What is Financial Freedom?
Financial Freedom is a situation in which an individual has enough money to meet their basic needs and is able to create the lifestyle they want without having to rely on a monthly income. In financial terms, the achievement of financial freedom is when the total amount of passive income is greater than actual costs. Despite that, the meaning of financial freedom can vary from person to person.
Example: Some people strive to earn money and save heavily to be able to afford early retirement, while for others, the meaning of financial freedom is to be free to choose the career that they like regardless of a certain monthly income.
What is saving?
Saving is an excellent way to achieve short-term financial goals by putting aside money regularly, creating a crucial financial brace for future occasional financial emergencies.
Example: Let's say you want to save USD 1,000 for a new laptop, and you have ten months to do so. By setting aside USD 100 each month, you can reach your goal without having to pay interest on a loan or a credit card.
What is investing?
Investing is a way to grow your money over time by putting it to work in financial instruments such as stocks, bonds, or a collective investment scheme. Unlike saving, investing involves taking on some risk, but it also has the potential to earn higher returns over a period of time. It's essential to choose investments that align with your goals, risk tolerance, and time horizon. This is based on investment theory,which specifies “the longer you invest, the higher return, but the more risk you take on due to the volatile nature of the stock market at times”.
| The difference between saving and investing | ||
| Saving | Investing | |
| 1 | Higher liquidity can be easily converted to cash within a short period of time. | Lower liquidity than saving requires a waiting period, depending on the type of investment you have selected. |
| 2 | Minimal risk depends on the savings method you have selected. | Higher risk than saving does not guarantee a return and depends on investment products, personal analysis and experience. |
| 3 | Earn less interest than investing or earn no interest if you choose to save money at home by yourself. | Higher returns investing has the potential to generate much higher returns than saving. |
Why do some people prefer to save rather than invest?
Some people may choose to save rather than invest for a variety of reasons, including:
- Prefer the sense of security of having more money set aside in a savings account for unexpected expenses or emergencies.
- May have a larger number of short-term financial goals, such as saving for a vacation or the down payment on a house, and decide to keep the money in a low-risk savings account.
- May not have the knowledge or expertise to invest, or may not feel comfortable with the level of risk associated with investing due to having a low risk tolerance.
- May simply not have enough money to invest after covering their essential expenses.
How much money should be saved vs. invested?
The amount of money that should be invested versus saved depends on one's individual age, income, existing debt,financial goals, risk tolerance, and personal circumstances. A good rule of thumb is to save enough to cover three to six months of living expenses.
Why do some teens fail at investing?
There are several reasons why some teens are struggling and failing with investing, such as:
- Lack of knowledge or experience, which can lead to poor investment decisions or a fall into a situation that is difficult to recover from.
- Fear or greed can cause investors to make impulsive or irrational decisions.
***Successful investing requires a long-term perspective, discipline, and patience.
***Disclaimer: This article has been compiled solely for informative and educational purposes. It is not intended to offer any recommendations or serve as investment advice. The SERC is not liable for any losses or damages caused by using it in such a way.
Prepared by៖ Securities and Exchange Regulator of Cambodia, Department of Research, Training, Securities Market Development and International Relations
Email៖ [email protected]
Telephone៖ 023 855 611
