Ever wondered about this?

I heard Brian Tracy’s answer to this and I am leaning towards agreeing with him. Take a minute and ask yourself, “Why am I working/ Studying/ or whatever your occupation may be. His take is that we work so that we can get to a point where we do not have to work any more. Call it retirement, taking it easy or financial independence.

The point being, if you want to keep working because you love your job, it is a matter of choice, not a necessity. I had never thought about it that way before. My focus had been more from the financial independence perspective. The same question can be asked of students. What is the purpose of going to school? Is it because your parents said so? Or because all the other kids in the neighbourhood are going so in order to get your playmates, you need to go where they all go during the day?

I have always had a very strong bond with my bed. It is pure torture to get out of it every morning, and it has been so since as far back as I can remember. One morning I was whining (as usual) as the nanny got me ready for school. She explained to me that the reason I had to go to school is that Adam and Eve sinned and were thrown out of the garden of Eden which was paradise. So if I was to be upset with anyone, it should be with them. Had they not sinned, we would all still be in paradise, having a blast, not having to go to school, eating all the food that I could only long for (ice cream and chocolates) and playing all day with lions and tigers!

In the same way, businesses do tax planning, we should make a retirement plan.

Step 1: How long would you like to live after you stop working? If it was up to you, how many years would you like to continue living after retirement/ you stopped working? Let me say 20 years or thirty or forever. This is your long term goal.

Step 2: How much money will you need to be able to sustain the lifestyle you want without working? In order to get this number, you need to establish how much you currently spend per month. This is always a painful part of financial management. this is where most people get stuck and are not able to budget. Keeping an eye on your expenses in a given month. I recently reworked my number and was shocked at how much I spend on food!

Here, you are trying to find your Number (with a capital N) and work out ways in which you will be able to attain it. Like any other plan, you start out with the long term goal (the end) and break it down to the medium-term goals, further down to the short term goals and finally to now.

Step 3: Armed with your list of all your regular monthly expenses, you can now extrapolate and come up with your number. Say your number is Kshs.25,000 – multiply this by 12 to get your annual needs. Next, multiply by 20 (if 20 is the number of years you would like to live after retirement if it was up to you). And just like that, you have your Number!

Step 4: Now work backwards to establish how much you need to invest in order to reach your Number. Note that I said invest and not save. When you invest, you expect a higher return and of course, you would be earning interest on both the principal and the interest accrued. If you were to save, chances are that at some point, your savings would run out. However with investments, if you put away a large enough principal, you can survive only on the interest for as long as you would like without touching the principal which will be earning more interest for the years to come.

Wouldn’t that be lovely?

FYI: If your goal was to live forever, please talk to an actuarial scientist. They are better placed to calculate how much you need to invest now to ensure income in perpetuity.

Author of this article, Susan Nyakiamo is a personal finance coach, email: susan@tantosuziema.com.

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