Wouldn’t it be great if you can wake up every morning and have the freedom to choose how to spend the day? Free to do the things you love, free to travel, free to pursue your hobbies, free to spend time with the people you love. Well, financial independence could give you this freedom!
At some point in your life, work can become monotonous if you only focus on earning money to pay rent, put food on the table and basically survive. Some of you are spending your time working in jobs that do not satisfy you in order to earn money to buy stuff that does not fulfil your needs. You are simply trading your time for money. Maybe you love your job but still feel tied down and you would like greater freedom and independence or simply having options to do other things.
According to a Harvard study, most people know what would bring them happiness but not everyone is focused on achieving that happiness. People would accept jobs that didn’t bring them joy at the moment but gave them the finances to create memories later.
What if you can increase your finances without having to work longer hours or waiting for your big break? This would certainly buy you some financial independence to improve the quality of your life and have the time to do things that make you truly happy.
What is financial security?
Financial security refers to the peaceful state of mind when you are not concerned about whether your income is enough to cover your expenses. It also means that you have adequate savings for emergencies and are able to pursue your long-term objectives. Your stress level decreases when you are financially secure, leaving you with a free sense of well-being. It simply gives you the freedom to live the life you desire.
Most of us, however, would reach this when we retire with a good pension in our sixties. However, this is provided we contribute long enough (at least 25 to 30 years) to the UN pension system. But imagine if you can achieve this independence in a quicker way and not have to wait decades for it? Please read on.
How do you start your journey to financial independence?
1. Find out how much you need to live on
This is an important step – a must-do!
What is your total monthly living expenses (e.g. housing, food and grocery, transportation, utility, healthcare, clothing, travel)? If you do not track your expenses, a simple tip is to look into your bank statement for a given month and total up what goes out of your bank account.
With this figure, you will know what your savings rate is and how much you need to save to reach your financial goals.
There is the much-talked-about 4% rule of thumb (which I will write about in a future post) which states that you can safely withdraw 4% of the initial value of your financial investment portfolio each year with very little risk of running out of money(!).
Let’s say, your total expense is CHF5,000 per month then, in theory, you would need at least CHF1.5 million (total annual expense / 4%) to be financially independent.
2. Live below your means
This requires commitment. Adjust your spending and try to live below your means. You do not need to buy things to impress people. Countless studies have shown that buying material things do not make you any happier in the long term as things fade over time and there is always something new right around the corner.
As Henry David Thoreau once said, “The price of anything is the amount of life you exchange for it.”
Instead of buying things you do not need with the hours of your life, live below your means and invest the money saved. Spend more on experiences (e.g. travel, adventure) and on things that would save you time (e.g. staying closer to your workplace to reduce commute) and on those whom you love.
3. Create an emergency fund
Do you have enough cash to cover your living expenses if you do not have a job for the next 6 months? If not, start saving for an emergency fund! This is necessary and your priority.
One of the best places to save for an emergency fund in CHF is in La Mutuelle which is available to working international civil servants. It gives around 1.35% per annum (2021) on CHF which is relatively high. The only caveat is that you can only put in up to CHF2000 per month.
Once you have your fund saved up, you may sleep better, feel happier at work, and even be more willing to accept a new opportunity. The next step is to start investing what you have beyond your emergency fund.
4. Invest as early as possible!
“If you keep your life savings in your back pocket or under a mattress, instead of investing, the money doesn’t work for you and you’ll never have more than what you save or receive through inheritance. Conversely, investors generate money by earning interest on what they set aside or by buying assets that increase in value.” (Investopedia)
As an international civil servant, one of the best and simplest places to invest is in the stock market. It is not by coincidence that the UN pension fund is heavily invested in the stock market. Over the past 50 years, the UN pension fund has had an annual return of 8.7% (2021) and they invest almost 60% in stocks.
Unlike investing in a property, the stock market is highly liquid and you can stay invested even if you move away. Furthermore, as a private investor, there is no capital gains tax (or the tax imposed on the profit made from the sale of your stocks) in Switzerland.
Two of the most common questions are:
There are thousands of companies, which stock should I invest in?
Your investment portfolio need not be complicated. The simpler it is the better and the most likely you would succeed. Invest in a low-cost global index fund or ETFs (Exchange Traded Funds) which contains thousands of companies in it.
What if the stock market crashes?
Invest as early as possible and do not wait for the next stock market crash to invest. Invest the same amount every month regardless of how the stock market is doing. Consistency is the key.
The best time to invest was yesterday, the second-best time is today.
This is called dollar-cost averaging (DCA) and it is a common investment strategy that is a better alternative than trying to time the market. With DCA, you are investing the same amount of money regardless of market conditions. As a result, you do not need to worry about finding the perfect moment to invest.
Don’t worry the Money Monkey will help guide you through this jungle!
5. Invest in yourself
Besides money-generating assets like stocks, bonds, property and now cryptocurrencies, the number 1 place to invest is in yourself.
What do I mean by this? Focus on updating your existing skills especially the ones that come with experience rather than through a course that anyone can do. If you have skills that you can do better than anyone else, then you are valuable to the organization.
Then acquire new skills that in combination with your existing ones are rare. And if your rare combination of skills can solve other people’s problems, then you are absolutely priceless.
So, instead of buying stuff you do not need, invest the time and money saved on yourself.
6. Choose 5 people closest to you carefully
The highly-respected author, motivational speaker, and entrepreneur Jim Rohn once famously said,
“You are the average of the five people you spend the most time with“
This refers to research that shows that our lives are greatly influenced by our 5 closest relationships. So, they affect our thinking, attitude, behaviour and especially the way we spend and save our money. Associating yourself with people who you consider to be successful, supportive, positive and non-toxic is a huge part of setting yourself up for success.
The Money Monkey is here to accompany you on your journey to manage, save and invest better for your own financial security or independence.
If you have started your financial independence journey, what tips do you have? If you have not started, what is holding you back? Leave your comments below and don’t forget to subscribe!