Photo by adobemac

Photo by adobemac

When I was growing up, I remember thinking that I wanted to earn as much money as I could so that I could spend as much money
as I wanted.

Now that I’ve grown up, I realised that it’s not about how much you earn but it’s about how much you spend.

Financial freedom is about taking control of your lifestyle and taking control over your expenses.

The Straits Times article, “Credit Card Crunch” (17 November 2008), demonstrates aptly how people who were making $12,000 and $10,000 a month could still end up with unpaid credit card balances of $228,000 and $75,000 when their incomes plunged drastically due to the start of recessionary factors affecting the companies they worked in.

Credit Card Debt – Living Beyond Your Means

Credit cards are a tool. They allow you to spend first and pay later. You defer the payment but you don’t avoid it. Hence, if you use it wisely as a means to manage your cashflows by paying up within the credit terms (30 days), it is just a means of payment for you. But if you decide to only pay the minimum amount and rollover the balance, then you are effectively borrowing that amount of money from the bank at 24% per annum.

At 24% p.a., a balance of $1,000 unpaid will rollover to become $2,000 in 3 years time. Your fixed deposits at say, 1.5% p.a. will double in 48 years. See the difference?

Credit card or unsecured debt is a powerful and dangerous form of leverage. By borrowing at such high interest rates, you open yourself up to being made a bankrupt should you be unable to pay a debt. A person can be made a bankrupt for a debt of $10,000 and above. Being a bankrupt is no small matter. You are restricted in many activities and your credit history goes to pieces and you will find it very difficult or near impossible to borrow money in the future for a home or a car.

Living Within Your Means

The path towards financial freedom lies not in attaining a high income level. Of course, earning more money makes it easier to achieve financial freedom IF (and that is a very big IF) you manage to live within your means. Someone who earns $10,000, lives a lifestyle that spends $9,000 will have only $1,000 per month in savings. Another who earns $4,000 but saves $1,500 per month will end up saving MORE than the person who earns 2.5 times his income. Lifestyle inflation is something we have to be aware of to avoid this trap. To become financially free, you need to learn the lesson of living within your means and sometimes even below your means. This frees up cash savings that can be channelled into savings and investment. Read more…