“Work is money, money is happiness,” a catchy sentence that many have heard since childhood. It teaches us that we have to work to make money. And happiness comes from having money to spend We have to be people who earn from working to very hard as we are. But nowadays, our income may not necessarily come from work alone.
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In addition to the income generated from the work called Active Income, which is income from work, additional work, sales of products or services that we have to do ourselves. These revenues will disappear as soon as we stop working. There is also another type of income that we receive and that is Passive Income and for that, we do not have to work and it is working on their own. Always be rich or retired but we have to accumulate or build assets for investment in different ways. It is designed to have enough investment assets to generate income from the returns of these assets. It is enough to cover the expenses that we have to spend all the time without having to rely on income from work anymore, we have “Financial Freedom” On the one hand, having financial freedom is like retiring from a full-time job before retirement. Financial freedom is not all about earning a lot of income and creating enough wealth. You need to have enough time to enjoy the wealth which you have accumulated and due to this, you can do whatever you want to do. So if you have ‘Time Freedom’ along with ‘Money Freedom’ then only you can say that you have ‘Financial Freedom’.
Financial Freedom = Money Freedom + Time Freedom
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At the beginning of the preparation for financial freedom, We still have to rely on our active income. We will gradually accumulate assets, invest through savings, and invest our savings to have more and more investment assets.
“Investment means putting your money to grow in the right asset class which can earn a decent return that beats inflation and helps to achieve the earmarked goal”.
Therefore, we can apply various financial ratios that can help you to plan for financial freedom effectively. Financial ratios can be divided into the ratio that we should “increase” and the ratio that we should “reduce” or “control”.
The ratio which helps us build Investment Assets are:
- Income Savings Ratio:
People often misunderstand that earning a lot will lead to financial security. But in reality, saving is the key to financial security. Saving is leftover post deduction of all kinds of expenses from your income.
Saving = Income – Expense
As for people who are young and starting to build themselves, they are often burdened with high debt. Savings in this period are below the threshold, but should not be lower than 10%, and for people who have been burdened with a lot, the good savings-to-income rate should be at least 20%, so when we have income From working Rs. 1 Lac, Rs. 20K should be divided into savings to be used for investment for generating Passive Income.
So, the Income to Saving Ratio should not be less than 10%, and try to maintain it around 20%.
- Financial Investment Ratio
The money we save is an investment asset that generates returns for us. The return on investment is also taken. To use and invest until we achieve net worth. Net worth on a personal balance sheet is a person’s actual position. This ratio is used to determine an individual’s invested assets (excluding self-consumption) out of total Net Worth.
Investment Ratio = Invested Assets / Net Worth
Net Worth = Total Assets – Total Liabilities.
As for a company’s balance sheet, equity is the same thing as net wealth that represents the company’s real position. And the production line machines in the company’s factories are like investment assets that generate income. Investing in income-generating assets reflects the growing value of ourselves. An effective Investment Ratio is having a high percentage of investment assets. This reflects that we have ongoing passive income-generating opportunities to help us build our financial freedom from assets and achieve our goals we should accumulate and build on our asset-to-wealth ratio. It should not be less than 50%. If it is less than 30% then you may not be able to achieve financial freedom.
- Income-based Debt Repayment Ratio
If each month we have to spend a lot of money to pay off various debts. Showing that we have high debt and there is a risk that we will not be able to pay back the debt when our income is reduced. More importantly, our ability to save as well. People who are young or starting to work Often have a debt burden from buying a house and a car causing the need to pay in installments for a long time so, the opportunity to achieve financial freedom is far and away. Therefore, we should control the expense of repayment of debt to no more than 40% of income so that we have the money to spend and save properly. If our ratio is close to 40%, then we shouldn’t incur additional debt. Ideally, it should in the range of 20% to 25% so that you can achieve financial freedom.
- Debt to Asset ratio
This ratio is a ratio that occurs simultaneously. With the debt repayment ratio. This ratio calculates an individual’s ability to pay liabilities out of assets. A ratio of more than 100% indicates that we have more liabilities than assets. But if this ratio is even lower It shows that we have increased net wealth. And have a lower financial burden We should have a debt to asset ratio of less than 50% to give us the opportunity to have greater financial freedom. Ideally, it should be less than 30%.
These ratios to financial freedom will enable us to generate Passive Income rather than expenses and create our net wealth to increase and eventually to have a lower financial burden and Decreased debt to assets. That’s it, the door of financial freedom will gradually Open for us to step in as we want to achieve Financial Freedom.
So why are you waiting? check your Shining Ratio for achieving Financial Freedom.
Happy Reading!!!