ONE paradox of modern life is that while our planet's aggregate store of human wealth grows (almost) inexorably from one year to the next, yet too many of us continue to flounder or struggle in debt and poverty.
Aggregate human wealth expands through two mechanisms:
1. The rising number of living people each year — that number is approaching 8.2 billion people — with our gross number of births each day about double our gross number of deaths; and
2. The expansion of the economically important middle class — most notably in the first, second and fourth most populous countries: India, China and Indonesia.
(If you're wondering, the third most populous country, the United States (US) has seen its ratio of the middle class fall 10 percentage points to 51 per cent over the past 52 years from 1971 to 2023, according to a fascinating study by Pew Research (www.pewresearch.org/race-and-ethnicity/2024/05/31/the-state-of-the-ameri..., which is bad for the US and thus bad for the rest of the world because a disgruntled underclass in the world's wealthiest country promotes societal unrest, which is a breeding ground for dangerous demagogues.)
Honestly, though, most of us are rightly more concerned about our families and ourselves than we are about society at large. Toward that end, nurturing self-reliance, first in ourselves and then in the next generation, is crucial. American founding father and its third president (from 1801 to 1809), Thomas Jefferson, wrote in an 1825 letter:
"Never trouble another for what you can do yourself."
FINANCIAL FREEDOM
As we look about us, in our own time and within our own country, we notice those with an entrenched entitlement mentality — who expect others, especially the government, to always come to their rescue — generally fall behind those who grasp the reins of life and take charge of the direction they wish to ride. From a financial planning perspective, that means personally aiming for the happy state of Financial Freedom, which we'll abbreviate here to FF.
Gaining FF means attaining a significant level of success in the pursuit of wealth. Centuries ago, the Old English word wela referred to well-being. From wela we ended up with two contemporary words: "weal" and "wealth". Both words are used today to mean riches, but we're obviously far more familiar with the latter.
Financial guru Robert Kiyosaki has often taught that true wealth is measured not in dollars but in time. As in, how long will our money last us, based on our current or desired lifestyle level?
Toward that end, cash flowing into our lives to fund our cash outflow requirements is of primary importance. In other words, we should pay attention to our total income (TI) comprising our active income (AI) and our passive income (PI).
Early on in young adulthood, all that most of us have is AI since we don't yet have a capital base to generate our desired PI. But if we responsibly manage our finances by curbing our appetites and thus our expenses, we will generate a steady cash flow surplus.
The accumulation of such surpluses lays the foundation for our personal capital base. When we allocate our capital — carefully — into viable savings and investments, we end up constructing a Portfolio of Wealth (PoW). This personal economic construct then serves two goals:
1. Generating capital gains (CG); and
2. Growing passive income (PI).
Pulling everything together, we see, as mentioned earlier, our total income in any period, say a month, equals our active income in that period plus our passive income over the same period. Whenever I teach this concept to clients and seminar audiences, I do so with this formula:
TI = AI + PI
Our ability to generate AI is restricted to our active working years, while our need for PI becomes crucial throughout our subsequent retirement years or decades.
So, our long-term level of true wealth relies on both our AI and our PI, but note that genuine FF hinges on our PI. And we attain FF when our PI is larger than (>) our lifestyle or operational expenses (OE) plus our regular payments on our portfolio (or collection) of debts (RPoPoD).
All this, therefore, gives us a helpful guiding formula for a teaching construct I created many years ago called "The Rajen Devadason Blueprint for Financial Freedom", which you're welcome to Google for additional details.
THE BLUEPRINT
Here is my guiding formula:
FF: PI > OE + RPoPoD
And this is how you may explain it to others who look to you for advice:
We attain financial freedom when our passive income is larger than our operational expenses plus our regular payments on our portfolio of debt.
Now, let me leave you with two pieces of earnest advice:
1. Do not retire until all your debts are repaid;
2. Build wealth by beefing up your passive income in the form of interest or profits from cash savings, dividends from EPF and stocks, cash distributions from income funds, and rental received — directly or indirectly — from investment real estate.
I've outlined what you should do. Will you get it done?
© 2024 Rajen Devadason
Rajen Devadason, CFP, is a securities commission-licensed Financial Planner, professional speaker and author. Read his free articles at www.FreeCoolArticles.com; he may be connected with on LinkedIn at www.linkedin.com/in/rajendevadason, or via rajen@RajenDevadason.com. You may also follow him on Twitter @Rajen Devadason and on YouTube (Rajen Devadason).