Imagine retiring at, say 40, with not much expenses, no debts to pay, your emergency fund fully paid for, and with a steady investment income. Financial freedom generally means having enough savings, investments and cash on hand to afford the lifestyle we want for ourselves and our families and a growing nest egg that will allow us to retire or pursue the career we want without being driven by earning a certain amount each year. Getting to make life decisions without being overly stressed about the financial impact because you are prepared. You control your finances instead of being controlled by them.
I was privileged to attend Dr. Tayo Oyedeji’s Village Fire (Financial Independence, Retire Early) event in Nairobi on 4th May 2019 and conversation at the event circulated around achieving financial independence and retiring early. It is at this event that I learned about the stages of financial independence and appropriate behavioural mechanisms to adhere to in case you are on that path.
Forget those ‘get-rich-quick’ schemes. The path to financial independence isn’t a get-rich-quick strategy. Achieving financial freedom is an uphill task that requires discipline, dedication and perseverance, a lot of each three. You actually need to put in a lot of hard work to graduate to the next stage of financial freedom. There are seven stages of financial independence; financial dependence, financial novice, financially underwater, financially precarious, financially stable, financial progress and finally financial independence. A later stage that you should not kill yourself is the financial abundance stage, that only has about one per cent of the world’s population.
First, financial dependence is the stage of life where we live our financial life solely at the expense of others; parents, guardians, sponsors, charities, governments etc. here, we are perfect consumers. Remember the days when your parents bought you everything you had, from your undergarments to your latest PlayStation, when they paid all your bills; school fees, accommodation money etc. Well, those were your dependence days; no income, lots of expenses, no debt, no emergency fund and of course, no investment. A big cost centre to everyone.
Anyway, life happens and before you know it, you enter the next stage; financial novice. Here, you have an income (no matter how small,) a lot of expenses, some debt in student maybe student loans and money you keep borrowing to cover the expenses that your meagre salary cannot cover, no emergency fund, and of course no investment income. This is where real life starts, probably in your twenties. You become financially active, with little or no knowledge about financial systems, expenses matching or slightly exceeding your income, thus taking small debts along the way. Most of the youth are in this stage.
The next stage, financially underwater, you realize that your income grows at arithmetic progression while your expenses increase at a geometric progression. Therefore to stay afloat, you take on more debts. Consider being in the city with a salary of Kshs 20000, with rent to pay, send some money upcountry, buy house utilities, and still have some money to spare for use throughout the month in areas like transport costs, lunch money, airtime, sudden calls from the village to send cash to treat the neighbor’s child who was bit by your dog among many others. By the time you are done budgeting with the cash, you are on the negative side, thus forcing one to take more loans thus increasing debt. At this point, you have started depositing some money into your emergency fund, therefore draining you even more. During this stage, we experience lifestyle inflation. Lifestyle inflation refers to increasing one’s spending when income goes up. It tends to continue each time someone gets a raise, making it perpetually difficult to get out of debt, save for retirement or meet other big-picture financial goals. Lifestyle inflation is what causes people to get stuck in the rat race of working just to pay the bills.
The fourth stage, financially precarious is a ‘light at the end of the tunnel’ stage where you are more financially aware and begin to make efforts to increase your income and save a little. This includes getting part-time jobs. Debt is still high, but one is in a position to liquidate them. Still, no investment, thus losing your job throws you over the financial cliff. So no assets, with an income just as much as your debt. Here, you can be able to live within the money you have without borrowing.
With discipline and constant dedication, you get to the next stage, financial stability. Here, you are no longer in debt, you have cut down on expenses, your emergency fund is significant, and with a steady source(s) of income but still, no investments. However, the good news is at this stage you are in a good position to start investing.
Stage six, you start making financial progress. Even more financial savvy, you avoid debts at all costs, decrease expenses and increase your emergency funds. Also, one embarks on aggressive investment and begins to make a little investment income too. Here, you have become a great saver and an active investor with an income that caters for all your projects without much financial struggle.
Finally, you achieve financial independence. Here, you exit the rat race and ‘hire’ others to ‘work’ to pay your expenses. You are financially free to live the life of your dreams, make real contributions to society/humanity and able to pass on a real legacy to the next generation. You no longer work for money, because your life and other interests are funded by the investments income. People at this stage can either quit their jobs or keep working regardless of the money flow. Also, at this point, your emergency fund is consistently ‘fuelled’ and your investment income is enough to cater for every need and want. The next but not necessary stage, financial abundance, you become a global institution of sorts, attractive to big businesses, corporations and national governments. You are no more into a perfect competition, you become a monopolist.
However simple this process might seem off the paper, you are expected to put in a lot of hard work, work extra jobs, be highly disciplined and determined in order to make it to the stage topmost stage. To achieve financial freedom, you have to exercise frugality – spending less by purposefully managing what you earn. You also need to get ways of increasing your income, save a lot more, invest and of course, plan for your retirement.