Gaining financial independence

More often most people already know that they need to save to gain financial freedom but even in cases where we are able to save, we still find that gaining financial freedom remains a mirage. On the other hand, one may perpetually find excuses for not saving and leave with that. To be able to comprehensively understand the art of gaining financial freedom, we must first address two questions namely; what makes us not save and when we have saved, what makes us not attain financial freedom? In assessing the savings levels, it is important to note that the ratio of savings is proportional to one’s level of income as expenses are based on the same income. In other words and in practice you cannot spend what you don’t have. That, therefore, means that irrespective of the levels of income one should be able to save a certain proportion of the same income to be able to create own wealth. Saving is a mindset and if you assume that you have to reach a certain age or income levels to start saving, then you will never save as both age and income are dynamic. Starting to save early not only reduces the pressure on time to accumulate substantial amounts but also reduces the proportion one needs to save over time to attain meaningful wealth. The other thing that makes us not save is spending on wants not needs. Before you spend money on anything, you should ask yourself whether you want it or need it. Experience, however, shows that quite a big proportion of income of spend on wants even when individuals purport not to have any money left to save. The income we spend on wants can as well be channeled to savings. Some people assume that with high salaries, one is able to achieve financial freedom. The reality is that big salaries also attracts higher expenses to meet the expectations of improved status and lifestyle thus creating the dependency on salary income something that makes you to have to work to meet increased lifestyle expenses. If you have to work to earn money to live no matter your standard of living then you are not financially independent. Higher income from salary also means that you need to save and invest more to attain a reasonable replacement ratio should you lose the job. On the other hand, the mere level of income or savings cannot guarantee financial freedom but what you do with the savings and how the savings works for you. Saving is totally different from investing. By just saving alone you may not achieve financial freedom. The first and important step in gaining financial freedom is understanding how money works and then put it to work for you. Savings in itself is never complete without a purpose. You must save with a purpose of investing and the investments must have the purpose of cash flow. When you have more cash flowing into your pockets from invested assets than your living expenses, then you are financially independent and that means that money is working for you instead of you working for money. Only then can you be deemed to be rich. In understanding how money works, it is important to appreciate that savings exist in complex environments. One of the major threats to the value of our savings is inflation. If savings are maintained in a bank account for instance, with returns below the rate of inflation which is often the case, then you lose out on the value of your savings over time. That means that you are better off spending the money today than keeping it as the same amount will not be able to buy the same goods and services in future. For the savings to work for you, you have to understand broadly, the characteristics of investments, more importantly, the asset in which you are investing, the rate of return, cash flow, risk factors and a couple of other factors that make an investment good or bad. When you have invested in several assets that guarantees you good cash flow that exceeds your expenses, then you have achieved financial freedom. That also means that when you have more income coming in each month from your investments, you may not need a job and therefore salary. You are then financially free, and only then are you financially independent. Financial freedom means you have the choice to choose to work or not to work and still be able to take care of your income needs. fnyayieka@liaisongroup.net.

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Gaining financial independence