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:
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.
A common trait of the financially independent few is the emphasis they place on reading and life-long 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, 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.”
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 can provide you with consolidated financial, tax and legislative advice in a single, comprehensive financial plan.
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;
- Discretionary investment solutions;
- Retirement planning & funding;
- Risk protection;
- Tax and estate planning;
- Budgeting & cashflow;
- Succession Planning; and
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 can 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.
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 are common habits 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.
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.
Maximise tax efficiency
With effect from March 2016, investors can 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. Retirement annuities offer investors an opportunity to invest in flexible, unit trusts on a tax-free basis – without penalties, cancellation fees and less-than-transparent 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.
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 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 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.