While financial success may mean different things to different people, financial independence speaks to a universal language. Financial independence allows a person control over one of our greatest gifts here on earth: time. Regardless of the monetary value of financial success, the emotional value found in being truly financially independent is earned through these time-tested habits:
1. Don’t procrastinate: Assuming that an average working career spans from age 25 to 65, the average person has about 480 pay cheques to fund for a retirement that may last for 30 or 35 years. The sooner one harnesses the power of compound interest in the wealth accumulation process, the better. The power of compound interest is matched only by its antithetical ability to erode your wealth when working against you. The earlier one starts saving, the longer compound interest has to perform its magic. Don’t delay.
“You may delay, but time will not.” – Benjamin Franklin
2. Educate yourself: A common trait of the financially independent few is the emphasis they place on reading and lifelong education. Educating oneself on personal financial planning is critical to understanding the framework in which you, as an investor, can operate. We are fortunate to have world-class publications such as Moneyweb Personal Finance and Financial Mail (amongst many others) that provide brilliant insight and commentary on the financial planning environment. And yet, as Anton Chekov once noted, “Knowledge is of no value unless you put it to practice.”
“An investment in knowledge pays the best interest.” – Benjamin Franklin
3. Consult the experts: Combining one’s own education with the expertise of professional advisors is the most prudent next step in fortifying one’s financial future. Our advice is to seek out a fee-based financial advisory practice where unfettered and independent advice is dispensed in your personal best interests. Ideally, appoint a team of advisors that is able to provide you with consolidated financial, tax and legislative advice in a single, comprehensive financial plan.
“The only source of knowledge is experience.” – Albert Einstein
4. Develop a plan: Once appropriately mandated, your team of experts should be well-equipped to develop an easy-to-understand, workable and adaptable financial plan that maps a clear path to financial independence. In terms of coverage, the advice within the plan should extend to all of the following areas: • Short-term savings & money management • Medium-term investing • Retirement planning • Risk protection • Tax planning • Estate structuring • Budgeting • Succession Planning
“A goal without a plan is just a wish.” – Antoine de Saint-Exupéry
5. Protect against risk: In financial planning terms, the years up until one’s retirement are referred to as ‘the accumulation phase’ as it is during this period that one is able to generate sufficient income to build a retirement nest egg. The ability to generate an income during one’s pre-retirement years is the platform upon which one’s entire retirement plan is constructed, and should be protected at all costs. While often insurance is considered a grudge purchase, any money spent on a comprehensive income protection benefit, which provides for one’s living expenses and investment needs in the event of disability, is money well spent.
“Do something today that your future self will thank you for.” – Sean Patrick Flanery
6. Control personal debt: While healthy and consistent habits can lead to financial independence, bad habits can be equally as powerful in the opposite direction. Frugality and a willingness to live within one’s means is a common habit of the financially sound. Financial independence is often the result of an individual’s unwavering commitment to make sacrifices earlier on in life, such as driving less expensive cars, enjoying local holidays and avoiding unnecessary debt. Controlling personal debt involves living now like others won’t, so you can live later like others can’t.
“Beware of little expenses; a small leak will sink a great ship.” – Benjamin Franklin
7. Align your spending with your goals: The path to financial independence is largely transactional. Every purchase you consciously make today is a withdrawal from a goal or dream you have planned for tomorrow. Those who are financially independent are adept at aligning their current spending with their future goals. If the value of every potential purchase is measured against the value you’ve attached to your goals, the result would be more considered and cautious spending.
“Don’t tell me what you value; show me your budget, and I’ll tell you what you value.” – Joe Biden
8. Maximise tax efficiency: With effect from March 2016, investors are able to invest up to 27.5% (subject to a limit of R350 000) of their taxable income into a retirement fund on a tax-free basis, which is significant. While often considered the pariah of retirement vehicles, retirement annuities now offer investors an opportunity to invest in flexible, unit trusts on a tax-free basis – without penalties, cancellation fees and unfathomable investment returns. In addition to premiums being tax-deductible, no income tax or CGT is charged on the investment returns earned in a retirement annuity. It makes absolute sense to maximise tax efficiency.
“In this world, nothing can be said to be certain, except death and taxes.” – Benjamin Franklin
9. Don’t act impulsively: The role of human emotions in the context of financial planning should never be underestimated. Behavioural finance is a very well-researched area of human psychology, and one of the key roles played by a financial advisor is that of a sounding board for all future financial decisions. Volatility in the investment markets as a result of political or economic turmoil can create speculators out of even the most cautious investor. Fear and greed are the greatest drivers of impulsive financial decisions, and it is during these times that the financial advisor has an important role to play as a financial touchstone.
“The investor’s chief problem—and even his worst enemy—is likely to be himself.” – Benjamin Graham
10. Give: The personal satisfaction gained from giving to others far outweighs any fleeting delight one might experience from making material purchases. The real gift belongs to the giver – the one who gives generously of his time, expertise or resources – for as Anne Frank once pointed out, “No one has ever become poorer by giving”. Giving is a notable habit of the financially astute and a persistent reminder of this immutable truth: that money cannot buy happiness.
“No one has ever become poorer by giving.” – Anne Frank
Achieving financial independence is a journey defined not by luck or chance but by intentional habits and disciplined action. These habits, consistently practised, empower you to reclaim your time, enhance your peace of mind, and enable you to live a meaningful, fulfilled life. Embrace these proven principles, and you’ll discover that true wealth is measured by the quality of your experiences and the freedom to pursue your passions.
Have a great day.
Sue
