When the money you have saved from your salary, business or
other source can generate an income that meets all your needs
for the present and future you can safely say you have achieved
financial independence. It means you will never have to worry
where your next meal is coming from. If you live to a ripe
old age you will have ample resources to pay for the best
medical attention and long term care. How much should it take
to achieve this? Much depends on your lifestyle but the figure
for most in today’s money would be somewhere between
half a million and a million US Dollars. Such an amount, if
properly invested (and that is another important story!) should
generate an income sufficient to live comfortably without
dipping into capital until inflation starts to bite. This
also means that the figure will need to be larger the younger
you are.
How do you start to climb the ladder?
The answer may seem obvious – from the bottom! Yet many
people try to get to the top too quickly and as a result never
get past the first rung or two on the ladder. In terms of
financial planning I would see the steps on the ladder as
follows:
Step 1 – Building up a cash reserve
Without a secure cash base, trying to advance to a higher
level can be very risky. For example, you may be concerned
about not having a pension plan and launch into a long term
commitment based on what you think you can save. Then something
goes wrong, as has often been the case for those whose income
is linked to the fortunes of the tourist industry in Bali.
Your income suddenly stops or reduces and you cannot maintain
contributions to your pension plan. As a result you risk losing
some or all of the contributions you have made to date. If
you had built up a reserve however, this could keep the plan
going until better times arrive. The best place for expats
to build up this reserve is usually an offshore bank account.
The minimum to get on the first rung of the ladder? I would
say US$5,000. But you must keep building on this, even as
you climb the ladder.
Step 2 – Protection
Before progressing further up the ladder it is important to
ensure you and your family are protected against life’s
uncertainties. Medical insurance is a priority, particularly
if you live in Bali. Then, if you have dependents but limited
assets you must have life cover. If you are fairly young,
pure life cover can be relatively inexpensive. If it is just
yourself you need to protect then some form of income protection
or critical illness insurance should be put in place.
Step 3 – Savings and retirement plans
Once you have ample cash in the bank and protection in place
and provided that you can anticipate a steady income over
the coming years you can start a regular, disciplined savings
or retirement plan. At this stage it is important to get a
single plan up and running but as time goes on you should
have several plans running simultaneously. The plans should
mature at different times according to different lifetime
needs, perhaps the most important of which is retirement.
Step 4 – Lump sum investments
As your cash reserves grow, or perhaps as your first savings
plan matures, you should be able to move into a lump sum investment.
This will give you access to a wider range of assets and funds
than a regular plan. An initial portfolio could be invested
in a diverse basket of stocks, bonds, hedge funds and commercial
property funds.
Step 5 – The larger portfolio
This is really an extension of Step 4. But as your ability
to invest grows you can expand into an even wider range of
assets such as commodities, including gold, precious metals
and energy, land banking, property development funds, leveraged
funds and many more. Most of these can be embodied in a single
portfolio bond so you do not need to get buried in paperwork.
Step 6 – Financial independence – you have made
it!
When the wealth you have accumulated reaches the desired target
you need worry no more. You can tell your boss you will not
be coming into work tomorrow – or ever again! But you
do need to ensure your hard-earned savings are well managed.
You must have a diverse and well-balanced portfolio so that
when one asset falls in value – as all assets do at
some time – it is counterbalanced by other assets that
do not fall at the same time.
Are there other ways of reaching the top of the ladder?
Indeed there are, and many people have made it to the top
without relying on the financial markets. Bill Gates is a
good example, but the stark reality is that the majority of
small businesses fail or do not generate the kind of wealth
that can lead to prosperity and independence. There are other
quick ways to the top of course. A lottery ticket could make
you a millionaire overnight. But if you spend all your savings
on lottery tickets the chances are you will never get beyond
that first rung on the ladder, let alone make it to the top!
Colin Bloodworth is a senior adviser with Financial Partners
International. The opinions expressed are his own. If you
have any questions relating to personal finance you may contact
him at 021 520 8099 or colin.bloodworth@financial-partners.biz
