Achieving Financial Independence

By Evarist Shirima

Achieving financial independence is unrealized goal for many individuals.  Financial independence is an accomplishment of a specific level of financial worth that can free an individual from fear of poverty and failure. Hence, it helps to build a stronghold of safety. This is a subjective state that is ideal for responsible adult life.  Being financial independent requires attention. It gravitates toward people who respect and value their finances and are capable of doing worthwhile things with their financial resources. Financial resource depletes from people who do not understand or take proper care of their finances.

Irresponsible management of finances can lead to retirement poverty. Its pity when people retire poor at the end of their working lives. Parkinson’s Law can help us understand why people end up poor during their retirement. The Law says that as people make more money, their spending habits also increase. Thus, the tendency of increasing spending when income increases deprives people from saving and investing for their retirement life consequently trapping many people into retirement poverty and dependence on their families and state. In addition, the tendency of increasing spending when income increases leads individual to consume what they do not need and can sometimes lead to debt traps and financial frustration.

Accordingly, to escape poverty and financial frustration one must violate Parkinson’s Law by being conscious, deliberate and regular in spending less than earning. It can be achieved by maintaining a lower rate of growth in expenses compared to earnings. This will provide enough funds to save and invest for future. Investing on the difference, will create the potential of independence as the interests on savings and returns on investment will compound over time. The savings can provide a buffer and peace in times of trouble and uncertainty.

To understand this, consider the following example. Juma is 30 years old and he earns $1000 dollars, if he spends what he earns by the time he is retiring at 60 years old he will have no any retirement saving. However, if Juma spend 90% of his earning and save the rest 10%, that is $100 dollars with an interest of 5%. Juma will contribute $36000 but will have $84,000 on his retirement fund. This suggests that Juma can spend $700 every month for 10 years without working, or he can spend £350 every month for 20 years after retiring. This means that if Juma decided to decrease his spending to 80% he will save $200. That means Juma will contribute $72,000 but will have $168000 on his retirement fund. Thus, Juma can spend $700 every month for 20 years during his retirement. This is a little bit less than what he spent during his working life. Therefore, prudent spending leads to financial independence and easing during lifetime. It ensures continuity in ability of spending. It also helps in transfer of wealth to other generation as it reduces chances of dependence during retirement and if life cuts short too early one can still provide for their loved one. A way of achieving such stability in life is by getting life insurance and or interest saving accounts.