How many times have you written as part of your vision, to be Financially Independent?
Year after year whilst reviewing my goals, I wondered when this vision would be achieved. This got me thinking, what exactly does it mean? What is Financial Independence? I just thought it was having enough money to live comfortably without having to worry. As I thought it through, I realised it required more than just that.
For most people, the time taken for them to reach Financial Independence will differ. This is influenced by lifestyle, taste, where you are in life (Single, married, kids) and your priorities.
To be Financially Independent, you need to have assets that generate income greater than your expenses. Assets can include rental property, a business, or investments. Ideally, you shouldn’t have to actively work to earn this income.
Take for example a 25 year old who has a monthly expense of £500 monthly. If they own a property and the property generates cash after all expenses of £700, they have achieved Financial Independence, and they are now free to spend their time doing the thing they enjoy without needing to work a regular job to pay their bills.
If, on the other hand, a 50-year-old earns £50,000 a month but has expenses that equal more than that per month, they are not Financially Independent because they still have to earn the difference each month just to pay all their bills.
Reaching Financial Independence is simple. You can find out how much you need to save using the 4% rule. The 4% Rule is known as the safe withdrawal rate, or the amount of expenses you should be able to withdraw from your savings each year when you retire without touching the principal. This number is based on a study from Trinity University that determined 4% is a good rate to withdraw per year for around 30-years retirement.
Here’s a handy chart to show you how much you’ll need to save based on possible yearly expenses.
|EXPENSE||AMOUNT TO SAVE|
I can imagine the gasps the above table generates the 1st time one sees it. To be Financially Independent, there is one crucial factor on achieving this. PLANNING! You need to have a financial plan and a budget so you know what money is coming in and going out. Having a clear view of your income and expenses can help identify appropriate strategies to move towards your financial goals.
Another crucial factor is your debt, especially bad debt (Bad debts are those that drain your wealth, and offer no real prospect of ‘paying for themselves’ in the future.) If you do not tackle your debt, it will control your future and your journey to financial independence.
In my next article, I will explore some steps to take to start the journey to financial independence.
Article written by: Folake Abiola – James BA Hons. ACCA, DipPFS, Financial Controller – October 2017
The above references an opinion and is for information purposes only. It is not intended to be investment advice. You should consult with a financial advisor to determine what may be best for your individual needs ~ Folake Abiola- James
©Folake Abiola-James October 2017. All rights reserved. Do not distribute without prior permission