No matter how much you love your job, financial freedom should be your ultimate goal. For those unfamiliar with the term, financial freedom can best be understood as a state where individuals or households have enough financial resources to cover their living expenses without having to depend on work to maintain their standard of living.
“Most of us aim to have financial freedom by the time we hit retirement age, when we need it most,” says Kananelo Matela, Investment Consultant, 10X Investments. “But if you can achieve it before then, that’s even better. Suddenly, things like company downturns and retrenchment exercises become less of a worry. And if you feel like you need to take a mid-career sabbatical, you can.”
Matela adds, however, that achieving full financial freedom requires a savvy approach to investment.
“The days where one could achieve full financial freedom through traditional savings mechanisms are long gone,” he says. “Today, investors must ensure that every rand they manage to put away works as hard as possible.”
According to Matela, following a few simple steps can make that a great deal simpler.
- Have a financial plan
“It might sound simple, but building wealth starts with putting together a comprehensive financial plan,” he says. “That means taking the time to identify your goals and figure out how you can accomplish them. Having that plan in place can go a long way in telling you what financial products you need to use as well as what kind of risk appetite is required to achieve those goals.”
As Matela points out, some will attempt to, yet most people don’t have the expertise to create this kind of plan on their own and should therefore engage the services of an accredited financial advisor.
- Diversification is critical
That financial advisor will encourage you to bake as much diversity into your portfolio as possible. That diversity starts with the financial products you use and should, at the very least, include a retirement annuity (RA), tax-free savings account (TFSA), and living annuity.
“Having a diversified portfolio with different types of investments can both protect the wealth you’ve accumulated and position you to reap rewards for your future, even when times are tough,” says Matela.
He points out that investors can add further diversity to their portfolios by ensuring that they have a reasonable balance between local and offshore assets, with the latter acting as a hedge against rand volatility.
- Give your investments a raise whenever you get one
Tempting as it might be to treat yourself with a new car, TV, or kitchen refurb when you get a salary increase or bonus at work, it’s important to put at least some of that increase into your savings and investments. According to Matela, you should look to put aside at least one-third of every raise and bonus you get.
“This allows you to improve your quality of life gradually, while also ensuring you don’t fall victim to having a high standard of living that will be impossible for you to maintain in retirement,” he says.
- Invest in yourself
Of course, the best way to get those raises and bonuses is by investing in yourself. Whether it’s an online course or a side hustle that makes use of your skills, self-investment is an important step when it comes to building wealth.
“The more you earn over your lifetime, the more money you have available to invest in market downturns,” says Matela. “These kinds of investments also mean that you’ll be more resilient to those kinds of shocks during your working career and better able to keep money flowing when it’s needed most.”
- Start now
It’s never too late to start investing but it’s always best to start early. That’s because compound interest gets more effective the longer it’s in play.
“The power of compound interest over the long term helps turn invested small sums into fortunes over time,” says Matela.
To illustrate how powerful compound interest over time is, let’s consider a principal investment of R5 000 invested over 20 years and one of R15 000 invested over five years, both at eight percent annually. At the end of 20 years, the R5 000 investment will be worth R23 304.79. By comparison, at the end of five years, the R15 000 will be worth R22 039.92.
Financial freedom is achievable
Ultimately, Matela points out, financial freedom shouldn’t be seen as a pipe dream but as an attainable goal for all working people.
“As long as you’re realistic in your planning and understand what it takes to achieve your financial goals, financial freedom is entirely achievable,” he says. “Whether you reach it when you hit retirement age or even earlier, your future self will be grateful for the sacrifices you make today.”
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