Personal Finance - 3 Simple Steps To Achieve Financial Independence

I may have left the banking industry for a while. However, the concepts of personal finance remain intact in my mind even up to today. Many find the topic of personal finance a little challenging to understand. With that in mind, I have written this article using simple terms so that anyone with little or no financial knowledge can comprehend it. Let’s get started then!

Personal finance is not rocket science. It involves only three simple steps.

Minimise expenses
Maximise income
Compound the difference at the highest possible return

Yes, that’s all. It is as simple as that. We shall look into each in more detail in the article.

Step 1 – Minimise Expenses

Minimising expenses is the first and easiest step to execute. The concept is not difficult. However, what prevents people from putting this basic personal finance concept into practice boils down to the mindset. Many are overly concerned by how society perceives them based on appearance. Such emotion does not just put unnecessary emotional pressure but also highly damaging to one’s financial well being.

One good example will be a wallet. All of us know that a $10 wallet can do a pretty good job of holding our cash and cards. Nevertheless, some of us still choose to spend hundreds of dollars on a wallet that serves the same function as its much cheaper counterpart.

Well, I used to choose the most expensive item in the category when I went shopping. I thought that the higher the price tag, the better the products or services would be. Since I pursued accounting and spent more than a decade in the accounting department, I learnt that was not always the case. Inefficiencies in the company’s processes will almost always result in a higher cost of production, which eventually passed down to the customers. Since then, I will never pay more than I need to.

I do acknowledge it can be emotionally challenging to ignore how society perceives you based on your appearance. It is also the main reason why many spend that much money on branded goods. I used to feel that too. However, as my knowledge of personal finance improves, I realised that the higher my expenses are, the harder I need to work to generate income. That is not a good bargain indeed.

Step 2 – Maximise Income

In general, people will go through three stages in earning their income. The three stages are as follows.

Getting a job
Side hustles
Running a business

Let’s look at each of them.

1. Getting a job

The first stage is getting a job. A job remains the primary go-to destination for fresh graduates. Unfortunately, many do not go beyond a job in their lifetime. There is absolutely nothing wrong with that. However, over-reliance on a single source of income from a job is extremely risky. The risk multiplies when one has a family.

I had jobs too. Many of them. However, I see my jobs as an opportunity to learn how to run a business. While I tried to learn as much as I could from the jobs, I was clear that a company is a profit-making vehicle. When it is not profitable, I can lose my job.

2. Side hustles

The second stage in the process of earning income is starting a side hustle. With the invention of the internet, there are many businesses that you can do on a part-time basis. Trading in the financial markets, e-commerce, social media influencers are just some of the examples. If you need some guides on how to get started, this article on my freelance accounting journey may be helpful.

It takes time for the side hustles to flourish. During the period, it would be wise for you to retain your full-time job. With perseverance, you will one day find that your income from the side hustles surpasses that from a job.

When your side hustles have grown to an acceptable size, you may consider incorporating them. It will then bring us to the third stage – running a business.

3. Running a business

There are many large companies in the tech industry that begin as side hustles of the founders. When you decide to turn your side hustle into an incorporated company, there are more areas that you will need to manage. In general, these are the five core areas in running a business.

1. Marketing
2. Products and services
3. Accounting
4. Legal
2. Technology

I have written an article on statutory requirements for businesses in Singapore. If you have converted your side hustles into a business, this article may be handy for you.

In this digital world, the use of technology to automate day to day tasks is a must. If you are looking to automate your accounting process, you may want to check this article out.

Step 3 – Compound the difference at the highest possible return

Albert Einstein once said compound interest is the eighth wonder of the world.

I agree.

Compounding is probably the most important mathematical concept in personal finance. In simple terms, compounding multiplies your money again and again over your lifetime. Many of us would have probably heard about compounding before. It is not a difficult concept to understand. However, the challenge is likely to come from how to execute it.

There are two ways of compounding your reserve. They are saving and investing. You are saving if there is no risk to the amount you have set aside. In exchange for capital protection, the interest rate you may earn is very small. Saving may be a good habit. However, investing allows you to grow your money at a much higher rate. As the capital may fluctuate in investment, you will need to learn to achieve a higher level of financial literacy to manage the fluctuation.

Original article by Yanto Wong.

Personal Finance – 3 Simple Steps To Achieve Financial Independence

Step 1 – Minimise Expenses