Let’s be honest, we all desire financial freedom. Who doesn’t dream of retiring early, travelling the world and indulging your hobbies, all the while knowing your loved ones are taken care of?
While this may seem like some far-off pipedream, the heart-warming truth is that achieving financial freedom is within your grasp … Provided you start early and you develop some sound financial habits, like diversification and rebalancing.
Follow these six steps to earn your financial freedom…
The only sure-fire way to make a success of investing is to give yourself plenty of ‘time in the market’. The earlier you start, the better. It’s commonly accepted that you should invest at least 15% of your salary from the very start of your career to earn financial independence in retirement. In South Africa, you can get a tax deduction of up to 27.5% of your earnings when you invest in a retirement fund such as a retirement annuity. If you hit this mark, the odds are good that you’ll achieve financial freedom.
You may think that this will restrict your lifestyle and even make saving for a home or paying off a car tricky. But be assured that many genuinely wealthy people developed a habit of living well below their means before rising to affluence. Why not accept that minimalism is the new black, that you don’t need a large home and that snazzy cars are a thing of the past? Globally, we’re all moving towards an era of shared assets such as using house swaps for holidays and Ubering to work.
People who earn financial independence base their investment decisions on correct asset allocation. They know that the various asset classes including equity, property (private and commercial), bonds and cash instruments each bear varying degrees of risk and are suited to different investment timeframes.
Successful investors are well aware of the need for diversification: owning investments in different asset classes which each behave differently during the market ups and downs. Diversification includes investing in varying geographic locations as well as in different asset classes. Diversification minimises risk and smooths out returns.
Rebalancing your investments (the process of readjusting the overall asset allocation in your portfolio to maintain your objectives) is also vital to achieving financial freedom. In practice, this often means selling some overperforming assets and buying more of those which have underperformed. Although this may seem counterproductive, it’s a proven investment philosophy that works as it locks in your gains.
Successful investors aren’t gamblers and don’t entertain illusions of being able to ‘time the market’. Even financial analysts and fund managers are unable to accurately predict these market shifts as no two business cycles are the same.
Also, smart investors allow themselves ‘time in the market’ to earn financial freedom. Many people struggle with a ‘herding investment bias’, which results in selling during a bear market and buying when the market is bullish. You need to accept that there will be stressful times when the markets fall, but they always make a comeback eventually.
Wealthy people use debt very prudently. They use only one credit card to pay for disposable items such as food and clothes, pay off the balance monthly and make use of loyalty programs. They understand that while compound interest works very well for you from an investing point of view, it works very hard against you when you don’t pay off your credit card as the cost of the interest is continually added to the outstanding capital, and you end up paying interest on an ever-growing pile of debt.
Successful investors also never use credit to pay off assets that depreciate in value. They don’t pay off cars using personal loans with high-interest rates, but they do use mortgages with low-interest rates to pay for property. Wealthy people use debt to leverage business growth based on calculated risk. They do their homework, seek professional advice, and do cash-flow projections to ensure that the benefits outweigh the risks.
Another habit that the wealthy rely on is automated saving and investing. They know that monthly contributions towards ‘safe’ investments such as money market trusts will provide for emergency expenses such as unexpected dentistry bills that aren’t covered by medical aid. They accept that emergencies will always arise.
The wealthy also automate their investing to benefit from the wealth-building strategy of rand cost averaging. When investing a fixed amount on a regular basis, one buys more units (of shares or unit trusts) when prices are low and fewer when prices are high. By doing this over a long period, you get a reduced average cost per unit over time. What’s more, by automating your investing you minimise the risk of losing capital if you invest in lump sums and the market falls.
Embrace wellness on all fronts
If you aren’t already taking all six steps towards financial freedom, speak to us now about getting all your ducks in a row. Once your financial freedom’s taken care of, you can move on to ensuring you’re in a position to enjoy it. Look after yourself physically, invest time in continuous education and work on maintaining or mending the relationships that matter most to you.
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