The Sterling ReportSunday, July 11, 2021
BY DWAYNE NEIL
The idea of financial independence (FI) can be different for many people. For some, the idea of FI is one of having enough income to cover your expenses for the rest of your life without having to be employed. For others it may be saving and investing so as not to rely on others to achieve your financial goals. No matter your definition, FI is about setting and reaching a goal which will then enable you to live comfortably for the rest of your life.
One way of doing this can be to create streams of income (passive income) which can cover your expenses based on the projected cash flows. Once the inflows can cover expenses for the rest of your life, and any possible future changes in expenses, then one can be considered to have achieved FI. Another way of achieving this is to accumulate a lump sum, through saving, investing or entrepreneurship, from which periodic drawdowns can be made to cover expenses for the rest of one's life.
This concept can be applied at various stages of life. Persons in their 20s, 30s or 40s may look at making a FI plan to retire earlier than the traditional retirement age. Older persons may also create their FI plan to ensure that when they do get to the traditional retirement age, they are able to be at the point of financial independence and live comfortably during retirement.
CREATE A PLAN
Determine your expenses, both current and foreseeable future expenses. Also, it is important to factor in the effect of inflation on your spending power during your lifetime. This will allow for a more realistic calculation of how much is needed for future consumption. These factors will help to determine your target pool of funds needed to provide passive income or allow for periodic drawdowns as needed.
Once you have determined the target dollar amount needed for FI, decide how you will begin to save and invest to achieve this goal. Funds saved periodically (monthly, quarterly, etc) should be moved from a savings account into an interest-bearing investment. Doing this overtime increases your earnings as you are adding to the principal invested. There are many investment instruments which allow for additions to be made at any time. Also remember the power of compounding interest. Interest received from interest-bearing instruments should also be reinvested, as small amounts compounded over a long period can have huge effects on accelerating the growth of your investment.
INCOME AND EXPENDITURE
These are also key areas to look at in seeking independence. Both can affect your savings and investments. If your income increases, you should be able to save and invest more by retaining the same level of expenditure. Also, by decreasing expenditure, the additional savings can be invested. The way to maximise savings would be to incorporate both an increase in income and a reduction in expenditure. This will maximise the periodic amounts being saved and invested.
Each investor must first determine what financial independence means to them. Then set goals and look for investment vehicles which will allow them to achieve these goals in the timeliest manner. There are various types of investments available to meet the risk appetite of any investor looking to achieve FI. Speak with a licensed investment advisor for guidance in achieving your financial goals.
Dwayne Neil, MBA, is the AVP, Personal Financial Planning at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm Feedback: if you wish to have Sterling address your investment questions in upcoming articles, e-mail us at firstname.lastname@example.org.
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