Financial independence is defined as a state in
which an individual or a household has sufficient wealth to live on, without
having to depend on income from some forms of employment. In other words,
financially independent people are those who are able to meet their needs and
expenses from sources other than their primary occupation.
Financial Independence doesn’t just happen, but starts with a detailed plan and a willingness to commit to that plan. Financial Independence is what everyone wants, but very few people ever achieved it. There are probably many ways to achieve financial independence, but if you want to achieve it legally, and without the fears of EFCC, ICPC and SARS breathing down your neck, your options are limited.
To achieve financial independence, you need to achieve a mastery of at least two or all of three income types: They are:
A. Earned Income
B. Portfolio Income
C. Passive Income.
In this article, we shall focus on 7 Steps derived
from the 3 income types that can help you along that journey. They are steps that
have been proven to work, and have helped others to achieve their desired financial
independence. They are:
1. Track, and control your Living expenses
The easiest way to financial independence is to control your expenses. A lot of people have no idea what they spend money on every month. They just see their earned incomes come in, and all that money is gone at the end of the month. It is essential to track your monthly expenses. You need to bring it down or at least keep it steady so you will have a chance to build up some savings.
Most people let their expenses creep up along with their increasing income, and that’s the wrong way to do it. Instead, you need to minimize lifestyle inflation and funnel those raises into investments. The investments will generate income which will help propel you to financial independence. The formula for Financial independence is simple. It begins when your net worth exceeds 25x your annual expenses.
2. Grow your Earned Income1. Track, and control your Living expenses
The easiest way to financial independence is to control your expenses. A lot of people have no idea what they spend money on every month. They just see their earned incomes come in, and all that money is gone at the end of the month. It is essential to track your monthly expenses. You need to bring it down or at least keep it steady so you will have a chance to build up some savings.
Most people let their expenses creep up along with their increasing income, and that’s the wrong way to do it. Instead, you need to minimize lifestyle inflation and funnel those raises into investments. The investments will generate income which will help propel you to financial independence. The formula for Financial independence is simple. It begins when your net worth exceeds 25x your annual expenses.
Earned income is defined as income that is obtained by participating in a business or trade. Earned income typically includes salaries and bonuses, wages, commissions and tips.
The correct game-plan will be to save as much money as possible, and to adopt a lifestyle of frugality. This lifestyle will ensure that earned income consistently outpace living expenses, so that you can save and invest more.
Pitfalls to avoid
A. Over-reliance on your knowledge and skills. Earned income is essentially based on the work you do, which unfortunately is dependent on the demand for your skill set. Demand for skill sets depend on extraneous factors such as need, relevance and fit.
B. Defining your self-worth by the name of the corporation you work for. The danger is becoming so absorbed that you become nothing more than what you do between 9:00am and 5.00pm. Corporations, and the skills they require to run them changes with time. Young professionals should be constantly upgrading themselves with new skills, knowledge, and be fully prepared for situations that can affect their ability to generate earned income.
3. Invest in the Stock Market
The stock market is a great way to build wealth. Even though the stock market has had its up and downs in the recent past, there are still great stocks that combines consistent dividend payments with yearly stock appreciations. Stocks in Banking, Telecommunication, Oil & Gas and the multinational section of the manufacturing sector had been particularly reliable in Nigeria. You can also look for penny stocks of companies in ICT, Manufacturing and start-up companies in the energy sector.
Looking at the recent downturns in many stocks on the exchange, it is tempting to dismiss the stock market. Granted, the stock market may appear volatile in the short term, but if you invest for the long term, the power of compounding will apply to help you reap handsome benefits.
The key is to invest through the good and bad years.
Pitfalls to avoid
A. Don't rely on your knowledge alone, research stocks, the trends, performance history and government and industry regulations before committing your savings to stocks.
