Key Ingredients to Securing Your Financial Freedom

Do you own a luxury home and/or a luxury car? Many people would take pride in owning such expensive properties and become asset rich. Your assets can be your house, car, cash on hand, bank deposits and investments. You could measure your assets by estimated market value. However, take a pause and take a good look at the other side of the equation. In the accounting sense, there is an opposing element called the "liabilities". How much liabilities do you have? Your liabilities are often debts, such as personal loan, credit card debt, housing loan, car loan, etc. Take stock of your total assets and liabilities and calculate the difference. You will have what we call the "Net Worth". If your total assets are greater than your total liabilities, you have a positive net worth. In simple terms, your money is working for you. On the reverse, if your total liabilities are greater than your total assets, you have a not so good situation called the negative net worth. In simple terms, your have too much debt and need some healthy cleansing!

Bear in mind your assets may not be worth much to you until or unless you achieve a positive net worth. It is also arguable whether a person's home should be classified a true asset. The reason is simple. Suppose you own a half a million dollar home, what are the chances you may settle for a cheaper home after selling your house? For most, it is difficult to go backwards! You probably want to get a decent new home reflecting the current standard of living and/or your "wish" list. Not forgetting, housing prices would probably have gone up over the years and although you may have settled a nice percentage of capital gain over your old home when you sell it, you might still have to settle for an even more expensive new home, plus renovation! Cost of renovation could also get out of control easily if you don't manage your budget tightly.

Besides net worth, another key ingredient is cash flow. I have explained before that cash flow is essentially a reflection of your total income over total expenses. The most important element here is having a positive cash flow, where your income exceeds total expenses. What you should do is to differentiate what gives a positive cash flow. For example, rental property is a good source of cash flow and could be a good source of generating positive cash flow. However, before concluding that it is a good piece of rental property to invest, make sure you take into account all the monthly expenses, including loan installment amount, upkeep expenses, maintenance fees, monthly utility bills, etc. Once you deduct the rental income against all the other related expenses, you will determine whether such piece of property gives you a positive or negative cash flow return. Therefore, don't just jump into any piece of investment before you have fully covered all the potential estimated expenses against your expected income!

So, have a true reflection of your financial position and gun for the positive net worth and positive cash flows, the key ingredients to securing your financial freedom.