Oran Hall | The joy of financial independence

My friend could not disguise her joy when she declared in our conversation a few months ago that she, fairly recently retired, was financially independent.

Financial independence does not mean the same thing to everybody, and to some people, it does not even mean being very wealthy. Generally, though, people who see themselves as being financially independent seem to believe that they are enjoying financial freedom.

Some people seem satisfied to be financially independent for a limited time, having freedom to take care of themselves without worry and without the need to earn an income from employment. Then, it is back to work when they choose. For others, like my friend, it is not temporary. It is permanent, so they see themselves as having no need to work if they don’t ever want to.

In this permanent group, there are, basically, two types: those who have a preference for retiring before the normal retirement age, and those who are quite comfortable pacing themselves to reach that stage at the normal retirement age.

My friend owns a nice house in a desirable community; has no debts; has a pension, savings, and investments to generate income; and does some consulting to keep active and engaged, in addition to giving voluntary service. That makes her happy, particularly as she has time to enjoy family after decades of work, work, work, and study. As a bonus, she has good health. Knock wood.

It is up to each person to determine what the lifestyle of a financially independent person is like. Television adverts showing life at hotels and at the beach, perhaps even a jet-setting life, are not what many people aspire to.

I know people who have taken time to pursue hobbies – diving fully into activities they were not previously able to give the attention they wanted to. Others have focused on volunteerism, delving into activities and causes that are making positive changes to the lives of many and going to the point of helping to fund the educational and training needs of the less fortunate.

There are several sources from which people are able to derive the funds to attain financial independence. Some owe it to business success, others to high-paying jobs, others to large insurance payouts, others to smart, successful investing, others to having multiple sources of income. Let us just focus on the legitimate means.

Building a solid nest egg to bring about financial independence requires far more than chance or luck. It requires proper planning, focus, discipline, and the ability to see opportunities and take advantage of them. It requires sensible risk-taking and the willingness to avoid waste and save consistently.

People who budget well and stick to it are in a better position to achieve financial independence than those who don’t. They are willing to delay gratification, thus enhancing their ability to save more, thereby earning income and investing more.

They do not divert those funds for short-term benefits. Neither do they allow their spending to grow in step with increases in their income. Generally, they spend sensibly. They keep their eyes fixed on the end result.

Additionally, they do not encroach on the income or gains they derive from their savings and investments, thus allowing the power of compounding to work for them. They follow this course because they realise that it is important to follow the road map to the land of financial independence.

They look for safe and profitable ways to invest. For example, they take what the tax man gives them, that is, they seek out tax-efficient investments, which grow faster than income that is taxable. If they do not find income that is tax-free, they find those that are tax-deferred. Thus, they include instruments like stocks, capital growth collective investment schemes, and equity-linked life insurance policies to help them boost their returns.

People who start early have a much better path than those who don’t. The power of compounding works more effectively for them, and they use debt wisely, not extending themselves, for just as compounding works wonders when income is being earned, the opposite is true when interest is being paid out on debt. It has the power to choke. It can suffocate the indisciplined user of debt. Good debt, nevertheless, can boost wealth.

The road to financial independence can be long and bumpy, passes through lush financial fields for those able to discern, and requires patience and effective planning. It has rewards, though – time and resources to give back to society, quality time with family, and more time for relaxation.

One thing is needed, which should not be trifled with if the benefits of a good nest egg are to be beneficial: good health.

Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel. Email: finviser.jm@gmail.com