Financial Freedom vs Financial Independence

A relative whom I met recently told me that he will be finishing paying for his condominium in KL very soon, maybe in just one or two more years. He has bought the condo just over 7 years ago. This meant that instead of the typical repayment period of 25-35 years, he would have finished paying for it within 10 years. He should be 35 this year. I asked him, what’s his reason for paying so much and so fast. He said he wants to achieve financial freedom. When asked if he has another property, he said no because he wants to be debt free first before saving up to buy another one. He drives a RM130,000 SUV which he is still paying for. I think a lot of relatives would see him as very successful. Without doubt, I also believe he is successful as he already has his own plan to achieve financial freedom.
Around 7-8 years ago, I told a young friend this story. You can choose to buy one property, pay for it as fast as you can so that you would be debt free as soon as you can or you can buy one, pay for it slowly, leverage on mortgage loan while you save and within five years, buy a second property, rent it out and within another five years, buy the third property and rent it out. After 15 years, you may still be paying for your first property, 2nd property and 3rd property but by the time you are 50 years old, you would have no less than 3 properties, all of which has doubled in value. You have used the rental to leverage on your wealth creation. It means you are three times faster than if you have just one property. In fact, by then, if you sell off two of your properties you should have more than enough to live until the day you say goodbye to this world. This young friend of mine who is now a manager and around 30 years old has two properties and is looking for his third. Both his properties were rented out. I have little doubt that he would exceed my expectations easily.
I am not advocating everyone to follow this young friend. There is nothing wrong to be debt free. However, do read about the concept of good debts by a lot of financial consultants and you would understand that financial independence may be a goal which is actually better than just financial freedom. Financial freedom means you owe no one anything. You can retire happily when you reach 56. Financial independence, depending on when you achieve it means you can retire anytime you want without the worry of losing your job.
Let us be reminded, there’s no difference between staying in a property worth RM700,000 versus RM700,000 under your bed apart from the fact that the property can continue to appreciate but you are not leveraging on it. The most from the savings you can get from a fully paid property is the rental at the market rate at that time.
Do read more about financial freedom versus financial independence online.
written on 30 Jan 2014
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  1. Good one. I liked “leverage”. You should have posted this article 8 years ago. 🙂

    1. If only I had understood investing when I was still 25 … sigh…. too late. now have to look to future….

  2. For me, financial freedom does not necessary mean we are debt free. As long as the passive income is more than enough to cover our living expenses, and we can choose to work / not to work / do whatever we like without having to worry about money, that’s the financial freedom in my context. It does not matter if I have ten properties under mortgage with rental enough to cover monthly installments and other recurring property related fees. My 2 cents.

    1. chia how, I do agree with your view but in financial terms, you need to be debt-free. 🙂

  3. Your relative adopts the conservative approach that he knew at that moment. He might not be aware of the “leverage” approach. Maybe he has other planning as well. Anyway, I would opt for the “leverage” since in our country the loan rate is higher than say, Indonesia. It is good to keep more akin to “putting eggs in different baskets”. Only if this were taught in school instead of other useless kangkung subjects…

    1. Hi Oakley, thanks for reading and comment. Appreciated. Actually there’s nothing wrong with a conservative approach. I think it’s just personal preference. I have a friend who told me to tell her when I am buying any property. I have told her quite a few times but she has yet to buy. Yet, she is happy at the way she is managing her finance. So, to me that’s great too. 🙂

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