Remember those rebellious teenage years when you couldn’t wait to get out of your parent’s house to be independent and do what you want? An increasing number of grown-ups have not lost that rebellious streak.
More adults globally are attempting to achieve financial independence at a younger age. Financial independence is the freedom of not having to worry about working or being dependent on anyone else for your income.
So, what is the easiest and quickest way to financial independence?
Do the maths: the first thing you must do is calculate how much you will need to be financially independent. Take your monthly expenses and multiply it by 300. Saving 300 times your monthly expenses will allow you to draw an income equal to 4% of your capital, which is seen as sustainable through most market cycles.
Get specific: define what financial independence means to you. Do you want to pursue your passion? Once you know what you are going to do with your freedom you will know how much you need.
Budget: start by assigning your income specific tasks - 50% of your income to needs (house, car, groceries, schooling), 30% to wants (clothes, gym, takeaways) and 20% to savings and debt repayments. Then work towards the second level of financial independence, 40% needs, 10% wants and 50% savings.
Downsize: you might need to go from DSTV to SABC. Cutting your expenses is the quickest way to achieve financial independence.
Buy, don’t rent: buying has major advantages when you plan on becoming financially independent. It forces you to save every month through the bond repayments. Once the bond is paid off you now own an asset that can be rented out.
No more debt: paying interest on debt will not help you save, so pay off your debt either by following the snowball method where you settle the smallest debt first and then use the freed income to pay off the next biggest debt, or the debt stacking method where you start by paying the debt with the highest interest rate first.
Save: saving 25c of every R1 you earn could allow you to retire in 32 years’ time depending on your needs. If that is too long, save 50c of every R1 you earn and you could retire in 17 years’ time whilst maintaining your lifestyle. Start by saving three to six months of expenses in an emergency fund using a money market or tax-free savings account.
Invest: one day when you reach financial independence you will live on the income generated by your investments. Your investments will generate interest, dividends, rental income and profits while you spend time at the spa or on the golf course. Once your emergency fund is set up, start by investing in a set of diversified assets like stocks, bonds, and property through a low-cost unit trust investment.
Boost your income: using your talents, interests and passions you can create alternative sources of income allowing you to achieve financial independence faster. Sell stuff online, start a podcast or create an internet business around your hobbies.
Ready steady go: start today! The earlier you start, the less you need to save and the easier it will be to achieve financial independence.
Jaco Prinsloo is a certified financial planner at Alexander Forbes.