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.

6 basic needs that we must have.

What is our need? Needs are man’s basic requirements to be able to live daily. Examples are food, shelter, and clothing. We need food so we can have energy to work and study. We need shelter where we can sleep. We need clothes to wear in school, in office, and at home. To live without these needs makes our life difficult.

If you have a job or have a source of income, then it is your advantage to meet your needs. But despite  of having a job, there are still many Filipinos who cannot save money, and usually run out of money.
Many of us live beyond the means because we sometimes do not know the difference between our needs and wants. Usually, we measure our needs based on the things we see around us, pressure from our friends and family, and being insecure or envious of others.

To solve this problem, we need to identify our real basic needs. Below are the real needs that will help us to live well.

1. Food.
Filipinos are known as food lovers. Everywhere you go, you can see many food shops like fast foods restaurants to fine dine-in restaurants. And usually, it is one of the reasons why we always run out of money. To eat a simple and nutritious food cooked at home is a need. But eating in an expensive restaurant is really a want. However, there are times that it is cheaper to buy food rather than to cook. Just choose which option will give you nutritious food at the lowest cost.

2. Clothes.
How many clothes do you really need? You need clothes that are clean, neat, and are suited for your daily activities. To buy expensive clothes which is out of budget is a want. Take the example of Jimmy.
“Jimmy is admired because he is always dressed well and neatly. Actually, he only has four pairs of pants and ten shirts, even if he can afford to buy more. He says that he is able to save by buying only when his pants and shirts are already worn out. He chooses high-quality clothes that will last long and will still look good, even if he has worn them many times.”

3. Housing and Utilities
A house which is enough for you and your family, with simple furniture, a basic cooking set, a TV set, simple cellphone or telephone are needs. However, a big house with expensive furniture, expensive home entertainment, and expensive cellphone are wants.

4. Transportation
Enough money for you to be able to work and return home is a need. Sometimes, it will cost you less to own a car than to take public vehicles. How about buying a car? There is nothing wrong in purchasing a car. It only becomes wrong when you buy it without carefully examining your financial capacity to pay.

5. Education
Many young people think that to study in a prestigious school will give them a good future. This idea is not true. You can be a successful student if you are diligent in your studies. If your parents cannot afford you to enroll in your chosen school, then you can help them by:
• applying for scholarships
• becoming a working student

You must also remember that choosing what course to take and what school you will study is an investment decision, so choose wisely.

6. Recreation
You need a simple recreation to help you relax and cope up with stress. There are many free things that you can enjoy without worrying any financial expenses.
• you can go to a public park
• you can read books and magazines
• you can spend quality time your family
• you can jog every Sunday morning
• etc.

Avoid travelling in different places and having big parties if you will use the money from your active income. Travel and big parties are only for those who already have passive income to spend.

To live a financial stress free life is possible. It only depends on the person’s lifestyle,and to live within your means is the best rule.
-Adapted from Wealth Within Your Reach book 2