Most people will never attain financial freedom. But you aren’t most people, are you?

I hope you beat the odds and end up as one of life’s big winners. I say this because...

1. You’re one of my readers; I like my readers; I want you to succeed; and

2. Global demographic numbers tell us that — statistically speaking — most people worldwide are inadequately prepared for a long retirement period lasting two, three or four decades.

To help you beat those odds, here are three ways to improve your chances of succeeding financially, retiring confidently, and living with economic dignity your whole life.

First, keep learning on the job so you steadily rise to the top of your field.

Second, plan to work longer and retire later than your peers.

And third, as I wrote here last week, focus on understanding, tracking and lowering your AI:PI ratio.

Your AI:PI ratio refers to how much larger your Active Income is than your Passive Income at any time.

We earn our Active Income by going to work for an employer and being paid wages or a salary, or for ourselves to earn business profits. Either way, if we toil at our jobs or businesses we make money actively. If we stop working, our Active Income runs dry.

The secret formula for personal finance success is to spend less than you earn, save and invest the difference, and to do so for a long time. If you will do that, then with each passing month as you add to your stash of cash, as you move a portion of your savings into investments, and as you stay the course toward financial freedom, you’ll grow wealthier.

To track your progress, use two related ratios:

1. Your Expense Ratio; and

2. Your AI:PI Ratio.

Your goal should be to REDUCE both ratios.

Your Expense Ratio is equal to 1 minus your Savings and Investment Ratio, while your total Active Income (AI) = Savings and Investments (SI) + Expenses (E).

Let’s express it as:

AI = SI + E; or

E= AI - SI

To increase your AI you should work harder and smarter at your job or business.

If you have never saved consistently before, then I suggest you start low and slow, perhaps between 1 per cent and 5 per cent of your AI.

You will control and curb your E by exercising delayed gratification and opting to live below your means today in order to be wealthier tomorrow.

If you earn RM4,000 a month now and are able to save and invest RM120 of that, then...

E = RM(4,000 - 120) = RM3,880.

As you save and invest month after month, you’ll nurture discipline within your psyche and plant seeds of bounty within your Wealth Portfolio.

As you save money in secure repositories of liquidity like bank accounts and money market funds, you’ll gradually initiate a trickle of Passive Income (PI) in the form of interest into your Wealth Portfolio.

With the passage of time, your savings will rise, your interest income will balloon and, if you diligently study investments, so too will your acumen on how to grow your money a little faster and wiser.

You might become comfortable investing in stocks for capital gains and dividends, in unit trusts for total returns

(= capital gains again plus distributions), and investment property yet again for capital gains and rental inflows!

Journey towards economic maturity

As more Active Income (AI) flows into your life over time, if you apply the brakes on your naturally inflating expenses (E), the percentage of your AI dedicated to savings and investments (SI) will rise.

I recommend ratcheting up your SI to AI ratio by a few percentage points a year until you reach 50 per cent. When that happens, perhaps one or two decades after beginning this fascinating journey toward economic maturity and hopefully financial freedom, you’ll be spending half your AI on current expenses and the other half on tomorrow’s aspirations. If you reach that point, I urge you NOT to become a scrooge; DO NOT raise your SI ratio above 50 per cent. Life is to be enjoyed and money, within reason, is to be spent.

So please note, if along the way you find yourself earning, say, RM10,000 (after income tax each month), spending RM6,000, and saving and investing RM4,000, with a diversified Wealth Portfolio of RM300,000 that yields a blended annual return of 7 per cent, then this is how you calculate how close you are to financial freedom:

If you keep your expenses steady at RM6,000 a month, that’s RM72,000 a year, while your Wealth Portfolio is generating RM21,000 a year (7 per cent of RM300,000).

Note: Financial freedom is reached when your PI is equal to or more than expenses.

Therefore, in this example you are 21/72 or 29 per cent on your way to financial freedom.

Another way to look at these numbers is to grasp the crucial lesson that your AI:PI ratio must be steadily LOWERED over the decades of your career until your PI in ringgit terms is equal to or HIGHER than your E each year.

Eventually, if you’re the kind of winner who loves a challenge and responds to targets, the formulas you’ve learnt might well propel you to financial freedom!

© 2017 Rajen Devadason Read his free articles at on,, and Twitter @RajenDevadason

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