Being debt-free should not be confused with being financially well off. If you are only debt free, you still have to work in order to pay for your basic expenses and taxes. In order to be financially free, the first thing we have to ask ourselves is what does it take to be debt free? Basically, it does not involve any loan under your obligation.
It's common that Malaysians 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 bankrupted due to car loans, housing loans, personal loans, business loans and credit card.
Table 1: Number of individuals bankrupted as a result of loans from 2007 to 2013
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 i 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, take your car for a wash and tyre repairs. That’s just the car.
Your other expenses has be factored in tandem with your income.
An obvious truth, but if expense > income, you are far from being free from anything.
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 Wrap Up
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.