can get to it when you need it. To be truly financially free, you need long-term savings as well. This is money you don’t anticipate needing for the next three to five years. This can be invested in the stock market, which is likely to generate a higher rate of return.
Are You Following a Budget?
Sticking to a budget may seem like the antithesis of financial freedom. But knowing where your money is going ultimately makes you freer. If you give every dollar a job, it becomes easier to deal when you encounter an unexpected expense. Mostly you will be switching things around between discretionary spending categories: your “wants.”
Maybe you were planning on buying a new phone this month when a friend invites you to go bowling. You’ve already spent everything you’ve budgeted for recreation this month. Do you have to say no? No, you just move the money from the new phone fund to the recreation fund. Yes, you’ll have to wait an extra month or two to get the phone, but life is about tradeoffs. Making responsible choices instead of constantly feeling squeezed for money is financial freedom.
Are You Living to Work or Working to Live?
How do you feel about your job? Do you get a sense of satisfaction from going to work every day, or is it just a way to generate enough income to do the things you truly love? One answer isn’t better than another, but part of financial freedom is being honest with yourself about the role money plays in your life. If you don’t like the answer you come up with, you can work toward changing your circumstances via the suggestions above until you reach financial freedom.