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How to use your income to be financially independent

There are many misconceptions about being wealthy or financially independent. People think that you are wealthy if you have millions of cash in your bank. Are you wealthy if you have 5 million pesos? What about 10 million pesos? Being wealthy depends on the person’s lifestyle. Even you have hundreds of millions in cash, but you have also millions of debt, then you would still be short of money.

“To be wealthy is a condition where your present financial resources can support your lifestyle over a long period of time, even if you do not work to generate income.”

If you are currently employed, or if you have business, then you have the capacity to become financially independent in the future. For the common Filipino, our personal income is our financial resources. There are two different kinds of income: one is active income and the other is passive income.

Active income comes from your job, talent, and skills that you have. There are 2 basic types of active income:
 primary income – this is the main source of our income. It comes from our salaries.
·         additional income – this comes from our sidelines or irregular incomes.

Active income should be only used to “fund your living expenses” and to “fund your savings and investments to generate future income for you.” It should be only spend for our needs not for our wants.

How about passive income? It “is the income that is generated by your earning assets and investments.” It is an income you earn even you do not work. It has two main purposes:
·         “to further increase your investments that will fund your future needs when you have to stop working.”
·         “to fund your periodic WANTS”. This is where you’ll get the money for the things you want like vacation, parties, fashionable clothes, etc.

Let me use the experience of PJ as a example written in Dr. Colayco’s book.
“At the age of 32, PJ became a very successful marketer since he was a very driven and hardworking man.”

“He was able to earn over fifteen million pesos in just 18 months. His dream, apparently, had finally come true. Emboldened by his instant wealth, PJ began to indulge in unnecessary luxuries. A brand new Pajero was his first purchase. Next came the extensive remodeling of his family’s rented apartment, expensive furniture, two more vehicles, millions “invested” in a pyramiding scam; a movie production that was never completed; and big loans to friends for projects that were not viable. “

“He spends a lot of money on things that were unnecessary and did not bring in any income at all.”
“Sadly, financial success is not the end of PJ’s story. In less than two years, he ended up losing most of the money he had earned.”

Now the question is this: “How did he end up losing all the money in a short time? PJ failed to understand what his needs are, and what his wants are. He shouldn’t use his active income to pay for his wants. 

According to Dr. Colayco, he should have:
·         “brought a cheaper but useful and reliable car first”
·         “saved the difference in cost and invested it to earn interest”
·         give himself some more time and let his investment accumulate earnings”
·         set fixed financial goals and once achieved, he could use this passive income to upgrade his car to a Pajero”

To achieve financial independence is possible if we will use our financial resources properly. We must always remember that active income should only be used for our NEEDS, and passive income is only for our WANTS.

You do not need to wait to be financially independent. You can achieve it “at any age.” But it’s your advantage if you will start to save while you are still young.

Lastly, “to be wealthy means we have the passive income that can support our chosen lifestyle until we die.”

Adapted from the book of Dr.Colayco’s Wealth Within Your Reach.

To learn more on how to be financially independent, kindly visit his website.