It is everybody’s dream to be financially free. The road to this freedom is however so evasive that most people believe it is not achievable, unless one comes from a well-endowed background. This however is a myth. Financial independence can be achieved at any age by anybody. This I believe whole heartedly.
You see, I never believed anybody can come to my counsel on financial advice, yet it happened so many times and so randomly that I interrogated why that is. The reasons came from looking at the history of my life. Some people looked at me and saw success, although I did not see myself that way. I judged myself negatively because of my broken family background growing up.
I grew up well to become a strong independent woman, raised by my Father and Stepmom. Life’s struggles at adulthood saw me battling financially until I took a stance to work on my mindset and went on a worthy journey to learning about money and wealth. My approach to personal and work life along with my believe system altered. This opened me up to a life of opportunities that I never dreamed possible. Apparently everybody was watching this transformation while I was totally oblivious and focused on my goals.
The morale of this intro, is that besides having the mindset of the rich, of self-love and of hope for better things for yourself, there are certain habits and actions that become strong pillars for success and financial freedom. We will get to those habits and actions shortly, but first, let us decode the term FINANCIAL INDEPENDENCE.
To have enough saved and invested as well as having cash on hand to afford the lifestyle you want for yourself and your family is defined as financial freedom or financial independence. It implies having a growing nest of eggs that will allow you to retire at any age or if you like, pursue a career you wish without the need for earnings. Too many people fail to reach this goal for a number of reasons, i.e increasing debt, financial emergencies, emotional spending and other issues. This article is however intended to put you on the right path.
Insurance Protection for Emergencies
Most of the financial gurus would tell you to the set your financial goals and be clear of what your freedom number is. This is so true, but while in the midst of your struggles, often times one loses sight of these goals and fail to see them to fruition despite their best efforts.
To stay on course, one thing is key and that is to maintain emergency cash reserves equivalent to your basic needs expenses of a minimum of 3 months, referred to as an emergency fund. This fund should be the largest balance of cash you can ever maintain.
It must create enough buffer for you to use in case of emergencies, like loss of job or any other catastrophic reasons. In case of loss of a job, you may need a financial buffer of up to 12 months. Your fund is therefore recommended to cover your expenses from 3 to 12 months.
An emergency fund can be an ordinary savings account you can access within 48 hours that yields between 2.5% to 8% per annum. This will help keep you from liquidating investments or using debt to solve unexpected financial problems. If you wish however you can have an emergency fund as high-yielding savings accounts. These accounts are considered safe and the funds are liquid, which is the most important factor.
How much money do you need for financial independence?
To successfully achieve your financial goals, you need to have an exact number to work toward. That is, you need to answer this question for you, how much money do you need to be financially independent?
On average, $1, 000, 000 is mostly considered as the number for most households. A million is however quite relative and its adequacy depends on your lifestyle. Accordingly, one’s total monthly costs multiplied by 12 will give you your annual income need. Take this total multiply by the number of estimated years you have to live. The total number will be your Absolute Financial Freedom number.
For instance, if $60, 000 is your monthly expenses at 40 years of age, to retire at 65 years, then
Annual Income need = 60, 000 X 12 = $720, 000 X 25 Years = $18, 000, 000
The $18, 000, 000 is the absolute financial independence number to work towards. If you want to achieve this in 25 years,
break down the number into years, months and weekly saving’s goals.
Accordingly, you need to save $720, 000 every year for 25 years; $60, 000 monthly for 300 months and $13, 846.15 weekly for 1,300 weeks.
Being Free Financially in a Span of 5 Years
I was not aware of the differing levels of success to get to the ultimate financial independence. In my search for answers, I stumbled on the fact that there are varying stages which translate into your financial performance progress. This performance depends on the rate to which you save and the time it will take you to achieve your financial goals.
Accordingly, 10% of your income saved is said to remove 1 year off your work life while 90% saved removes 9 years off.
A very quick and easy recommendation to follow is the 50/30/20 rule of thumb to at least allocate 20% of your income into your savings; another 50% (maximum) to your necessities, while 30% should cater for discretionary items, that include giving.
If you consistently maintain this rule, you will be well on your way to a wealthy you. You however need to build into your plan some periodic progress reviews and monitor your performance in line with the mechanism of milestones as follows:
Year 1; Be Solvent– whatever expenses you have, use bad debt to pay them off;
Year 2; Be Financially stable- have all your bad debts paid off;
Year 3; Be an Agent of your own success– build enough savings to provide enough buffer to be able to choose the work you would prefer to do; Your emergency fund must at this point be nicely established with enough money to cover a year’s worth of basic expenses;
Year 4; Be Secure-your investment income must cover your or your family’s needs;
Year 5; Be Independent– your investment income must be able to maintain your standard of living; and
Year 6; Have Abundance– your income whatever the source should start funding yours or your family’s additional goals.
Of course, this may not go as linear as above in real life depending on your personal discipline and circumstances. But it does provide a clear enough progressive achievement mechanism to celebrate at intervals.
How to Increase your saving rate?
To have the success you desire to improve the rate of savings, there are two conditions to fulfill here and those are; Cut costs and Earn More Income.
Keeping your expenses down to a point where you do not find yourself strapped from month to month is one key aspect of cutting costs. This applies regardless of how much you earn. Simply put, LIVE within your means and save a little of the excess income into your long term goals.
This needs to start as soon as yesterday, especially for those at 40 years of age and above. For the 35 years of age or so, start time is today and if you are 18, you have until you are 25 to start, however the earlier you start the higher the returns. The moment you get your first salary is a good time to start. The more you limit expenses, the more money you keep for smarter investing-the closer you will get to an abundant you.
Increase Your Income
Find ways to make more money. Essentially, have more income at your disposal. Be careful not to fall into the “easy-money tactics”, they will only waste your money and time. Speaking from experience here- I lost over $5000 worth of my hard-earned money to such schemes, all in the hope to make a quick buck and get out of debt faster-only it got me into more debt I did not know what to do with.
There are many ways to boost your income. But I will recommend the following three ways:
1. Do not get involved in meaningless tasks that pay low, rather learn a new skill-This could take months to achieve but the pay off will be worth it. Alternatively, you could spend some of your money out of your pocket to make your first dollar on a side hustle as it is normal called, be it an online business.
2. Optimize your career and job-This is by far the easiest way to make the most money. It will require you to have some negotiation skills though to negotiate that raise. And you will that new skill to leverage on.
3. Negotiate your Bills– This could potentially put $100-$500 monthly into your pocket. How? Negotiate with your monthly service providers to scale down your monthly costs and translate them into savings. These are services like cell phone bills, cable fees, credit card payments etc. These Companies rely on thousands of customers to come through their payment process and would generally hate to lose any of them. They will always therefore be willing to make life easy for you. All it takes is just a quick phone call, you could get these costs lowered, putting more money directly into your pocket.
Managing your income and expenses including saving and investing are key elements to achieve financial freedom. This allows you to focus on “living your life” rather than focusing on how to earn enough to retire financially secure.
As Jim Rohn puts it, “To become financially independent you must turn part of your income into capital; turn capital into enterprise; turn enterprise into profit; turn profit into investment; and turn investment into financial independence.”