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Wednesday, February 1, 2012

Path to Financial Freedom -- Create your exit plans

I'm referring to  the following blog post link
http://www.cpf.gov.sg/imsavvy/blog_post.asp?postid=943438268-310-6846058964
and perhaps others with a similar mindset.

In the post, the author lists 5 steps to financial freedom:
Step 1 – Boost your Active Income
Step 2 – Get Rid of Unnecessary Debt
Step 3 – Save More
Step 4 – Reduce Spending and Live Within Your Means
Step 5 – Invest For Passive Income

I do not know anything about the background of the author, but interestingly, to get out of the rat race, his mentality and suggestion, like many, is actually to get into the rat race and be the best rat among all.

Fair enough, especially if we start with a near zero networth. I started the same way.

But... is the road to financial freedom so direct? I used to think it was, but gradually, as you might have seen from some of my older posts, I start to have the following thoughts:
1) What's the point of attaining financial freedom at a ripe old age? Use it for medical? (Read: 1 million dollars... so what?)
2) Is there any point being a millionaire scrooge?  (Read: Millionaire Scrooge?)
3) We all have different definitions of money... and hence financial freedom (Read: Financial Relativity)


In my opinion, the 5 steps by the author is a very sound retirement plan. One can retire comfortably provided one follows the plan with good discipline.

The harsh truth: This is, to me, a newer and more modern rat race, thinly veiled and disguised as a path to financial freedom.


See the similarity.

This was proclaimed as the rat race:
Study hard, get good grades, get good career, work hard at career, get promoted, retire comfortably with pension and savings.

This is now proclaimed as the way to exit the rat race, attaining financial freedom:
Study hard, get good grades, get good career, Work hard at career, disciplined savings plan, money to put into investments that will generate you passive income so that you can retire.


There isn't much difference to me. I see the difference as between being fed by pension vs being fed by your investments. Money, instead of going into your pension fund, goes into your investments.



What then, is truly the path to financial freedom? Is it merely working hard, saving well, cutting debts, spending less and increasing your passive income?  I used to think so, and as I mentioned, this is actually the newer and more modern rat race.

Now, my understanding has been updated.

The path towards financial freedom, is about having a sound exit plan for everything you do.
(Read: http://ktservices.blogspot.com/2011/02/importance-of-exit-plan.html)

For example:
Having a massive amount of passive income is about having an exit plan for active income.
Having a massive amount of savings (or inheritance) is an exit plan for active working.
Having the ability to do freelancing/tuition/coaching is an exit plan for career, for school.

Exit plans are also for equities buying, business set ups, and etc etc.

In the book The Richest Man In Babylon, there was one story in which copper was imported for the King. The importer had an exit plan ready; should the king decide not to buy the copper for his plans (the main business bet), they could still sell the copper to the metal workers (the exit plan).

The lesson in this story is about finding exit plans for your investments or business ventures.


Building a path towards financial freedom is about building/creating and strengthening your exit plans. 

Let me summarize what I have done over the past few months to build my exit plans (as can be seen in my goals).

1) Career
I have started building an exit plan ever since graduation. I gave tuition as a freelancer, and recently invested in a tuition centre.

This is exit plan 1.

To further strengthen, I plan to synergise my exit plan 1 with more plans, in terms of authoring my book, creating my apps. While nothing is concrete yet, these form my building blocks.

For my planned publishing, my exit plan would be to use the book for my current and future students.

For my iPhone apps creation, I needed a laptop anyway. That itself is an exit plan for me. The laptop satisfies a want (for a more than sufficient powerful computing), a need (for portable computing), and functions as an investment for future apps creation. Apps creation is itself a potential money making machine in the future to synergise with my educational skills, as well as being a hobby of mine (the exit plan).


In addition, another exit plan I have is a PhD study planned. I teach physics olympiad to secondary schools as well, and another exit plan would be to coach students in a polytechnic as an adjunct lecturer.

Thus, I consider myself as being free from my career. I can choose to stay or not to stay as I'm not limited or held by the need for the job's salary payout at all. I work more for socialising than for money. This itself is a form of financial freedom.


