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Financial Understanding + Responsibility Yields Independence


Finance and Fury will be focusing on helping you define your aims, and increase your knowledge and ability so you can make the best financial choices.

Aug 21, 2017

There is a quote by the Roman Politician, Cicero. "What then is freedom? The power to live as one wishes."

In this episode, we will discuss how to gain freedom through financial independence.

As Cicero said, what is freedom if not to live your life the way you want? This means not being beholden to a job, being able to travel, live where you want and go after what you want.

So, what does it take to achieve financial freedom? It is really simple, having enough passive income to pay for your expenses. If you have investments which can pay a passive income to cover your expenses, then your only reason to work is because you enjoy it.

This is where money can buy happiness through doing what we enjoy and is meaningful.

If you want to have financial freedom, you need to decide what this looks like for you and plan on how to achieve this!

This can be broken down in to six steps to work through and then implement:

  1. Determine what income you need to cover your costs.
  2. How you generate a passive income?
  3. Reverse engineer to meet your goals
  4. Do some planning
  5. Implement your strategies
  6. Review regularly

Step 1) Determine what income you need to cover your costs.

This first step is where you decide what financial freedom looks like to you. So how much income would you need to live comfortably? This can sometimes be tricky as your expenses change over time. You might have a mortgage and school fees which will inevitably cease at a certain point.

There are two ways to work this out. The first is to look at what you would spend on yourself without those temporary expenses through completing a budget.

Another way is to look at ASICs assumption on what retirement costs the average Australian. Just remember that holidays and travel costs will be extra costs on these levels.

Having an idea of when you want to be financially independent is also important. This will help plan and also account for inflation. Time will be either your biggest friend of worst enemy. If you have a long period of time it will be easier to achieve.

Step 2) Figure out your asset base that can get your level of income.

There is the Rule of 20. This is based off if you can generate 5% per annum in income, then you simply multiply your desired income by 20 to work out the investments needed. For example, if your target level of passive income is $50,000 per annum, then your asset base would be $1,000,000.

However, inflation will need to be accounted for as well. This is where time is of importance as it allows to work out what level in future values is required. If you wish to be independent in 15 years, then this $1,000,000 would be closes to $1.45 million.

Step 3) You know the target, so time to set some goals on how to achieve this.

In this step, you need to work out how you will reach your target level of investments. Working out how much you need to put away into investments each month can be a little difficult.

This can be done using the PMT formula in Excel or through calculators on the MoneySmart website. It is best to work off a relatively conservative return on long term growth investments of around 8.5% per annum.

Say your target it $1.45m in 15 years, then you would need to invest $4,000 per month to reach this. This monthly figure can sometime be daunting especially if you are having trouble saving in your current position. Try to start out small with the ‘pay yourself first’ strategy and build up to your target over time.

Step 4) Plan and look at alternatives to invest in to meet your criteria.

Once your target on investments and monthly savings is worked out, look at the investment options available to you.

This can range from investment platforms with managed funds, direct shares, properties or any asset which will pay you enough of a passive income. Just remember there is no point investing into shares or a property that won’t eventually be able to pay a passive income.

Historically, growth investments have performed better than income only assets in the long term. This is due to the return equation being income plus growth. Therefore, cutting out half of the equation will limit how the funds perform in the long term. Just remember that the investments need an income as well and should be well diversified.

Step 5) Start your plan!  

Success takes planning but not following through on your plan is pointless.  

Once you have your plan in place, it is time to start saving and investing. Set up your investments to be well diversified and to reinvest the income over time. Volatility is your friend when it comes to long term investing, especially when making regular investments.

Try to make this process as automated as possible, setting up regular direct debits or investments.

Step 6) Review Regularly

The final step is ongoing reviews of your progress. How are the saving targets going? How are your investments performing? This will help to keep you accountable along with being able to change your plan over time as needed.

For further information on gaining financial independence, check out a Webinar I have done on this: