I want financial freedom
I think one of the most awesome goals when it comes to your money is to be financially free as early in life as possible. What does financial freedom mean? This means not having to depend on working for the rest of your life in order to survive, because you have built an asset base from which the income exceeds you living expenses. When you are financially free you have the freedom to choose if you want to work, how you want to work, when you want to work, and for who you want to work.
This is obviously not something that is achieved very easily or very quickly, for most it will never be a reality, since in South Africa only around 6% of people are able to retire comfortably, which means even less are financially free well before their usual retirement age.
Want to take this challenge? Here are my basic steps to guide you on a journey to financial freedom:
Step1: Relentlessly track your spending and save as much of your income as possible
The best way to be relentless at saving money is by tracking every cent that leaves your account. This allows you to have complete visibility on your spending habits and you will be able to quickly see problem areas where you are overspending and need to take some action on. You can also identify all those unnecessary expenses which you are not making proper use of and cut these from your life. This is the real difficult part because it requires daily discipline and planning, but once the habit is formed it is something that will serve you well throughout your journey to being financially independent. It doesn’t mean you need to live under your bed and eat two minute noodles all month but do your best to find a balance between having fun and living well within your means, saving more money than you ever have before.
Step 2: Remove bad debt from your life
You have now started saving more money than ever before and now you need to do something with it. First you need to start by eradicated all bad debt. Any loans, credit card debt, and that bloody car. These things are costing you a fortune in interest and are only making you poorer by the month. You need to get these out of your life before you start anywhere else.
Start by paying your extra savings into the debt with the biggest interest rate first, while still paying your minimum instalments on any other debt. Once you settle one of your debts or all of them something amazing happens. You suddenly have extra funds available every month. You were so used to letting that monthly debit order take this money away from you, and now that it is gone you now have even more money at your disposal that you can use to channel into remaining debt or into the next steps.
Step 3: Build up a financial safety net
We have just gotten rid of all bad debt and now we need to ensure that we never get there again. So we need to build a financial safety net or emergency fund for when life happens and we have major unexpected setbacks or expenses. A good rule of thumb is about 3-6 months worth of expenses. Do not dip into this for just any expense, and when you have a situation where you do dig into these funds, you must then build the fund up again before continuing with the next step.
Step 4: Build a portfolio of income generating assets
You are finally in a situation where you can start making your money work for you. You can now start building the income generating assets that you can one day live off.
This step is the longest process of all, building up a strong and well diversified investment portfolio takes many years, but with the basics of steps 1-4 in place you will be able to do it with more focus than ever before. If you haven’t got the first clue when it comes to investing an unbiased independent financial advisor (not working for a bank) is often the best place to start, but learning is all part of this amazing journey to a worthy goal.
My personal technique on this last step is well written about in my blog (see this post for example), but I also like how it is explained on this episode of the money show on Cape Talk*1 (listen to the audio clip near the bottom of the page).
*1 – A lot of inspiration for this came from an awesome book called “Become your own financial advisor” by Warren Ingram which I read about a year ago, and I can’t recommend any better book for a South African interested in personal finance. I also often listen to Warren Ingram on the money show with Bruce Witfield on Cape Talk between 6-8pm.