Practical steps to attaining financial independence

In the words of Robin Bartholick, “If you make $1m a year from a job, you could lose your job any day. If you make the same $1 Million from owning hostels, or businesses, no one can take that from you. Having a high income alone does not mean financial independence.”

The concept of Financial Independence is perhaps wider than what you think. Simply put, Finance has to do with money, economics, business, investment, banking, sponsorship and funding. Independence means self-reliance, freedom and autonomy (Encarta Dictionary, 2009).

Therefore, Financial Independence (henceforth referred to as FI) is described as a state of having sufficient wealth (not income) to live on without having to work actively for basic necessities (Wikipedia, 2014).

The emphasis of FI is on wealth-creation and not income-generation. Wealth is succinctly defined as an avenue that generates income without the earner’s labour. Wealth avenues include ownership of a private business and financial instruments such as bonds, shares, etc that provide a constant source of income without the owners’ active work.

FI focuses on two key concepts which are Assets and Expenses. Your assets are resources owned by you and which increase your income and build your wealth. Expenses, on the other hand refer to your spending on items of necessity (and non-essential items too).

While income-generating assets enhance one’s FI, expenses curtail it. There are practical steps to attaining FI which focus mainly on increasing your assets and minimising or prudently managing your expenses. Rather than amass income, amass wealth. You are financially independent if you can live without additional pay from any other source other than from your wealth-generators.

From Bartholick’s opening statement above, it is a bitter truth that a highly-paid employee who doesn’t have other independent wealth-generators such as Shares, private business or Estate investment that amass wealth for him is only a high income earner.That does not make him financially independent.

In the work of Joshua Kennon, there are different approaches to achieving FI. Chief among these approaches is to spend less than you earn. This sounds logical. To be free from financing your daily expenses through debt/borrowing, it is only logical to live within your earning bracket. Incurring a Naira above your earnings means it will be financed by an external source which makes you indebted and hence you are denied your FI.

It is a different thing to borrow so as to invest the borrowed sum to generate income. This is no longer borrowing to finance daily living but an investment which is wealth-generating.

Furthermore, it is said that FI is a slow process and it takes time.
One does not jump to FI. All financial success is said to start with savings (Kennon). The principle of savings is as old as man. Joseph as the technical head of Egypt saved for the time of want and he served as the sole supplier of food to nations. Achieving FI does include increasing one’s surplus fund which should be channelled towards profitable investment options that will enhance one’s FI. The habit of saving is also pivotal to being financially independent.

Savings serve as a buffer on which one can fall back on in future.
Though a bitter pill to swallow, it is the truth that in the effort to eke out a living, we do jobs we don’t like or which we even make us lose control over our time. The job dictates where we should be at 8a.m and which reports must be made available before the close of business.

According to Charles Waller, unless you get to do what you love every morning when you get out of bed … you are merely a highly paid wage slave. This truth may be difficult to accept but its rejection does not change it. To enjoy FI, one needs have control over one’s time. This defines freedom.

Such a freedom or self-reliance is perhaps only guaranteed an Entrepreneur and not an employee, regardless of whether the latter is a manager a manager of another man’s business. So far the job (and not a wealth-generator) pays his bills, his continued financial strength is tied to a source that isn’t his, and hence, he lacks FI. Therefore, FI requires entrepreneurship and not company employment.

Rob Colvin emphasised that by solving society’s problems, you reap huge rewards on which you can live comfortably independently! There are societal problems and needs. Generating ideas that are solutions to people’s needs positions one for FI. Ideas, they say, still rule the world. If one generates ideas that amass wealth for one, one rules one’s finances and hence secures FI. “Think and Grow Rich”, an author titled his book.

For a married person who dreams of FI, he should also have a spouse that is not a spendthrift or a squanderer. Kennon opined that it will be counterproductive if one makes efforts to be financially independent but shares bed with a spendthrift.

It cannot work because while one is thinking of cutting expenses and increasing asset base, the other is thinking in the opposite direction. Team up with people who are also interested in being financially independent and by this, you will sharpen your financial iron with theirs.

Pursuing entrepreneurship or private business is a major route to
attaining FI.

Omoyiola is an entrepreneur whose business of distributing finished products (drinks) began in her kitchen with a single freezer summarised what FI means when she said she is yet to see anything as fulfilling as being one’s master. To attain ultimate FI, one must be in control of a wealth-generator as earning income is not same as making income.

In conclusion, to attain FI, one must increase one’s assets and cut
expenses. Expenses could be cut through modest living while passive income could be generated through owning assets giving rise to rental income, dividends from shares, interest on bank fixed deposits, returns from writing books/magazines, profits from business ownership, etc.