No need to be rich to be financially independent

Published on Feb 24, 2013
By Goh Eng Yeow

But you do have to be debt-free and have an investment portfolio that gives you a steady income

Just what does it take to have financial independence?

After writing for years on investments, I found myself confronting this age-old question as I made my usual rounds of reunion with friends and relatives during the recent Chinese New Year holidays and heard how their lives are panning out.

A number of my friends stopped working in their late 40s and early 50s, and chose instead to live on their savings and investments.

One has become a full-time investor, using the knowledge he gained from years of reading balance sheets to grill the boards at companies' annual general meetings. Another has turned to religion, spending much of her time studying Buddhist scriptures when she is not overseas visiting holy sites.

Among them, none is rich by any stretch of the imagination. Some live in private condominiums and others in Housing Board flats. Their incomes - from having worked in banks and multinational corporations - are probably far less than what others of their age are earning, yet they get along in life just fine.

Going by their examples, achieving financial independence is not the same as getting rich.

I know many wealthy people who worry about money all the time. They want to make more money but they are fearful, at the same time, that they may lose all of it and become paupers.

Then there are friends who are high fliers in investment banks and international law firms, and should be the envy of us all. But some of them seem troubled by the sky-high mortgages and car loans they have taken to finance lavish lifestyles, and they have to constantly rely on the next pay cheque to keep themselves financially afloat.

Hence, financial independence is not about achieving a certain level of wealth. Rather, it should be measured in terms of obtaining freedom from financial worries, and freedom to make lifestyle choices.

One other trait stands out: the ability to give back.

For those of my friends who now have time on their hands, nothing gives them more happiness than doing charitable work - tending to the elderly and less fortunate. Some even do it full-time.

So what are the keys to achieving financial independence?

Being debt-free is important. There is no way to be financially independent if you have to worry about the next mortgage or car loan payment.

You also have to ask yourself how much income you need in order to be free to choose between working and not working.

Then there is the question of how to build an investment portfolio which gives you a worry-free and steady stream of that income you need.

Now, that last item is one I have touched on regularly over the years as I discussed various investment strategies, such as buying low-beta and sin stocks, and watching where smart investors are placing their bets.

But I find that the best approach, by far, is to start saving when you are young, and invest wisely while you have youth on your side; in fact as soon as you start working.

One way to inculcate a regular saving habit is to open a Supplementary Retirement Scheme (SRS) account with one of the three local banks and make a contribution to it every year.

This is a voluntary savings programme launched by the Government over a decade ago which complements the Central Provident Fund by offering tax breaks as an incentive to save - and one which more savers are taking advantage of.

The impact of compounding returns in the SRS account over the years can be immense, if the SRS monies are used to buy stocks such as OCBC Bank's and United Overseas Bank's scrip dividend as an alternative to cash dividend, or a low-cost fund such as the Straits Times Index exchange-traded fund.

It was one of the ways I succeeded in doubling the money I have put into my SRS account over the past 11 years.

And it is never too late to start saving, although the sum put aside will have to be far bigger.

There is another observation worth highlighting: Despite achieving financial independence, many of my friends chose to stay gainfully employed.

A few actually quit their jobs, only to find themselves so bored that they went back to work. It was, after all, impossible to spend all their time every day trying to rejig their investment portfolios.

Going from a full-time job to no job may seem like an idyllic goal to achieve with financial freedom. But it is also important to plan what you want to do and how you will make use of the hours of the day meaningfully.

engyeow@sph.com.sg

No worries

Financial independence is not about achieving a certain level of wealth. Rather, it should be measured in terms of obtaining freedom from financial worries and freedom to make lifestyle choices.