The road to financial independence

Financial independence can be defined as having enough money invested to enable you to live your preferred lifestyle on the proceeds without having to work again. The three main participants in this endeavour are income, expenditure and savings. Most people believe that income is the most important variable of the three but that is not necessarily true. For many people income is not something they can control. Their income is determined by the opportunities they have had during their life and other factors they have no control over. Just like nobody had a choice as to their birthplace, so too do few people have a say in what they will earn one day. It is also not true that if you actually manage to earn a lot of money, that you will automatically become financially independent. That is where one of the other participants enter the story, namely expenditure.

One of the greatest contributors to becoming financially independent is understanding the value of money. If you have never worked for the rands in your purse, it will be difficult for you to appreciate what things cost. But fortunately the things you spend your money on, are more of a choice than what you earn. You can choose the car you drive or the house in which you live. You can choose where you go on holiday or whether you will braai chicken or steak. It is not wrong for someone who earns a lot of money to also spend a lot of money, as long as the expenditure never exceeds the income. If you earn R100 000 and spend R30 000 per month, it is the same ratio as earning R10 000 and spending R3 000. The problem occurs when you spend more than you earn, and use your income as security to get a loan from the bank. There will be a further complication if you lose your income stream, and that is where the third player enters, namely savings.

Saving is completely up to you. Just like understanding the value of money is critical to becoming financially independent one day, so is developing the discipline of saving from an early age. One of the biggest mistakes people make, is believing that they will start saving sometime in the future, like next year. Just like saying that you will quit smoking after the holiday, or go on a diet next week or start exercising in the new year, so planning to start saving later is futile. You have to understand that there might be a day when your income will dry up; or when a disaster will require additional funds; or when you will realize there is more to life than work; and then you will need your savings to fall back on.

You can become financially independent on a very modest level of income, as long as you spend less than you earn and put some money into savings. The time it will take for you to reach that state of independence will depend on the ratio of income to expenditure and savings, and the success with which you invest your savings. Life is a journey of some ninety years during which income, expenditure and savings will all play a crucial role. We have to respect all three of them equally at their designated times.

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