Financial independence requires a psychological approach

Jodi Suchard, Advisory Partner, Citadel

For any individual, the pinnacle of financial success is becoming financially independent. But what is financial independence, and how will you know once you’ve got there? And what are the issues that may be preventing you from achieving your financial goals?

First, the concept of financial independence relates to self-sufficiency, and not needing to rely on others to maintain your current or accustomed standard of living for the rest of your life – including your business or your job, friends or family.

The exact figure will vary according to each individual and their unique circumstances and needs, but a good starting point is to conduct a detailed cash-flow analysis to identify the exact sum needed for you to be able to retire and live autonomously. This number will also need to account for factors such as inflation, and whether you intend to live in South Africa or abroad.

Once you have identified the sum that you will need, you can then create a detailed plan tailored to you and your goals, an individual plan of action to reach your targeted amount.

When doing this, it is important to bear in mind that a person’s saving and spending behaviour is informed by one’s psychology – one’s feelings and attitudes towards money. And South Africa’s infamously poor retirement landscape is littered with examples of individuals who allowed their emotions to lead them away from their strategy, or worse – those who never had a financial roadmap to begin with.

One of the first bridges or obstacles that nearly everyone needs to face on their journey to financial independence is therefore to identify and address their underlying issues regarding money – even the wealthy. After all, happiness is not defined by the size of your bank account. Money is rather a means to an end, and reaching financial independence isn’t about your riches so much as your comfort and ability to enjoy your life.

For instance, I’ve encountered individuals who consistently spent too much, believing that the latest car, fashion or technology would make them feel better – much like emotional overeaters. And yet it was only through discussing and understanding what happiness meant to them, redefining their financial goals, creating a monthly budget and working towards (and eventually achieving) financial independence, that they achieved true happiness.

On the other side of the coin, I’ve also met individuals who had more than enough funds to sustain themselves and their families, but were trapped in the cycle of wanting more and more without being able to reap the benefits of the wealth that they had built. These situations have often been resolved through mitigating their fears that they may run out of money, and helping them instead find enjoyment in their wealth and give purpose to their money, such as through charitable donations.

All this is not the work of a day, however, it requires continuous mentoring and guidance to stay on track and maintain the right mindset. One of the key roles of a professional financial advisor is therefore not only to help clients define their goals and create a detailed roadmap for reaching it, but also to offer consistent advice and guidance, walking their financial journeys with them.

Creating your financial roadmap

As mentioned above, once the discussions around your individual financial goals have been addressed, and with a financial coach in your corner, it is crucial to create a detailed roadmap or deployment plan for achieving financial independence. This document will outline your goals, guide your decision-making and offer a benchmark against which you can consistently measure your progress.

There are essentially four key areas that should be considered as part of this plan, namely:

1.      Lifestyle: This concerns any expenses that are necessary for day-to-day living and maintaining your lifestyle and, once you are independent, you should be able to pay for most – if not all – these expenses in cash. Some of the goals that could fall within this area therefore include repaying your mortgage, paying off your car and freeing yourself from any debt.

2.     Wealth creation: Wealth creation regards any activities used to generate additional income and wealth, such as owning your own business, employment or property rental. As soon as you start earning, you should consult with a professional advisor to discuss your risk appetite and time horizon to invest a portion of these funds and further grow your wealth.

3.     Wealth preservation: While investing for growth is important, it is also vital to manage your risk and protect your capital through diversifying your investments, and allocating funds towards appropriate asset classes. Additionally, preserving your wealth means allocating a portion of your monthly income towards ensuring that there is a safety net in place to support yourself and your family even if the worse occurs – for instance if you should suffer a critical illness, disability or even die.

4.     Other people’s money (OPM): Once you are independent and have enough funds to sustain yourself and perhaps your spouse for your entire lifetime, you may wish to leave additional funds to children, grandchildren, other friends or relatives, or even charity. You will therefore need to consult with fiduciary and tax specialists to ensure that your affairs remain in order, and that your finances are appropriately structured.

With this detailed financial roadmap in place, you will then be able to focus your mind towards reaching your specific targets, as human nature dictates that we need to first set our goals and devise a strategy if we are to accomplish our goals.

Ultimately, a sound financial strategy and the guidance of a professional advisor will then help you to address any of your financial problem areas, and consistently make good decisions regarding spending and saving, ingraining the right behavioural patterns needed to achieve a bright, financially independent future.