Achieving financial freedom is not about retiring, it is about sleeping well at night, knowing you can do anything your heart desires. If you want to take off a month and travel the world, you can. If you like the job you are doing, then you are not under pressure to change jobs to earn more. Here are the steps you can take to achieve financial freedom.
1) Determine where you are
The first step to getting anywhere is determining where you are. For this, we use a metric called net worth. To determine your net worth, you need to determine the difference between everything you own that has value and everything you owe.
Then we use the 4% rule to determine what your net worth needs to be for you to be financially free. If you require R20 000 per month, you need an income of R240 000 per year. So if R240 000 is 4% of the net worth you require to be financially free, your target is R6 million.
This is however not a fixed target since the money you require every month needs to increase by inflation. This means that you are chasing a moving target. You can see how I track my progress in my finance update. From this year I am updating my progress on a quarterly basis.
2) Adjust your spending habits
I’m not going to be the person to force you to do a budget. A budget only helps you to see where your money is going. At the end of the day, all that matters is spending less than you earn. Some people do it by budgeting and tracking all their expenses (I fall into this category).
Some people do it by grouping their expenses into categories like recurring costs, day to day expenses and exceptions. Then you can just assign a budget to each category.
The last group of people do not budget. They simply spend as little as possible and make sure that they end the month with money in the bank. If you want some tips on reducing your monthly spending, you can read my article on how to save money on monthly expenses.
3) Break the debt cycle
The worst type of debt that you can have is short-term debt. This is the type of debt that you took on only because you did not have enough money in your monthly budget. Good examples of bad debt are store cards, credit cards and payday loans.
These are extremely risky and typically have interest rates that are batshit crazy. Once you have any extra money, you should get rid of this bad debt first. I don’t view house and car debt as bad debt since a home slowly increases in value and a car is a necessity for many jobs. However, the key is not to overspend. Don’t buy a massive home and fancy car. Buy a car that fulfils your needs and is cheap to maintain.
You can either start by paying down the bad debt with the highest interest rate (the best financial decision) or the debt with the smallest outstanding amount (to improve your monthly cash flow). Whatever you decide, pay it down aggressively and don’t take on any more bad debt.
4) Manage those emergencies
After taking the extra money and paying down your high-interest debt, you will inevitably have some extra money. This needs to go towards an emergency fund to make sure that you can handle the clusterfuck of issues that life will throw at you.
The size of this emergency fund varies from person to person and it largely depends on how confident you are about your present income. It typically varies between three and six months’ salaries. Most people keep this in an interest-bearing account. So, shop around to get the best rate possible. You can find a comparison here.
Part of managing emergencies is also making sure that you have the correct insurance. You don’t need 24 different types of insurance. When you are younger you need to at least make sure that you have insurance for your income. As you grow older and you get dependants, you need to start looking at life insurance. You also need home and car insurance because shit happens. Make sure to at least get competitive quotes from King Price, Outsurance and Discovery.
5) Invest strategically
There are a few tried and tested investment vehicles that you should be investing in. Firstly, you should look at optimising your growth with shares. These typically earn you about 12% in the long run and will ensure that you beat inflation. Even if you get decimated some years because of something unpredictable like the COVID-19 pandemic.
You can look at investing in Exchange-Traded Funds (ETFs) if you want to reduce your fees. This is arguably the most important metric when choosing an investment vehicle and you can read more about it here. It is also a good idea to diversify your investments into local and international shares. The ratio between these will vary from person to person depending on your individual preference.
Other investments that you can look at include retirement annuities, bonds, preference shares and properties. I wrote an article about the risks associated with each of these investments that you can find here.
6) Get additional income streams
You should be able to save enough money to retire by 65 by only having one income stream (a.k.a. a salary). If you plan to achieve financial freedom before then, it will benefit you to have an additional income stream.
You can do freelance work on websites like Fiverr or Upwork. Or you can start a side hustle with a novel idea that has the potential to earn you stacks of benjamins. I hope that my blog will someday earn me some extra cash, but for now, it is just a hobby. Maybe one day when I’m all grown up.
Find something that you enjoy doing and give it a shot. Even if it does not take off one day, you are not worse off than when you started.
7) Keep learning
Consume all the information you can. If you have no idea how to invest, the best thing you can do is to read about it. If you are stuck in a job that has limited earning potential, start teaching yourself new skills. There are good resources available on Skillshare that are absolutely free. From photography to business, they cover an insane amount of topics (there is also a free two-month trial to access of their courses – perfect for some lockdown learning). Never stagnate and keep improving yourself. We are never too old to learn new tricks and earn our financial freedom.
Be safe out there,
Quote of the weekSometimes I just want someone to hug me and say "I know it is hard, but you'll be okay. Here's a coffee and a million dollars." Click To Tweet
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