2) Equities
This is perhaps a more commonly practiced principle, an exit plan for your equities. As everyone knows, Berlian Laju has been suspended. This comes from me not having an exit plan, be it sound or not, in the past.


Traders will tell you to always plan for your exits, i.e. which point to take profit and which point to cut loss.



Right now, my exit plan for equities (almost none) is mainly "exit" via receiving dividends. E.g. for Starhub, I will get back my principle sum within 10 years.






So what is your exit plan?

11 comments:

  1. When I attended a job interview at a previous company, a operational director told me that one of a key successful trait of an employee is to be like Rambo. Have a lot of back-up plans in whatever you do so that we can clear the obstacles and move forward.

    ReplyDelete
    Replies
    1. True. Back up plans also featured lots in the Art of War. Ancient successful generals always have back up plans in case the original one fail.

      Delete
  2. Interesting perspective on your paradigm shift Wealth Buch!

    Sometimes... Having too many "exit plans" can lead to us not boldly moving forward.

    Just a thought.

    ReplyDelete
    Replies
    1. Hi SMOL,

      I think that would be subjective. It's not that easy to have too many "exit plans" in my opinion. Having some exit plans would sometimes lead us more boldly forward without fear of failure! ;)

      I think if we keep fearing and not bold enough to take the steps, it would go against the "freedom" in the phrase "financial freedom"! :)

      Delete
  3. Hi JW, really like your blog posts, and would like to repost some on my blogs. Please contact me at info@propwise.sg. Thanks, Andrew

    ReplyDelete
  4. Hi JW,

    I am the one who wrote that article. Financial freedom is that simple to achieve, provided you educate yourself for it and execute it in a disciplined manner. This is by far the easiest way in which anybody can do.

    There are of course other ways to do it, such as be an entrepreneur, buy a franchise etc. However, starting a business involves a higher element of risk.

    The difference between a rat race and working towards financial freedom is that you have a goal to build enough income generating assets to get out of the rat race, versus continue working hard to pay for liabilities which most people do.

    There are also major differences between funding your pension versus doing active investments.
    Firstly, you can generate much larger returns by investing actively versus letting fund managers do the investing and charge you high fees. Secondly, you are in control of your own money, not like a pension or CPF where the government or some company controls your money.
    Thirdly, you actually have to know what you are doing or you will get burnt.
    Fourthly, you can use leverage to boost your returns.

    If you find the path to be too slow, then you can consider investing into more risky assets, such as properties or business joint ventures.


    Calvin
    http://www.investinpassiveincome.com

    ReplyDelete
    Replies
    1. Hi Calvin!

      My main point is more about having an exit plan. Without an exit plan, one's previous efforts at building a financial fortress could be wiped out at unforeseen events.

      Financial freedom will be easy if everything goes smoothly without any hiccups. But how are we going to handle hiccups if any come along? And my plan for handling hiccups is via exit plans. Some may call it backup plans. A hiccup may come, but we will always be well prepared.

      Hiccups may come in the form of retrenchments, asset destruction (i.e. if properties in Aussie gets flooded, or earthquakes in Japan), etc.


      Also, working towards financial freedom by executing simple plans in a disciplined manner itself constitutes a rat race; I don't see any difference in it. There's absolutely nothing wrong with this path to achieve the eventual aim of financial freedom. But we still have to be rats to reach it.



      The question I always have in mind is, why isn't everyone engaging in this disciplined manner of building income generating assets if it is so easy and simple. And if one day everyone achieves it, what would be of the world when no one needs to work anymore?

      While getting more philosophical now, I believe the 80-20 rule will still applies even as we enter the age of financial awakening.

      Delete
    2. Would like to add that there's absolutely nothing wrong with the disciplined and very sound retirement plan in your blog post :)

      However, the path to it requires a sound exit or backup plan should active income falters due to retrenchments, or passive income falters due to recessions.

      Delete
  5. irony is that to get out, you have to run harder and faster. Which at some point in time, you might give up.

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  6. ...and when the rat discovers that he can really run and win the race, why get out of it? It's great being a rat, isn't it?

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    Replies
    1. But what if the rat stumbles halfway through the race? Any plans to ensure the race can still be won?

      Delete

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