Debt-free vs. Financially free
Being debt-free should be distinct from being financially well-off. If you are only debt-free, you still have to work to pay for your basic expenses and taxes. In order to be financially free, the first thing we have to ask ourselves is what it takes to be debt-free Basically, it does not involve any loan under your obligation.
It's common for Malaysians to require loans to get by, mainly because of the low average income. Truth be told, it’s difficult to stay debt-free. This table highlights how many individuals were bankrupted due to car loans, housing loans, personal loans, business loans and credit cards.
| Personal Loans | Business Loans | House Loans | Credit Cards |
|---|---|---|---|
| 49.22% | 17.05% | 8.28% | 6.35% |
Table 1: Number of individuals bankrupted as a result of loans from 2019-2023.
It is clear that these are the financial problems that we face in Malaysia.
Income vs Expense
Assuming you bought a car without any loans required, it does not imply you are financially debt-free, like we mentioned, there are other factors to take account of. Your daily expenses must be well managed to achieve this goal. You need to periodically service your new car, feed petrol, and take your car for a wash and tyre repairs. That’s just the car.
Your other expenses have been factored in tandem with your income.
This is an obvious truth, but if your expenses> exceed your income, you are far from being free from anything.
Financial assets
Financial assets are financial tools that will generate annual cash flow for you. These assets can be your ASB, shares, bonds, and mutual funds. You can get dividends from ASB(Amanah Saham Nasional) for the Bumiputeras and company shares or receive periodic coupon payments from your bonds.
For retired individuals, they can enjoy the benefits of EPF and PRS.
The reality of being financially free
It's easy to sell a story of being financially free. You might be no stranger to talks that preach on the importance of generating ‘passive income’ and ‘self-generating money’ tools.
But here is the thing, feel-good stories sell the best and people buy into this.
Investments and savings are good and all but as with most things in life, they come with risks, and no results are guaranteed.
In our books, being financially free does not equate to wealth accumulation but rather your lifestyle.
Live within your means, plan for the future, and make sure you have more than enough to get by before kicking the bucket and you can put yourself under the financially free category.
*The above article is intended for informational purposes only. Loanstreet accepts no responsibility for loss that may arise from reliance on information contained in the articles.
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