Financial Freedom: Start Investing As Early As You Can

Financial Freedom: Start Investing as Early as You Can

Getting your money to work for you is essentially what investment is all about, and it’s a crucial skill to learn, especially while you’re young.

Investment doesn’t have to be complicated or even difficult. In fact, it’s possible to automate your investments so that all you’ll need to do is some minimal management. I’ll go through all of this step-by-step in the upcoming posts, but for now I’ll explain exactly why investment is so important.

Start With the End in Sight

I tend to look at the end result or the endgame before I engage in any venture, and it’s the same approach I used for investment. I usually start by looking at my goals, and then finding a way to get there. I want to have flexibility in my future and I think that investments, when done right, can provide that. This could be true for you as well, which is one of the reasons why I believe that it’s highly beneficial to learn this skill.

Let’s take a look at my long-term goals:

  • Ensure a comfortable retirement
  • Financial freedom
  • Be location independent
  • Create a passive income stream which I could possibly live off if I ever needed to

Everything on that list is about having flexibility. I would say that it’s a priority for my life, but of course, this could vary from person to person. However, if your goals are similar to mine, you’ll definitely find investment to be an invaluable tool for your future.

Retiring as a Millionaire

One of the biggest fears for many in the working class is not having enough money to retire. This is where investment comes in. The important thing to note here is that you can have almost any job and still end up retiring in comfort. In fact, I’ll write a post explaining how you could become a millionaire (at least) with very little effort.

This might sound like a plug for some kind of get-rich-quick scam, but I’ll say right now that it couldn’t be further from the truth. It will take a long time to achieve this, decades even, but it’s entirely possible to retire as a millionaire regardless of the type of job you have. However, that’s beyond the scope of this post and I’ll come back to it soon.

Of course, having a higher paying job will get you there quicker, but the point is that by learning to invest your money, you could potentially have a career doing something you love even if it doesn’t necessarily pay very well, and still end up with a sizeable nest egg.

Flexibility and Financial Freedom

Financial freedom is a priority for me because I want to be able to make decisions out of preference, and not out of need. There’s a significant distinction between the two. For example, I want to be able to travel around the world for months at a time without having to worry about where my next paycheck will come from. I also would like to be able to make career choices based on what I like doing, rather than having to buckle down and stay in one place just because I’m dependent on the salary I’m being paid.

Start Investing Early

start-investing-early

To achieve that level of freedom and flexibility, it’s very important to start as early as possible, and that’s why this post is targeted at younger people (although anyone can benefit from it) simply because the potent combination of time and compounding you more potential to amass your wealth. I simply cannot stress how important it is to start investing as early as you possibly can.

I’m going to create a mini-series of posts about investment, which will cover topics such as:

  • Compound interest
  • ETFs
  • Warren Buffett’s approach to investing
  • How to pick stocks
  • Valuing a company
  • Investment resources
  • Setting up an investment account
  • Growth vs. value
  • Strategy and when to sell

Many young people who start getting their first paychecks spend most, if not all of it, very quickly. They hardly give a moment’s thought to investing that money, but if they did, they would be much better off and possibly enjoy a secure future. Once I learned about investing, I began to look at my expenditure in a new light.

This didn’t mean that I started obsessively saving money. Instead, I began to think in terms of opportunity cost and started spending on things I valued, while cutting down on things I valued a lot less. I go into much more detail about this in “A Simple Hack to Transform the Way You Spend“.

I’ll leave it at that for now, but follow along with the series and hopefully you’ll be able to confidently make your first investment and begin taking your first steps towards financial freedom.

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Save More Money by Spending Wisely

A Simple Hack to Transform the Way You Spend

It’s quite a struggle to resist the temptation of purchasing on impulse when you’re at a shopping centre. In fact, my bank account was taking quite a beating because of my unhealthy spending habits and I constantly found myself struggling with buyers remorse.

