Insight - Nine factors besides ROI for financial freedom

Yap Ming Hui: The truth is, return on investments (ROI) is overrated, and has become too much of an obsession for the middle class who are looking to grow their wealth. In my opinion, ROI is just one of the many factors that will contribute to your financial freedom.

WHEN it comes to investing, return on investment (ROI) is one of the most talked-about term.

In fact, many people are of the opinion that ROI is the single most important factor when it comes to investing. In their minds, the better the ROI, the higher their returns, and the more quickly their money can grow.

This is also one of the reasons why many books, webinars, and investment “gurus” drum up content to share the “best-kept secrets” to profit from the narrative.

The truth is, ROI is overrated, and has become too much of an obsession for the middle class who are looking to grow their wealth.

In my opinion, ROI is just one of the many factors that will contribute to your financial freedom.

In this article, I’m going to highlight nine other factors that are crucial in achieving your financial freedom:

> The point you start acting

The first and one of the most overlooked factors is the age or the point in life in which you start investing. The more time your investments have to perform, the more time they have for compounded interest to build up.

Therefore, the earlier you start investing, the better the position you will find yourself in. When time is on your side, you can even go for less riskier investments with lower or consistent performing ROI, to achieve your plans for financial freedom.

For example, if you start investing in your 30s, there’s still plenty of time for your money to grow and compound even with a low to moderate ROI. We are talking about additional 30 investing years until retirement.

In contrast, if you start investing when you’re in your 50s, you will have only about 10 years for your wealth to grow. This could get stressful, especially when you’ll be forced to look for investments with higher ROI to make up for the lost time.

> Your savings habits

Building a good savings habit is crucial. The more money set aside for savings on a monthly basis, the more you will accumulate to fund your financial goals.

When you have consistently saved, the added security will give you choices, ie, there’s more than one way to grow money without taking unnecessary risks with high ROI investments.

> Your household income

Household income in this context refers to the income that both you and your spouse make. The more your household income is, the more access you have to save and contribute towards financial freedom.

Compared with a single-income household, it is definitely easier when both spouses are working. Therefore, focusing on increasing your income through multiple means is just as crucial, if not more crucial, than chasing a high ROI.

> Your children’s education expenses

Your children’s education can end up being one of the biggest expenses in your life. However, the more money you spend on your children’s education, the less money you’ll have to fund your financial goals.

Therefore, make sure you weigh your options well when it comes to selecting your children’s education.

> Your home

Another big expense in life is purchasing your dream home. Buying a property can impact you for the next ten to 30 years, as you will be locked in to pay monthly property loans.

Compared with a RM750,000 property, you will have less money saved up and forced to achieve a higher ROI if your dream home was a lavish RM2mil bungalow.

> Your holiday expenses

Holiday expenses are another luxury item that slowly add up. Don’t worry, nobody is asking you to sacrifice your holidays altogether.

However, in terms of reaching your financial goals, someone who spends RM20,000 a year on vacations would definitely be in a better position than someone who spends RM50,000 a year.

Instead of splurging all your hard-earned money on one holiday, why not channel what would have been your travel fund into your savings to attain financial freedom earlier?

> Your retirement age

Once you retire, you lose your access to having active income. Therefore, the earlier you retire, the more income you’ll need for your financial freedom, and the higher the ROI you’ll need to get there.

No one wants to work forever, but someone who chooses to retire at 65, at a relatively healthy and high-functioning age, will require less income and ROI to maintain their retirement lifestyle compared to someone who chooses to retire at age 55 instead.

> Your retirement living expenses

What kind of retirement lifestyle do you want for yourself? The higher the cost of your retirement lifestyle, the more you’ll need to save to fund your retirement expenses. Thus, the higher the ROI you’ll need to achieve to attain financial freedom.

By choosing to lower the expenditure on your retirement living expenses, you are effectively reducing the amount of funds you’ll need to save and lowering the ROI needed on your investments.

> Your medical fund provision

Medical bills are expensive. They usually get costlier as you get older. It goes to say that the more money you spend on your medical provision, the less resources you will have to spend on other financial goals.

Therefore, it is worthy to spare the time and effort to figure out how to reduce your medical fund provision.

The most common way to do this is by getting an insurance plan to cover unpredictable medical costs.

There’s also the choice of going with public healthcare instead of private healthcare.

The nine factors that are listed here are not ground-breaking information.

If you can stop obsessing on ROI alone and start focusing on all ten factors to unleash the full potential of your wealth, you will find all these moving parts working and compounding simultaneously to attain the financial freedom that you are seeking.

Out of the 10 factors covered in this article, only one aspect is out of our locus of control, which is ROI.

Therefore, it makes even less sense for anyone to zoom into the one factor that lies beyond our control, and commit all our effort and hopes for it to grant us financial freedom.

Meanwhile, the rest of the nine factors here are within your control.

You can control how much to save, how much to spend on your vacation, when you want to retire, how much your children’s education expenses should be, how much your medical expenses provision should be, how much your living expenses should be in retirement, and, to a certain extent, your household income.

Therefore, if you are committed to achieving your financial goals and financial freedom, start looking at your finances holistically from the standpoint of all the ten factors that I’ve highlighted here and start taking appropriate action.

Ideally, everyone should get a holistic financial plan done to manage these ten factors effectively. Consider engaging a licensed financial planner’s expertise to develop your holistic financial plan.

However, if DIY personal finance is preferred, there are free mobile apps available such as iWealth that could guide you to manage the ten factors effectively to achieve your financial freedom.

Yap Ming Hui is a licensed financial planner. The views expressed here are the writer’s own.