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4 Small Steps That Take You Closer to Financial Freedom

Financial freedom allows you to live life at your own pace and make choices that follow your heart.  For many of us, that goal seems distant– but it needs not to be.  Follow these four steps, and you’ll likely get far closer to that dream.

1.     Act NOW

Compounding is your best friend in investing.  But it needs to work in tandem with a partner: time.  Let’s assume an annual rate of return of just 2%.  A $10,000 fund will grow to $12,190 in 10 years’ time, and $14,860 in 20 years.  Remember, this 49% gain is achieved while you do practically nothing. But to get the most out of compounding’s power, you have to start as early as you can.

There is another important benefit of starting investing early. Markets move in cycles.  Starting early allows you to learn from your mistakes early on, and be able to recover from them.  In fact, consider it a blessing if you have lived through a market crash before you’re 30.  This is way better than learning the ropes of investing with your retirement nest egg at 60.

2.     Have a Plan

Saving madly each month is commendable. But before you begin, you need a roadmap, with a clear destination and steps to get there.

A spreadsheet is an indispensable tool in this process.  As an example of the simplest plan, list out the headings “Goal”, “Amount”, “Time”, “Action”, “Yearly Target.”   On each row, list your key financial goals, short-and long-term.   Examples: “Buy a 500 sqft apartment in Shatin,” “Get an EMBA degree at UST,” “Take a six-month staycation in Melbourne,” “Retire at 55,” etc.  Be as specific as you can.  “Action” and “Yearly Target” should detail how much you need to save each year to reach the goals. In the advanced version, you can also include an assumed annual rate of investment return in your calculations.  Most spreadsheet programs have an array of built-in formulas for this purpose.

Indeed, to reach your dreams you’ll need to crunch a whole lot of numbers.  Fear not: All major banks offer online financial calculators in their websites, most commonly mortgage and retirement calculators.   Explore and use these tools to simulate different scenarios.  Get yourself familiar with the concept of time and money.

Spending the time to set up this plan will be the best investment in your financial future.  Use it as a tool to chart your course.  Revisit and revise as you go along.  This is a great way to keep you grounded, by forcing you to prioritize the many things you want. You quickly realize that life is all about trade-offs and making choices.  If retiring early is your most important goal, you might have to forgo those quarterly shopping trips to Tokyo.

3. Developing a Proper Mindset

Hong Kong is a global financial hub, with a sophisticated market and trading environment.  Investment opportunities and tools abound.  Financial news is available anytime, anywhere.  Against this background, it is all the more important to recognize that you have a long-term plan to achieve financial freedom, which is not the same as getting rich overnight.

When it comes to success in the long haul, having the proper mindset is far more important than checking stock prices every five minutes.  Look for great companies, not hot stocks. Treat market plunges as opportunities to buy, and invest with caution when the market surges. Carefully research a stock before you buy it; a great company that deserves your money today will likely still be a great company next week, next month, or next year. In short, be an investor, not a speculator.

4. Persevere

For most of us, the journey to financial freedom is long.   You might encounter bumps on the way: divorce, illness, corporate layoffs. Don’t let this derail you, and stay focus on reaching your goals.  This is the time to revisit your plan and use numbers to quantify your obstacles. Aside from being surprisingly therapeutic, this exercise will teach you that there’s almost always a solution in the numbers.

These four steps are simple yet essential in starting your journey to financial freedom.  Get set, and go!


Want to know more about the Hong Kong market?

There are lots of myths that could stop us from being successful investors. In Hong Kong, we might have the impression that people generally get rich by buying property. But is real estate the best-performing asset class?

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