How you can choose financial freedom

By: Jaco Prinsloo, Certified Financial Planner at Alexander Forbes

Remember those rebellious teenage years when you couldn’t wait to get out of your parent’s house to be independent and do what you want? An increasing number of grownups have not lost that rebellious streak. According to Jaco Prinsloo, Certified Financial Planner at Alexander Forbes, increasing numbers of adults across the globe are attempting to achieve financial independence at a younger age, allowing them to do what they want when they want. Financial independence is the freedom of not having to worry about working or being dependent on anyone else for your income. So, what is the easiest and quickest way to financial independence?

1)    Do the maths: The first thing you must do is calculate how much you will need to be financially independent. The easiest way is to take your monthly expenses and multiply it with 300. Saving 300 times your monthly expenses will allow you to draw an income equal to 4% of your capital which is regarded as sustainable through most market cycles.

2)    Get specific:  Define what financial independence means to you? Do you want to retire at age 45? Go on a six month-around the world-trip? Or pursue your passion without having to worry about the income?  Once you know what you are going to do with your freedom you will know how much you need to save to become financially independent.

3)    Budget: Budgeting might not be fun but it’s necessary. Start by assigning your income specific tasks: 50% of your income to needs (house, car, groceries, schooling), 30% to wants (clothes, gym, takeaways) and 20% to savings and debt repayments. Then work towards the second level of financial independence, 40% needs, 10% wants and 50% savings.

4)    Downsize: This is the most important point. You might need to go from bottled wine to box wine and DSTV to SABC. Cutting your expenses is the quickest way to achieve financial independence and the only way to remain financially independent.

5)    Buy, don’t rent: Renting a home in the short term might be a smart decision but buying has major advantages when you plan on becoming financially independent. Firstly, it forces you to save every month through the bond repayments and secondly once the bond is paid off you now own an asset that can be rented out in the future.

6)    No more debt: Paying interest on debt will not help you save, so pay off your debt as aggressively as possible either by following the snowball method where you settle the smallest debt first and then use the freed income to pay off the next biggest debt, or the debt stacking method where you start by paying the debt with the highest interest rate first. Once your debt is paid off you can channel the additional funds into savings.

7)    Save:  Saving 25c of every R1 you earn could allow you to retire in 32 years’ time depending on your needs. If that is too long, save 50c of every R1 you earn and you could retire in 17 years’ time whilst maintaining your current lifestyle. Start by saving three to six months of expenses in an emergency fund using a money market or tax-free savings account.

8)    Invest:  One day when you reach financial independence you will live on the income generated by your investments. Your investments will generate interest, dividends, rental income and profits while you spend time at the spa or on the golf course. Once your emergency fund is set up, start by investing in a set of diversified assets like stocks, bonds, and property through a low-cost unit trust investment.

9)    Boost your income: Using your talents, interests and passions you can create alternative sources of income allowing you to achieve financial independence faster. Sell stuff online, start a podcast or create an internet business around your hobbies.

10)   Ready steady go: Start today! You can start with point one calculating the amount you need or point four by cutting out any unnecessary expenses. Then from your very next pay check, start implementing points three and six. Remember compound interest is your friend – the earlier you start, the less you need to save and the easier it will be to achieve financial independence.

Discuss your individual needs with a certified financial advisor to ensure the plan that you implement will meet your desired outcomes. Becoming financially independent will require a lot of sacrifice and patience but becoming financially independent will allow you to sleep in on Monday morning when the Joneses are leaving for work. If you want to join the financial independence movement, take control of your finances today.