SOME people achieve financial freedom prior to retirement, but it’s not too late for older ones to realise financial freedom in retirement.

At a recent forum on ‘Investing for Today and the Future’, local business owners realised that time was crucial to the growth of their businesses and compound interest is dependent on time. In the same way gains from financial investments, such as stocks, bonds, and certificates of deposits are reinvested and compounded, profits from their businesses have been reinvested through the acquisition of equipment, human resources, and other assets.

The single most important ingredient in growing money to create financial freedom and wealth is compound interest, which I have said several times in my articles, and which I will continue to repeat, with today’s article focusing on the role compound interest plays in achieving financial freedom and highlights the story of a self-made millionaire.

A number of businesses started from small, humble beginnings, and owners who wisely invest the gains from their businesses have reached major financial milestones and created prosperity for their families.

It must be stressed that financial freedom can be obtained by investing small amounts over a long period. Time rewards those who are patient and willing to invest in assets that will grow exponentially because of compound interest.

What is financial freedom?

It’s having enough money to comfortably live your dreams. Financial freedom means having total control of your finances and decisions. Your savings and investments can adequately cover expenses and there is no need to worry about costs. It’s about having your money working for you instead of you working for money. Nevertheless, financial freedom means different things to different people. For some people financial freedom means being debt-free, for others, it is the ability to go on a vacation whenever they want. Whatever financial freedom means to you, we can all plan to be financially free.

Recently, I read an interesting article about UK self-made millionaire Nathan Thorne, CEO of Handy Flowers (a leading online shop in the UK). He said that patience was a valuable lesson that his gardening business taught him. He opined that “business and finance need seeds to grow over time”. It is best to start investing early and consistently save and invest regularly. When Thorne started his business, he saved regularly, and his main focus was investing for the long term. I have always advocated that successful investors have a long-term mindset. From whatever income earned from his business he invested 10-20 per cent in a diversified low-cost index fund. Thorne allowed his investment to compound. All earnings from his principal were reinvested and with time his investments grew exponentially. Thorne said that from the beginning of his career, he knew that “time is the most valuable asset when it comes to compound interest”. Just putting aside small amounts from your pay cheques every month in a managed fund of stocks and bonds or an equity fund for the long term can yield tremendous returns because of the magic of compound interest. As motivational speaker Les Brown said, “There is no secret to success. There is a system to success”.

Thorne aptly automated his savings and investments. According to him, having an automated system in place removed the temptation to spend his money and allowed him to build wealth over time. Automation of his investment provided for every dollar earned to be reinvested.

Thorne invested extra earnings from his business in tax-advantaged investment accounts. These accounts were tax-exempt or tax-deferred saving plans. Thorne therefore attained enormous growth from the tax benefits as well as compound growth of his investments over the long term. His investments provided another stream of creating wealth and acted as a buffer or cushion during the down times of his gardening business.

In Jamaica, having a pension plan is a sure way of investing money tax-free and tax-deferred. It’s an opportunity for all employees and employers to save and earn tax-free returns. Contributions are invested free of tax and further compound and grow the pension funds. There are additional savings for contributors who utilise the salary deduction payment method. Because contributions are tax-deductible the amount of income that is subject to tax is reduced. Unfortunately, the majority of Jamaica’s workforce does not contribute to a pension fund.

Streams of income are necessary for financial freedom. Another tip to financial freedom is to eliminate or reduce debt. Discipline is required for financial freedom. Track your expenses and as much as possible avoid discretionary spending. Keep investing in income-generating assets. Build an emergency fund. This will go a long way in reducing stress and provides peace of mind when unexpected financial events occur.

Compound interest is the catalyst that creates financial freedom. In the words of Nathan Thorne, “Reinvestment is the manure that makes compound interest grow to its fullest.”

Grace G McLean is a financial advisor and retirement specialist at BPM Financial Limited. Contact her at gmclean@bpmfinancial or visit the website: www.bpmfinancial.com. She is also a podcaster for Living Above Self. E-mail her at livingaboveself@
gmail.com