Why? Because we want to achieve our goal sooner than later – while enjoying the journey. Without applying this concept, our journey to achieve the goal will become very slow or not even started and not too convenient. Slow because your profit is not maximized . Not convenient because this thing will bug you down.

And if these happened, the tendency is people will just loose the spirit, forget the goal and just give up.

Ownership – Owning

Merriam-Webster define “to own” as: to have or hold as property. If something is your own property then you are free to do whatever you want with it (with certain restriction as allowed by law, of course). You may use it, modify it, you may sell it, you may gift it to someone else, etc. And of course, your name will be on the title of ownership.

How to get an ownership? To get an ownership we need to buy it. We either can buy it outright (pay it off upfront) or with debt (pay it off over certain period of time). This is what we call: the cost of ownership.

For example:

• You want to buy $550,000 house. Then you can buy the house outright (if you are rich enough to have $550 grant sitting on your bank account) or get a home loan and pay it over 25 years. Either way, you are toward an ownership of the house.
• You need a car. Then you can buy it outright or take a car loan and pay it off for fixed interest rate over 5 years.

Control – Controlling

Merriam-Webster define “to control” as: to exercise restraining or directing influence over. If you have control over something, you pretty much can fully use it as if you own it, although with certain limitation.

Similar to ownership, we still need to pay some cost to get the control. This is what we will refer as the cost of controlling.

There are 3 important aspects below that can be achieved by taking control (compare to taking ownership). These aspects are where the wealthy and riches really pay attention to and should do we. They are:

1. The cost of controlling can be significantly cheaper than the cost of ownership. So, the general idea between comparing ‘owning’ vs ‘controlling’ is how to get the full benefit of something with the least amount of cost to maximize profit. For example:
   • Instead of paying “principal and interest” loan for your own house (toward ownership), you choose to pay “interest only” loan. Read this property article: Why Not Paying Off Your Mortgage is Better For Investing for further detail. When you take “interest only” loan, your intention is just to control the property, there is no intention of paying it off.
   • Instead of paying your $100k share portfolio upfront, you choose to take 100% loan – capital protected margin lending which only cost you $700 per month instead of $100k upfront.
   • Instead of buying a car for your business, you rent it. Not only you got direct deduction, but also save resources and hassle in maintaining the operational of the car (service, repair, registration, insurance, etc) and concentrate on your core business instead.
2. Controlling can provide additional asset protection. If you own an asset, and something goes wrong and someone initiate a litigation against you (you being sued), then that assets will be safer from that litigation.
   For example: you put the family trust as the owner of your house instead of yourself. Hence is your business is in trouble, your house cannot be seized as it doesn’t belong to you.
3. Controlling can provide additional anonymity. If you own an asset, and you don’t want your competitor or other party knows directly that its belong to you, then you can choose having the asset registered under other entity while have full control over it.

So, because of these 3 factors – for smart investor – controlling is a better alternative compare to ownership.

What’s need to taken care of

As with anything else in life, we cannot just blindly applying something without assessing it properly. Some factors that you need in related to ‘Control vs Ownership’:

• By not paying off your asset, you will be constantly in debt (usually large one) which exposed you to additional risk. While eliminating this risk is not difficult, you need to consider this factor carefully. For example: big mortgage debt can be covered by life insurance/income protection insurance which allow you to still serve the loan if something unwanted happened. Another example: Downward movement in your 100% finance share portfolio can be protected by simply take the put option.
• You *have to* carefully optimizing and do your own calculation to determine that cost of controlling is significantly cheaper then cost of ownership that help you to maximize profit. The significant benefit will highly depended on whether negative gearing apply in your taxation law, your tax income bracket, the interest rate, the value of investment, credit history, among other things. Your specific circumstances may prohibit you reaping the maximum benefit. Check this first.
• Additional cost may be involved related to your asset protection structure. The usual way to achieve better asset protection is by creating legal entity as limited liability company or trust with company trustee. Creating this entity will involve setup cost, registration as well as more complex accounting requirement. They all will be translated to significant yearly cost. You need to weigh whether the benefit outweigh the cost based on your current situation. For example: if your business is not prone to litigation (low risk) probably it’s not worth it. Or if you just starting and the total asset in management is very small, maybe you can postpone this until your business/investing grows to certain level.

Conclusion

One of important keys to riches is understanding the concept of Control versus Ownership. By applying this concept to our wealth creation journey, we may be able to reaping the benefits explained above. Although certain consideration and care are needed – in long term – on the way to our success – we will generally better off choosing Control over Ownership.

For example: if someone asks how much money need to have before considered financially independent? Person A say: “a lot of money”, Person B say: “$1 miilion per year passive income”. Which one is easier to visualize, an abstract definition from Person A or Person B?  Of course from person B.

Freedom with No Burden !

This step is absolutely crucial to start your financial freedom journey. Why? By having this milestone, your goal is no longer MOVING TARGET. It’s fixed and written black on white. You can put it on your file, paste it on your wall, etc and become your tangible goal. You are no longer shooting in the dark, you have real figure number as your target.

