How financially free are you?

By Judith Mukiri Mwobobia

Reality is, while someone might be struggling to put food on the table, there is another worrying about their retirement plan, while yet another one is wondering about which luxury car to purchase.

To have financial success it is important to understand the different levels of financial freedom and the strategies you can employ to move from one stage to the next. But for each level you achieve, money-related stress will decrease and you will have more options on things like where to live, which car you drive, and how much you work.

Here are the different levels of financial freedom and some strategies to help in your upward mobility:

1. Living pay check to pay check In this level, you don’t have enough money or investments to live comfortably for a year if you suddenly lost your main source of income. This can mean that your expenses are higher than your income or you are in a constant loop of debt and repayment. This stage can feel like modern slavery, because you’re only one disaster away from poverty.  

Strategy to next level: At this level, creating an emergency fund for unexpected expenses is paramount. Apart from that, you should aim to save at least 15 per cent of your income every month. Keep a check on your regular expenses and cut out anything which is unnecessary to boost your savings. It’s advisable to always stock up three months-worth of  non-perishable food stuffs and other household goods, which will save you from worrying in case you have unexpected expenses or you lose your job.

2. You can briefly quit working Ultimately, financial freedom should be about not having to work for a living. At this level, you can afford to quit your job for a while if you needed to...not that you should.

You can channel the extra cash into your emergency fund, into investments, or your retirement plan. Strategy you need: You should aim to create multiple passive streams of income and curb the “lifestyle creep”- a phenomenon where you start viewing luxuries as necessities because of your income level.
3. Freedom of time Time is the most valuable resource for anyone. At this level, you have more say over how you use your time. You can pursue passions, spend more time with family, go on vacations without going broke. You are so financially secure that you could survive comfortably without an active income for up to seven years.

Both your main and passive incomes surpass your expenses and you have sufficient savings to cover any unforeseen expenses. Strategy: Focus on cushioning yourself in case of emergencies by investing in things like really good health and life insurance plans, learn smarter ways to invest and diversify your investment classes, and review your long term financial goals.

4. Enough for basic retirement If your dream is to retire early and live frugally, you can afford to do so at this stage. Your passive incomes are paying off well and you can live off them comfortably. You also have a handsome retirement nest egg. If you hate your job, you now have enough money to quit and pursue a passion without having to worry about money.

However, reaching this level doesn’t mean that you should retire- but it’s reassuring to know that you can. Strategy: Continue saving up for retirement and diversifying your investments. Make efforts to strengthen your passive sources of income so they can be almost like active ones. Focus on nonfinancial goals which give you fulfilment such as philanthropy, spending time with your loved ones, and taking care of your health.

5. You can retire into luxury This is the level that everybody dreams about but only few achieve. You have accumulated assets, passive sources of income, and savings which can allow you to retire and continue living luxuriously for the rest of your life. You can travel the world flying first class and staying in five-star hotels.

You’re so financially secure that you know that almost nothing can wipe out your fortune. At the highest level of financial freedom, you have more than you can spend in your lifetime and enough for your children to inherit. Obviously you don’t need to work at all, unless you want to just keep yourself busy.  

Strategy: You can use your abundant wealth to set a strong foundation for future generations- not only for your descendants but also for the community. Invest in your health by eating healthily, exercising, going for checkups and taking out the best medical cover possible- health is the best and most precious form of wealth.

Your business is now at a level where you can opt for ventures and mergers with other business groups. Like billionaires Bill Gates and Warren Buffet, you might also want to consider making plans to give away a vast majority of your wealth when you die.
Article was first published in the Sunday Magazine