Financial independence is the ultimate goal for most of us. This is the stage when your investment income is sufficient to fund your current standard of living for the rest of your life. You can afford the basics, and you can afford some comforts too. You are not beholden to a job to provide for your livelihood. Instead, your wealth supports your lifestyle
How can this be achieved? Firstly a target financial independence sum has to be ascertained. The target retirement age to achieve financial independence will also need to be set, followed by the amount estimated which you need postretirement, in order to fund your required monthly expenses and lifestyle until your end-of-life expectancy.
Some advisors advocate starting with the 25 Multiplier Rule, which is an estimate target of 25 times your annual living expenses and financial commitments. This will be the target financial independence sum to have, at the target age of retirement say, at 55 years of age.
Next, you need to take into account the expenses required for another 21 years of living thereafter, since the average life expectancy for Malaysia in 2024 is 76.79 years old (Malaysia Life Expectancy 1950-2024 | MacroTrends). How do you estimate your needs postfinancial independence? You could apply the 4% Rule. This concept caps your withdrawal to 4% of your retirement portfolio per year (adjusted for inflation) without running out of money for the next 21 years of your life. According to data from the International Monetary Fund, World Bank and OECD Inflation CPI indicator (published in www.worlddata.info), during the observation period from 1960 to 2022, the average inflation rate for Malaysia was 3% per year. This factor must be considered when planning for the sum needed for financial independence, as the purchasing power of your money will shrink in the future, dependent on the inflation rate.
Financial Independence is a worthy goal, and achieving it involves a combination of smart financial practices and discipline.
Here are some steps to help you on your journey:-
• Set Life Goals:
• Be specific about what financial freedom means to you. Define the lifestyle you desire, the amount you need in your bank account, and the deadline to save that amount.
• Create a goal sheet with amounts and deadlines, placing it at the front of your financial binder.
• Make a Monthly Budget:
• A budget ensures that bills are paid and savings stay on track.
• Regularly review your budget to reinforce your goals and resist the temptation to overspend.
• Pay off Credit Cards in Full:
• High-interest consumer loans hinder wealth-building. Aim to pay off credit card balances in full each month.
• Student loans and mortgages typically have lower interest rates, so prioritize them accordingly.
• Create Automatic Savings:
• Set up an emergency fund and contribute to a retirement investment plan.
• Automatic savings make it easier to build wealth over time.
• Take Care of Your Belongings and Health:
• Maintenance is cheaper than replacement. Regularly maintain your possessions.
• Prioritize your health; it’s essential for long-term financial well-being.
Remember, financial independence is about having sufficient income, savings, or investments to live comfortably without relying on a salary. Stay committed to your financial plan, practice frugality, and seek support photo credit debt.org when needed.
