FINANCIAL FREEDOM DEMYSTIFIED

Financial Freedom is a word that is often tossed about. In our classes and trainings we often ask people what they would like to get out of our programs and without fail one of the most common responses is to be financially free or learn how to be financially free.  However, as we aspire to be financially free many times we do not stop to consider what it actually means and what it takes to get there. I believe the true significance of financial freedom  goes beyond just having loads of money in the bank account but for today let’s starts with the monetary aspect as it is a huge part of financial freedom.Theoretically speaking financial freedom has been defined as the state of having enough personal wealth  without having to actively work to sustain a given lifestyle and provide for basic necessities.  Let’s think about it for a moment.  Today if you stopped working what would happen to your life? Would rent be paid, children go to school?  Would you be able to eat as you like or entertain yourself?  Would your car be fuelled? Would you be able to enjoy the finer things that you have allowed your monthly salary to get you accustomed to?  The answers to these questions will start to tell you how far or near you are from financial freedom.  Many times I have had to correct high earners because they believe and have taken comfort in the fact that their monthly income makes them financially free.  It doesn’t because without working and earning the salary they would not be able to live as they do.  In fact many times high earners are the most financially enslaved people because the more they earn the more they spend and the more dependent they get on their jobs. Earning a salary gives you monthly liquidity but has nothing to do with how wealthy you are. Maybe you have some assets.  Some shares, property, bank accounts etc.  Take the total value of those assets and subtract your debts. Divide this answer with your monthly expenses.  For example if you have total  assets worth two million shillings and debt of one million shillings you would be left with one million shillings.  Say you have monthly expenses of Shs 200, 000.  One million divided by Shs 200, 000 is 5.  If you stopped working and had to liquidate your assets and pay off your debts you would be able to sustain your lifestyle for 5 months.  You are financially free for all of 5 months.   If you have taken comfort in the fact that you have a portfolio and you are investing, do this calculation.  Maybe you may just realise that you are not doing enough.

To achieve this financial freedom you would have to build up assets that are generating an income that is equal to or greater than your lifestyle. So using the above same example we are saying that you would have to have assets that are generating at least Shs 200, 000 every month. For example you have built up a property portfolio that gives you rental income of Shs 200, 000 every month.  You have bonds that are giving you those returns. Treasury securities or bank accounts.  It could be a mixture of different types of investments. This means that even if you decide not to show up at work, your bills are still paid and you can even still afford to have cable TV. If the company you work for decides to retrench, it does not affect your ability to drive your car or pay rent.  It actually means you get to the point where you work because you want to work not because you are a slave to the salary you are paid. This form of income is what is called passive income.  This is the true meaning of money working for you.  You do not have to actively earn it with daily effort on your part.  Many people who run businesses are usually under a false illusion that they are financially free because they are self-employed.  If your chosen vehicle to achieve financial freedom is through a business, it should be able to run without you.  You should be able to step away from your business and it is still able to pay you a monthly income or dividends that can sustain your lifestyle.  This means as you are growing your business you are actively putting in place those structures and it is not a one-man show. Many businesses 15 years later, remain very dependent on the owner or founder to be there for it to function. The question to ask yourself is what are you putting in place so that this happens.  Because of the work I do I have met many retirees who invested in land. Land may be a  great investment.  But at the point of retirement they need income.  They still need to have breakfast in the morning hence money to buy bread and milk.  They have found themselves with land that is not generating income.  Very good to say they have it but it is not working for them despite the emotional attachment they have to it. What they needed to have done is convert that land into something that generates income when they are retired e.g.develop it or sell it and put the money into something that generates that income. So please remember the more you spend, the more assets you will need to build up to be financially free. So you have chosen to upgrade your car? What are you doing so that even when you are not working, you will still be able to drive that kind of car? Keep in mind inflation because fuel and all your other expenses will probably cost more than they do today. The way many people live, it is almost guaranteed that they will have to downgrade their lifestyles when they retire or can’t work. When you have little or no money going into acquisition of assets you are in the red zone. Instead of walking down the runway of poverty in designer clothes, spend some time thinking about what you need to be doing to be able to achieve Financial Freedom.