Eventually, I pulled up my bank statement – eyeballs popping out when I saw how bad it was – and decided that it was time to put an end to it. It was a lot easier said than done. I later began to wonder if my usual optimisation approach could be applied to fix my overspending.

Enter the utility approach

(You can think of utility as an arbitrary measure of happiness – it’s a concept I borrowed from microeconomics)

I devised a method which was deceptively simple, and yet managed to significantly reduce my spending. Here’s how it works:

  • I rank my potential purchases in terms of the amount of utility that I will derive from it.
  • Since the measurement of utility is arbitrary, I assign odd-numbered values to my purchases. For example, on a scale of 1 to 9, clothing would give me a utility of 3, while a good pair of earphones would be a 7.
  • I choose odd-numbered values because it’s easier for the brain to differentiate between a 3 and a 5, as opposed to a 5 and 6 because 5 and 6 are too close together to have any meaningful difference.

The rankings are based on a number of factors:

  1. How long the product will last
  2. How often I will utilise the item, or the frequency of use
  3. The opportunity cost (and this is a big one). Essentially, this means “What are you giving up, in order to buy this item?” I go into more detail later on in the post.
    • For example, if I’m buying a set of speakers, I am giving up my ability to purchase the new Kindle that I’d been waiting for.
  4. How things/life will improve as a consequence of the purchase

So if, for instance, I’m looking to buy a new guitar, this would be my checklist.

  1. It will last many years
  2. I use my current guitar almost every day so it’s very likely I will continue to do so
  3. I’m giving up my ability to purchase the new jacket I wanted, the hiking boots, and will probably need to cut back on spending as it’s a large purchase
  4. Quality of life will significantly improve because it’s a very big part of my life and I derive a lot of joy from playing the instrument

If the product/experience is very valuable, lasts a long time, can be used often and improves my quality of life significantly, I award it 9 “units of happiness” or a utility of 9, and I can prioritise it over, say, a new jacket with a utility of 5.

Noel, a good friend of mine, taught me to look at purchases as long-term investments. If the price was high but provided good value and long-term use, that would be considered a good buy. Credits to him for showing me this way of looking at items.

Going through this checklist, even in your head, can dramatically reduce the occurrence of impulse buying. It forces you to think about how happy the item is actually going to make you. In most cases, it’s probably not going to make you happy or even impact your life meaningfully, in which case you can happily pocket your money and know that you’ve made the right decision.

Delay your purchase

A tip that’s helped me very often is to hold off on buying big-ticket items. Half the time, you end up realising you don’t really want the item that much or you find a better deal and end up saving a ton of cash. Wait a couple of days or even a couple of weeks and see if you still want to buy it. After all, if you’ve lived without it for so long, do you really need it now?

Opportunity cost and how it helped me cut my spending in half

Whenever I am about to buy something, I go through the checklist very quickly, and I always consider the opportunity cost. I am currently saving up to travel in Europe. This means that if I’m buying overpriced popcorn and a drink at the cinema, I am aware that my opportunity cost is a night’s accommodation in South-East Asia (The price of popcorn here is unbelievable).

That sobers me up a little and makes me wonder about how much I value the popcorn (or whatever it is I’m thinking of buying) in relation to my travel budget. The more I spend on things which don’t give me very high utility, the less I have to spend on travel, which gives me considerably higher utility. I ended up cutting my expenditure by more than half once I started considering my opportunity costs.

As cliché as the saying is, moderation is key

All that being said, don’t start starving yourself of simple pleasures. I still go to the movies, have a cup of coffee etc, but I keep it to a minimum. I’ve replaced many of these expensive hobbies with free activities that make me equally as happy, such as playing the guitar, hiking with friends or enjoying a great book while at the beach.

The point is, you don’t have to buy stuff to be happy. Only make your purchase if it enhances your overall experience or quality of life in a meaningful way, and if you go through the checklist and the item passes your criteria, go ahead and make your purchase with confidence.