Early retirement and financial freedom used to be topics among the high-paid group. As the concept of Financial Independence, Retire Early (FIRE) and starting wealth management early have been gaining momentum among younger generations. Their goal is, despite having a limited income, to achieve early retirement through savings and investments.
FIRE is a financial concept sought after by the younger generation that has been brought to Hong Kong in recent years. The main goal of FIRE is to attain financial independence and early retirement through aggressive savings and investment planning, in exchange of more time and means to achieve your ideal life.
As FIRE advocate and author of the international bestseller "Financial Freedom: A Proven Path to All the Money You Will Ever Need" Grant Sabatier wrote, when your "total assets are 25 times your annual expenses", you may then achieve early retirement. His theory is that, as long as the principal is invested in the capital market, 4% of the revenue generated per year can be used to cover living expenses and become stable passive income, making early retirement achievable. The formula above should be taken as reference only. After all, everyone’s starting point, consumption pattern, and investment risk tolerance are different, and the formula and time needed to achieve financial freedom will naturally vary from person to person. In addition to the formula above, there are also many FIRE calculators on the Internet that would provide you with data on early retirement for reference, so that you can understand how close you are to achieving financial freedom.
Adopting the financial pyramid can be one of the ways to help achieve FIRE. The financial pyramid is a framework for managing your financial portfolio and balancing risks. Starting from the bottom, the four layers of financial pyramid are: protection, wealth accumulation, wealth building, and speculation.
This base layer can provide you with a cushion to protect your welfare in case of any emergency or unexpected expenses. For example, health insurance may help prevent you from wiping out your savings from expensive treatments in times of health crisis.
Among all types of insurance plans, life protection and medical insurance are common ones that could provide financial support in case of unexpected events, and is also your safety net to protect your savings. This layer protects your financial assets, and is a critical step of your journey to financial freedom. When it comes to choosing an insurance plan, it is important to consider your insurance needs, policy premium, health conditions, coverage, etc.
Once you have your protection sorted, you may start accumulating wealth with savings and low-risk products. Endowment plans and deferred annuity policies are two of the common life insurance plans with savings element.
Endowment plans provide a guaranteed cash value upon maturity while offering a life protection for assurance. As for deferred annuity policies, they are relatively long-term insurance products with an accumulation phase for the annuity to build up in value. The policyholder would start receiving stable guaranteed annuity income at annuity period. It is also important to earn extra interests with the stable stream of income to protect the value of your assets against inflation, leading the way to financial independence.
Upon having accumulated a certain level of wealth, you may start your investment journey. Common investment products at this layer include investment funds and Capital Protected Investment (CPI) Deposit. This layer offers higher potential returns yet higher risks.
Investment funds cover different regions, sectors and asset classes with a diverse range of options and flexible investment amount, helping investors seize investment opportunities across the world. As for CPI Deposit, it is a currency-linked structured product involving derivatives, with 100% capital protection at maturity and a chance to enjoy higher potential returns. Although this layer of the financial pyramid may offer higher returns, which could help accelerate reaching FIRE, one should be aware of the risks associated.
Reaching the top of the financial pyramid, you might already have secured strong protection and enough wealth. Some aggressive investors who are well-equipped with investment knowledge and experience might start engaging in high-risk investments such as derivatives and futures.
These speculative investments may offer attractive potential returns, yet they could also lead to devastating losses. Before investing in any high-risk products, remember to assess your personal profile and risk tolerance level. It is also important to note that the higher the risk of an investment product, the less money you should put into it.
Taking different courses to pursue professional certificates and qualifications in your spare time may help enhance your competitiveness in workplace and grow your income with better job opportunities. Moreover, through continuing education, you may discover your interests or acquire new skills, which could possibly bring you unexpected future income.
Starting a side job, such as opening an online shop and becoming a freelancer in your spare time is a possible way to earn extra money. Yet starting a side job is no easy task, you might craft a plan starting with your interests so as to mix business with pleasure.
Aiming to achieve financial freedom when investing may be stressful. If you can make investment as your interest and keep acquiring more investment knowledge, you may be able to obtain higher returns in the financial market and thus increase your earnings.
Note(s): As everyone possesses different skill sets and hobbies, the suggestions above may not be suitable to everyone and should be taken as reference only.
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