B. Gut instincts is not enough, get a stockbroker, or better still, an investment adviser.
4. Invest in Real Estate and Rental Properties
To build wealth quickly in real estate, prospective investors should take position by buying genuine land cheaply in virgin areas, yet untouched by development. In Lagos, such areas are found in abundance in Ikorodu, Epe, Badagry, Alimosho and Ibeju Lekki. Tomorrow's billionaires are those who take position today. For instance, a plot of land in Ikoyi was #150,000 in 1972, today it is #250 million and up to #500 million in Banana Island. Similarly, Lekki Phase 1 was sold for #1 million in 1999 - 2000, today, it is sold for #200 million.
Another financial independence strategy in real estate is to build, buy or lease properties in areas where potential for migration is very high, and to redevelop them into properties for rental income. Rental income is stable, recurring, and after management expenses are deducted, could provide very good income for further investing.
Pitfalls to avoid
A. Conduct adequate research to ensure that land is genuine, free from litigation, and not under government acquisition,
B. Ensure that land is being purchased from the right source to avoid being scammed.
5. Start a Business
Building a business is probably the most difficult way to achieve financial independence. You have to work really hard and you probably won’t make much income for years. There is no guarantee that you’ll be successful either and many entrepreneurs never make it big. However, the payoff can be huge. Check the list of the 100 wealthiest people in the world, and you’ll see entrepreneurs dominating the list.
For most people, starting a business is a very daunting proposition, and i am sure that more people will hesitate to give up their regular salaried jobs to jump into entrepreneurship with both feet. However, there are a lot of businesses you can start side by side with your regular salaried job now preparatory to taking the leap.
Be fully prepared if you must start your own business and become an entrepreneur. The following may guide you to start right, and sustain you on the journey to financial independence.
a. Learn to motivate yourself
b. Save, Save, Save. Spend only after you have saved
c. Learn how to sell
d. Be an apprentice. Work for another for experience
e. Network, and build relationships
f. Work 80 hours a week for 24 months
g. Build an audience, and customer base
h. Learn to do research and do it fast
i Learn your strengths and different industries
j. Constant place yourself on death ground, with your back against the wall. Get out of your comfort zone. Always set deadlines for yourself to achieve.
6. Create Intellectual Properties
Another great way to create passive income is to create intellectual property. I think this is the way to go for creative people. If you have a particular skill or talent, you may be able to turn that skill into usable products that would be purchased by those who want to learn from you. If those products have lasting value, you can earn royalty income for years.
7. Earn a pension
The Nigerian Pension Reform Act, 2004 and it's amendments in 2014 stipulates that all employers of labour should institute a pension plan for their workers. The pension plan is contributory. Pension deductions are made from the workers' salary with matching contributions from the employer up to a minimum of 15% of total emoluments of the worker.
Depending on the number of years, and regular contributions into the worker's RSA account, a huge sum of money could be made available at retirement of the worker. On retirement, an immediate lump sum payment can be made while the balance is converted into pension in the form of Annuity to be paid monthly by insurance companies for the whole duration of life, or Programmed Withdrawal to be paid monthly for a fixed duration, usually for ten years after retirement.
On retirement, the retiree is wise to invest further his immediate lump sum payment, while he can then get his living expenses from his pension account. Financial independence can be achieved if the living expenses is well below the sum of totality of the monthly pension payments and other investment income from the other sources.
Conclusion: Start your journey. Start Now!
Financial independence can be a long journey, but you can get there in less than 20 years. There are many ways to achieve financial independence and I think almost everyone can take one or more of these paths above. You just need to make financial independence your goal and start working on it. I don’t think anyone ever regret starting this journey so don’t put yours off.
Adewale Fayinka is a Published Author, Expert in Sales & Marketing, Insurance Practitioner, Career Coach and a Start-up Business Consultant.
This article, by the same author, appeared first in
the National Business Extra of Monday, 27th August, 2018 as “ How To
Achieve Financial Independence In A Depressed Economy”.
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