Financial Independence (F.I.) in Malaysia
There are a lot of misconceptions about financial independence and early retirement (FI/RE) here in Malaysia. People think you have a high income if you’re able to retire early. No doubt, having a high income helps, but the crucial part of the whole F.I. equation, in my opinion, is our ability to save and invest.
As with all things in life, financial independence can be broken down and achieved in stages, even after you’ve retired, you still have to work at it to keep your money flowing in. It’s a lifelong process.
Stage 1 – Dependence / Reliance
We all begin here at this first stage. We start off being reliant on financial support from our families. They provide us with our daily necessities for the initial years of our lives. We then slowly being to chip away at this dependence when we earn our first salary.
Some of us may get a head start by having part-time jobs while still in school. Some may have gotten lucrative scholarships which gives an allowance. All of these help us break free from our reliance and dependence on financial support eventually.
Stage 2 – Dependence (Continued)
After we are finally financially independent from our parents, guess what? We are still at the Dependence / Reliance stage. Moving out and living on your own doesn’t automatically make you independent. You are now in fact, heavily dependent and indebted to our various financial institutions.
The majority of us after ‘gaining independence’ from our families would have taken out a huge loan to buy their first home. You’re still in this stage if you spend more than you earn (if you’re digging deeper into debt). Basically, if you’re not earning a “profit”, you are dependent on somebody else. You are not financially independent.
After you start having a surplus — and again, this means you’re earning more than you’re spending — you FINALLY make your way down the path to financial freedom. One sure-fire way to do is to live frugally, which is how I was able to build my portfolio slowly.
Stage 3 – Solvency
Solvency is the ability to meet your financial commitments.
You reach this stage when you no longer rely on anyone for financial support. When you have surplus savings at the end of every month, you’re at this stage. This is where you’re no longer accumulating debt. You might still have loads of loan payments, but you’re not accumulating additional debt.
As a Certified Financial Planner, I’ve found that to get a person to go from the Dependence stage to Solvency is one of the toughest. It is not only taxing physically but also mentally exhaustive for someone to overcome Stages 1 and 2. But once a person finally finds themselves with a surplus at the end of the month, they will have the confidence to sail through the next 4 stages.
Remember, it varies from person to person how long it takes for us to reach stage 3. Some people reach this stage in their teens. Some never reach it. But even when it seems impossible, if you start taking charge of your finances,, I guarantee you’ll see the light at the end of the tunnel.
Stage 4 – Stability / Resilience
You achieve stability after you’ve repaid your bad debts (ie. credit cards), established some emergency savings, and continue to increase your savings.
You’ll feel an immense weight lift off your shoulders the moment you make the final payment to your debts. Trust me, it is a great feeling.
It is important to have your emergency fund built up to prevent yourself from falling back to stage 3 due to unforeseen circumstances. The usual recommendation is to save up to 6 months of your salary as your buffer. But if you’re feeling more risk-averse, there is no harm in going up to 1 -2 years.
Now you’ve built a buffer of savings to protect you from unfortunate events, you’re ready to put the extra funds to work by investing.
Stage 5 – Security
You reach the Security stage when your investment income can cover your BASIC needs. At this stage of financial independence, you have the ability to live and work as you choose. You have enough saved that you could quit your job at a moment’s notice without hesitation. I am still striving to reach this stage of financial independence. I estimate my basic needs as a young adult in Malaysia to be about RM1,500 per month. With the dividends from my portfolio – the Freedom Fund, I’m almost there.
Fortunately, I’m now at Stage 5. I’m able to cover my basic needs through my passive income from dividends. Stage 6 here I come!
Based on how much you have saved and invested, you could live a meager existence for the rest of your life without worrying about money. Even if you never worked again, you could afford shelter, basic food, daily essentials, and medical care.
Starting from Stage 5 on the road to financial freedom, your concerns are no longer just about survival. Money is no longer a safety net. It is now a tool to help you thrive and build the life you want. People who reach this stage will truly understand that money is just a tool. You will learn the value of your time. Instead of spending 8 hours a day for your monthly salary, you start to think about using money to free up your time for yourself and your family. Knowing what gives you meaning and purpose is a vital part of financial freedom and I believe it should be the starting point on this journey.
Stage 6 – Independence
This is the Financial Independence we should all aim and strive for where your INVESTMENT income can support your current standard of living. At stage 5, you are merely able to cover your basic needs. At this stage, you can finally declare true financial independence. The money you have saved and invested would allow you to live like you do today until the day you die… and then some more.
It is the ultimate goal and dream of mine to reach this stage as I’m sure it is for many of you. All the savings and investments I’m doing has been to eventually be able to reach this stage. Financial independence varies from each person. For some of you, FI is achieved at RM12,000 per annum. Some will only be satisfied with RM24,000 per annum. For me, the sweet spot is RM36,000 per annum. Decide on your number now and start working your ass off towards it.
Stage 7 – Abundance
In the final stage of financial freedom, you have more than enough. Your passive income will not only fund your lifestyle forever, you can even turn it up a notch or two. Now is the time to indulge in the luxuries in life and enjoy the fruits of your long tedious labour.
Here’s the bottom line: The more money you save, the more freedom you have, and the more risks you can take. As your financial independence increases, you chip away at the wall of worry. You’re able to make financial decisions pro-actively rather than re-actively.
There are tonnes of resources out there on Financial Independence each with their different stages. I’ve sifted through them all throughout the years and tried my best to compile them to best fit Malaysians.
The regular readers here are likely to be professionals (or at least semi-pros) of the personal-finance world. We should take the time out to help others out of the financial binds they find themselves in. I think it’s in our best interest — in the best interest of everyone, really — to get more people into the ‘game’ of Financial Independence.
The more Malaysians we can get on the road to financial freedom, the better off we all will be. I hope I’m able to start cultivating the Financial Independence mindset here at Dividend Magic.
For the next article of the FI/RE and Savings Series, check out article 006 – Basic Financial Plan for Malaysians.