Financial Independence is achieved when your investments reach a point where they can generate sufficient income for you to live off. It puts you in a space where you don’t need to earn an income any more. It empowers to to do the things you really want to. Many of us don’t get anywhere near being financially independent. We, instead, assign ourselves to having to work for as long as possible compromising on our standard of living along the way. Here are some reasons that stand in the way:
1. Living it up
If you are borrowing to maintain your lifestyle your standard of living is too high relative to your income. You should be able to service your debt comfortably after having firstly set aside the appropriate amount for savings.The cost of your total debt should not exceed 30% of your monthly income. If it is higher then you probably should be living in a smaller house or driving a cheaper car. The higher your debt the more you are paying the bank instead of yourself. The opportunity is lost in diverting interest repayments to compounding investment returns.
2. The idea that we will all make it one day
Many of us dram that one day in the future we will strike it rich in some business or win the lottery. We then don’t see the need to save along the way which ends up in starting to save to play catch up and often ends up being too late. The only realistic way to have a chance of building enough capital is to take full advantage of compounding. The sooner you start saving the less it will cost you as the power of compounding increases exponentially the longer you save. Its the only magical way to reach financial independence, but it does need time to make it happen.
3. Ignoring the value of money
Ignoring the value of money now and into the future will stand in the way of being financially independent. Many of us are more ready to spend now rather than save for the future. Think how hard it is to earn your money and how easily you seem to part with it. As the costs of living rise into the future the value of your money needs to keep pace to compensate. Furthermore, your investments need grow ahead of inflation if you want to get wealthier and set you on the path to financial freedom.The future cost of living needs a hard and honest evaluation especially with the essentials like medical aid, electricity and even water. Just these three necessities alone will take a huge slice out of your income needs into the future. The value of your money is important now but will become even more so into the future if you truly want to become financially independent.
Paul Roelofse, Certified Financial Planner® presents 'Financial Fitness' on Radio 702 and Cape Talk on Weekend Breakfast with Africa Melane and Azania Mosaka on Sundays just after 08h00. Visit http://www.investforlife.co.za/ for more.
This article first appeared on 702 : Financial Fitness: 3 reasons why you will never be financially independent