Financial Security

The first and most important component of your financial foundation is your financial security plan. This is your base – if all fails and the sky comes tumbling down, you have food on the table, can pay your bills and life goes on normally. Investments can fail to yield the desired returns. You can lose part of your capital and in some instances all of it. If other people’s money (OPM) is involved, you can end up with debt in addition to your losses.

Every investment involves an element of risk. The greatest risk is whereby the investor does not know what he is doing. When you are an investor, trader, or businessman, your income is not fixed. Some months it goes up and in other months it comes down. Again in some months, you may post a loss. Does it mean your standard of living will go up and down like a yo-yo? Some months you feed well and some months you shake out your trouser pockets. If you are an employee, if your employer goes out of business (meaning your salary and entitlements are gone with the wind) how long will you last before you start looking for where to borrow from?

If you are a businessman and the government seals up all your business premises for whatever reason, how long can you last before you run out of cash?

For most people, the answer is – not very long. If you have financial security the answer is – indefinitely. It means you have assets that bring in fixed income, come rain or shine. This typically comes from interest income usually from money market instruments. You don’t have to work for interest income. Your money works for you. You can set it up for the interest to be paid monthly into your account while the principal goes back to work. If you have other sources of income – from salary, business, etc, you can leave the interest alone – to go back and earn yet more interest.

You can grow your principal sum to the point whereby you can live on the interest. There are folks who have taken it to the next level – live on the interest of their interest, that is, the interest yields enough interest for them to live on. That is a very good place to be. Of course, you cannot get there overnight. It takes years and years of exercising the discipline of saving and delayed gratification, habits that are at risk of going out of fashion.

Earning interest income is the easiest way to have your money work for you. When your interest income grows to cover your monthly expenses, you are said to have achieved financial independence. That should be the goal of everyone, both employed and self-employed. You should not depend on your salary after working for a certain number of years. There should come a time in your life whereby you stop working for money and start working for love, passion, purpose, life mission, etc. That means you have a choice, a choice to keep doing what you are doing, or stop grumbling and go get a life. In the next article, I will look at examples of fixed-income assets.