5 Levels Toward Financial Freedom

Toward Financial Freedom

There are 5 milestones that help you achieve financial freedom. You need to get to Level 1 before go to level 2 and vice versa. The levels are:

1. Level 1 – Financial Protection
2. Level 2 – Financial Security
3. Level 3 – Financial Independence
4. Level 4 – Financial Freedom
5. Level 5 – Absolute Financial Freedom

Level 1 – Financial Protection

Financial Protection is achieved one you have 6 months worth of cash to meet all basic needs to survive without anybody need to go to work. So, if something bad happened, you have full 6 months to back to your feet again but continue your life as it is. So, what you need to define your level is your monthly cost or overhead.

This include all basic living cost: food, clothes, transport, all bills, insurance, home maintenance, credit card repayment, mortgage, basic entertainment, etc. But no holiday, no saving or other major purchase included. Only everything that needed to continue ‘normal life’

Example: John and Jane requires in average $3000 per month to meet all basic living cost. Hence their level 1 – financial protection is 6 x $3000 = $18.000. So, once they have $18,000 in the bank, they can survive for 6 months without having to work but can still be able to live as normal.

Level 1 – Financial Protection for John and Jane is $18,000.

Do not put this money in term deposit or the like. Put it on your daily saving account or any account that accessible from your ATM card. You might consider have stack of cash from this money. This is pure for emergency only.

Level 2 – Financial Security

Financial Security is achieved once your investment can produce 12 months worth of all basic living cost. This is not your income from work, but only from your investment such as: profit from share market, profit from your investment business, interest from your term deposit, your rent income from your positive cash flow property, etc. This is a passive income that provide you with financial security

Example: With $3000 mothly cost, then John and Jane’s investment need to produce $3000 x 12 = $36,000 profit per year before they can get Level 2 – Financial Security status.

Level 2 – Financial Security for John and Jane is $36,000 per year passive income

What sort of investment can produce this kind of passive income ?

• Cash interest. With 5% interest from your term deposit, $100,000 deposit can produce $5k per year, hence to produce $36k per year, they need to have $720,000 in a bank.
• Share market strategy. With typical 15% return from share market strategy, $100,000 portfolio will produce $15,000 per year. Hence $36k can be achieved if they have $240,000 as their portfolio.
• If you own profitable business that can produce 20% of return, then $36k can be produced if you have invested $180,000.

Of course you can do combination from all of them. The higher the return, the less capital needed to achieve the goal.

Level 3 – Financial Independence

Financial Independence is achieve if the investment can produce profit equal to your combined annual salary / current earning. So, at this stage your total income is basically doubled. In other word, income from your investment have produce the same amount of money that you can get from salary or work.

Example: John and Jane have total combine annual salary of $90,000 per year. Then their investment income need to produce $90,000 as well before they can hold Level 3 – Financial Independence status.

Level 3 – Financial Independence for John and Jane is $90,000 per year passive income

Level 4 – Financial Freedom

To achieve Financial Freedom (Level 4), the investment / passive income need to produce not only whatever you get from Financial Independence, but also 12 months worth of all the cost needed to cover the living cost plus all lifestyle and luxury item. All from your investment income. So, at this stage you can cover all the living cost plus lifestyle cost just from passive income derived from your investment. You still have additional earning from your salary / work. But obviously you no longer have to work again.

This additional lifestyle/luxury item can be calculated using the interest payment as if we get a loan to get hold of that item. (i.e: controlling vs owning, see the article)

Example: John and Jane have 3 lifestyle items that they really want to have once they have financial freedom:

1. $200,000 boat. With 8% interest, the monthly repayment will be: 8% x $200k * 1/12 = $1334 per month
2. Charity $1000 per month
3. New house of $1.5 million. Monthly repayment: $10,000 per month assuming 8% interest
4. Total these 3 items above is $12,334 per month/$148008 per year plus $90,000 = $238,008

Level 4 – Financial Freedom for John and Jane is $12,334 per month passive income

Level 5 – Absolute Financial Freedom

Your investment income have absolutely covered all your expendentiure beyond your imagination. Absolutely everything that you can buy with money in the world. For quantitive sake, let say at least you have 3 times the amount from Level 4. Hence :

Level 5 – Absolute Financial Freedom for John and Jane is $37,002 per month passive income

The Capital

The capital needed is really depended to the return expected from the investment. Say if the return of investment of cash is 5%, share market is 15% and business investment is 20% and John and Jane decide to invest 20% of their money as cash, 50% as sharemarket investment and the rest is business investment, then the capital neede for each level is as follows:

To reach your ‘critical mass’ of capital the soonest, you need to use the power of compounding interest. That means you always invest back all the profit from one period to the next periode. i.e: $10k investment with 10% return will have $1k profit. All of this profit and capital (total $11k) is invested to the next period that yield $1.1k profit, and vice versa.

What’s Next

Now that you have understood the meaning of the 5 level above, it’s time for you to calculate your own number. Remember you just need 3 data: monthly cost, annual income and monthly cost for lifestyle/luxury item. Then just use “Toward Financial Freedom” to calculate and print your pledge.

Then you have taken your first step toward Financial Freedom. Congratulation !

Recommended Readings:
[1] “7 Habits of Highly Effective People” by Steven Covey
[2] “What I Didn’t Learn AT School But Wish I Had” by Jamie McIntyre. The digital version of this book can be obtain legally and free of charge by clicking here. Some minor modification to enhance the definition has been applied on this article but did not change the big picture of the understanding.