OPINION | How much must you save to reach financial freedom?

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How much do you need to have saved or invested to win back control of your time and live life on your own terms? Jikku Joseph does the maths. 

I am a husband and a father. Taking control of our family’s future is hugely important to me. 

We are in the middle of a global pandemic and almost yearlong lockdown. I, like millions of South Africans, fear for what lies ahead. In the last year we have all gone through the longest recession in almost three decades. It is no exaggeration to say that the outlook of our economy is bleak with South Africa’s GDP per capita in recession for the past five years. 

Money lies at the heart of this feeling. These are tough times and many of us are struggling just to get by. We have lost jobs or accepted salary-cuts to stay employed.

But now is not the time to lose control. Your future, to some extent at least, is in your hands: whether you are unemployed, a recent graduate, a mid-level employee, a seasoned professional or a retiree, you can take action to protect your financial destiny. 

How much is enough?

The most valuable thing you will ever own in your lifetime is intangible: it’s your time. And there's an interesting relationship between money and time. It's often said that time is money. But you also win back your time when you have the power to decide what you do with it - and that means having enough money to make that choice.

This concept of financial freedom can seem a long way away. The FIRE movement (Financial Independence Retire Early) became particularly popular among millennials in the 2010s. Those seeking to achieve financial independence maximise their savings by finding ways to increase income and decrease expenses. A key part of the FIRE movement is the use of a formula that simplifies the “How much is enough?” question.

How much do I need to have saved or invested to win back control of my time and live life on my terms? Different people quote different numbers – some say 240 x monthly expenses but most quote 300 x monthly expenses. It’s really just about having a target.

What I love about comparing one’s investments to the 300 x monthly expenses formula is that it highlights the two things you have control over: 1) how much are you saving or investing? and 2) how much is your (monthly) cost of living?

If you realise that you have control over both these levers, you can get to the  outcome of 300 x monthly expenses sooner than you think.

So how do you start?

Firstly, you should track your monthly cost of living because what you want is an objective view of where your money is going. There are apps that can help with this - use the tracking to ensure that you spend less than you make. Once you’re spending less than you earn, you want to reduce your cost of living to an acceptable level for you. You can do this by creating a budget and setting up automated alerts. This is not about living on two-minute noodles but rather about paying for what matter most to you each month.

Secondly, you want to use whatever is left of your income to save for emergencies. Financial planners suggest saving at least three months' expenses for emergencies.

Thirdly, aggressively pay down your expensive debt i.e. pay more towards debt that has an interest rate of more than 11% per year. This 11% threshold is because it is exceptionally difficult to earn more than 11% over the long term in an investment. Be wary of anybody who tells you otherwise.

Fourthly, save or invest more towards your “300 x monthly expenses” goal. The more you save, the faster you will get there.

Lastly, if you don’t have enough, seek other ways to make money. Side hustles are more possible than ever with the advent of the internet and lower barriers to entry. But when you do make more, be mindful not to increase your cost of living. Otherwise, you are back to the start.

We can’t rely on others to help us solve the problem. We need to take ownership and responsibility of our futures today and take steps to save our future and win back our time. We can do this by tracking what we spend, spending less than we make and saving that little bit of extra money for unforeseen emergencies and financial freedom.

The pandemic and lockdown we are living through is unprecedented. Saving has become more urgent and the need to take control of our futures has become more imminent. The future of the pandemic is unknown. But how you react today and over time is determined by you. 

Choose belief over fear. Seek knowing over not knowing. You can save your future. 

Jikku Joseph is Managing Director at 22Seven. Views expressed are his own. 

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