An ardent reader of this blog noted that there was a running theme of Financial Independence in the first part of this 3-part series on personal accounting [or personal finance if you prefer]. Investopedia defines the term as having enough savings, investments, and cash on hand to afford the lifestyle you want for yourself and your family — and a growing nest egg that will allow you to retire or pursue the career you want without being driven by earning a certain amount each year.
Experts say that to be considered independent you need to have at least 25 times of your annual expenses in savings. For instance, if your monthly expenditure is KES 100,000, you need to have KES 30,000,000 in savings i.e. KES 100,000 x 12 months × 25. Overwhelming, right? I came across the FI concept 3 years ago. Never went back to it until last week when I thought it would actually make a good assessment for anyone who would like to rack up their financial wellness score.
Here are 10 stages you need to keep in mind when mapping out your Financial Goals.
Stage 1: Financial Dependency
Are you dependent on someone else for financial support? Are your living expenses and or debt payments greater than your income? This is not a bad place to be as we all start from here. Some of us stay here a little longer while others return to this space every now and then. The most important thing, though, is to make sure that you are doing the very best with whatever life hands you.
Stage 2: Financial Solvency
Are you able to meet all your bills without depending on anyone else? Are you current on all debt payments? Whilst this stage may place one at a financial score of 20%, I think it is pretty cool for anyone to be current on all their bills.
Stage 3: Financial Stability
Have you set up an emergency fund yet? Does it have at least savings equivalent to 3-6 months in expenses? The trick is to: One, set up an account that you cannot easily access. Two, save consistently. A savings of 1,000 every month will give you 25,200 in 2 years at 10% compounded interest, 73,261 in 5 years, and 191,249 in 10 years. Now imagine if that 1,000 was 10,000 or better still 100,000. Three, DO NOT TOUCH THE FUND. It is for emergencies, remember!
Stage 4: Debt Freedom
Are you free of high interest debt e.g. shylocks, mobile money loans, credit cards? Are you completely free of debt with the exception of mortgage? Good debt? Bad debt? All-kinda-debt is a topic scheduled for discussion in the next few weeks.
Stage 5: Freedom from Employer
Are you able to step down from a higher paying, stressful, less satisfying job to a lower paying, less stressful, more satisfying job without affecting your retirement benefits? By now you must be coming to the realization that some of these things can only be actualized through determination-discipline-denial and well of course winning the lotto which statisticians put at a 1 in 292.2 million chance (Forbes, 2021).
Stage 6: Financial Security
Can you survive without a job for some time until you find another? Can the cashflows from your investments meet your annual basic survival needs? The real question is can you keep calm in the midst of a storm? Tough questions, I know. But lets continue the session with calculator (or pen and paper) in hand; we need to do some math…
Stage 7: Financial Flexibility
Financial Flexibility marks the halfway point to Financial Independence. This means that you should have at least 12.5 times your annual expenses in savings i.e. if your monthly expenditure is KES 100,000, you need to have KES 15,000,000 in savings (KES 100,000 x 12 months × 12.5). Next Level Life, from where a good part of this thinking is adapted, defines this stage as being able to live off your current cash flows assuming that your budget is flexible enough to accommodate the ups and downs of the financial markets.
Stage 8: Financial Independence
I hope the introductory paragraph made you think about your monthly expenditure. How much exactly do you spend as a family? Or as an individual? And how can you activate or accelerate your journey to reaching the 25 multiplier factor? The goal, ideally, is to maintain your current lifestyle in retirement. As such, you may want to consider making some adjustments now (which includes a focus on investments) so that you can work with a more reasonable savings multiplicand.
Stage 9: Financial Freedom
At this stage, your investments should be giving you twice as much in cash flows as was determined in Stage 8. Can your mind even conceptualize that? Mine cannot and it is probably the reason why I always to return to a prayer mentioned in the Book of Proverbs by Agur, son of Jakeh which reads “Two things I ask of you, LORD; do not refuse me before I die: Keep falsehood and lies far from me; give me neither poverty nor riches, but give me only my daily bread. Otherwise, I may have too much and disown you and say, ‘Who is the LORD?’ Or I may become poor and steal, and so dishonor the name of my God.” A good definition too of financial freedom, don’t you think?
Stage 10: Financial Abundance
Mathematically, this is calculated as three times your financial freedom amount (KES 180,000,000 is the amount we would be targeting here if you consider the example we’ve been using through out this article). The cashflows from your investments are more than you will ever need and it will take a whole lot of effort to spend it all. And if the economy falls (or even fails), you will still be okay.
Ça va? Money can consume (control) us. Money can confuse (confound) us. Money can corrupt (contaminate) us. It, therefore, helps to consider our financial ambitions against a spiritual backdrop because spirituality tempers us in our dealings with money. Here are a few theological references for our reflection.
Give us this day our daily bread. Matthew 6:11
But remember the LORD your God, for it is He who gives you the ability to produce wealth. Deuteronomy 8:18
I know that my redeemer lives, and that in the end He will stand on earth. And after my skin has been destroyed, yet in my flesh I will see God; I myself will see Him with my own eyes – I, and not another. How my heart yearns within me! Job 19:25-27
Have a wonderful weekend 🌻 🌻 🌻
Accounting & Other Stories 