First F, Financial Independence – understanding the point of retirement

If you don’t plan for your net income properly, you will continuously be in debt. This will make you live in worry. You don’t

If you don’t plan for your net income properly, you will continuously be in debt. This will make you live in worry. You don’t need that. Do you?

Graph 1 and 2 below illustrate the point of retirement and poverty point.

In the above Graph 1; unless you are lucky to be born in a wealthy family, your wealth (driven by your earning potential) starts from the bottom (0).  The thick or darker line represents productivity and the lighter one represents wealth.

Your wealth will grow or stagnate depending on your productivity, financial discipline and shrewdness.

Most people start earning at the age of 20 and reach their productivity peak at the age of 45.

After this time, they start losing momentum, energy, as different health challenges take a toll on their work ethic. Beyond this age, productivity starts to decline.

If you solely rely on your capabilities (earning only when you are working), your net worth will fall as you reduce your working hours due to old age.

For that reason, you must start early to save and invest in income-generating assets like stocks or sustainable businesses to ensure steady cash flows past your retirement age.

At your point of Retirement (R), your wealth will decline faster than your productivity unless you have side investments or businesses to hedge you against loss of productivity.

After the retirement point, your wealth will decline further as you will be consuming without any income, or your consumption will be higher than your revenues. This is a very bad state to be in as it leads to the poverty point – the point at which the wealth and productivity lines touch the horizontal line, x.

You must plan for your retirement at an early age by saving and undertaking investments that will enable you to earn than to oscillate around the poverty point and being at the mercy of the state’s social protection program.

If you are lucky to access social protection benefits, your wealth (or poverty) will not slide below the poverty line – the horizontal line x. However, this stipend will just be sufficient to keep you surviving.

Now consider the wealth graph below.

Like me, most people’s wealth starts from zero (they have nothing on their bank accounts). They increase it gradually depending on their areas of expertise, lifestyles, and productivity.

If you cannot earn when you stop going to work, then your revenue is solely based on your level of productivity. It is not a sustainable situation. You must start early to plan on changing the status quo.

If you are a salaried employee in a private or public sector paid every month, your wealth will tend to show a positive growth trend as shown in Graph 2. As your productivity increases, your monthly net pay will tend to be revised upwards, until a time when you are unable to earn more for your labor input.

To avoid sliding into the poverty point, you must save and invest in income-generating assets like stocks, properties in good locations and businesses in high growth areas. That way, your wealth accumulation will not be tied to your productivity alone. Even if you don’t go to work, your investments or properties will bring in revenue. If you invest and establish a sustainable business model, your wealth will continue growing regardless of your age or your state of health.

That is what “earning even while you are asleep” is all about.

For entrepreneurs, the wealth graph may not be as smooth as shown in graph 2 above.

You will experience ups and downs depending on the success of your business. At start-up, the curve may start from negative (indicating borrowed funds injected into the business as startup capital). A series of ups and downs during your business growth may be experienced, which may even out into positive growth over some time or depending on the nature of your business.

High-tech and other companies characterized by high innovation will tend to stabilize within a short period due to their high growth potential. As an entrepreneur, your focus is to achieve high growth and implement strategies to ensure continuous success and sustainability of that growth.

The long-term goal of any business venture is to outlive its founder/s. Local companies like Madhavan, Mukwano or Brookside just like their global counterparts like Microsoft, Apple, and Toyota, among many others, have attained this due to their ability to establish proper business processes, systems, and structures. Such companies also have mechanisms in place to ensure the established structures and systems work as intended in addition to on-going self-review mechanisms for continuous improvements in response to business needs.

In Africa, many businesses collapse on the death or retirement of their founders due to a lack of proper succession planning.

Succession planning is not about identifying and nurturing in-house talent to take over the business leadership par see. That is a narrow view of the strategy. It is about establishing robust systems, processes, and structures and ensuring an effective implementation strategy to enable consistency, suitability, and ease to implement.

You want a system where new hires are easily trained about the company culture and processes in the shortest time possible. The ability to enable easy assimilation of new business partners into the ways of the company is what separates a star company from an average one.

If you notice, in Graph 2, one can retire at the age of 28 or 40 (at the peak of their productivity) because they are not relying on their physical efforts to earn revenue. Once you establish successful businesses or investments with alternative streams of revenue, you won’t have to go to work to earn.

You can retire (from hard labor) any time as your business systems will do the work for you.

That should be the focus for all professionals: save, establish good investments, enable sustainability and step aside.

Stepping aside gives you discretionary time – the ultimate definition of financial independence.

Please note that the definition of wealth is subjective.

It also depends on the cost of living in a given environment. Someone earning US $1,000 monthly revenue living in Kampala (Uganda) could be generally well-off and socially secure than another earning about the US $5,000 monthly revenue in a city like New York (USA) due to sophistication of the society and high cost of living in a developed economy.

As stated in The World Bank, Poverty Analysis Overview, “poverty lines vary in time and place, and each country uses lines which are appropriate to its level of development, societal norms, and values.” I couldn’t agree more.

You don’t have to earn a million dollars a month to be considered wealthy. Your ability to be financially independent by being able to afford your basic needs and wants, and sparing some to help the community is good enough.

To be financially independent, you must:

  1. Have a clear prioritized action plan to save and multiply your savings in profitable ventures and assets
  2. Be a master of your own life. You should write down what it is you want to achieve in line with your guiding values or personal credo. Set your agenda and work consistently towards your target in line with your values.

Don’t neglect to do this:

Write down your ideal business. What is it you will invest in to bring you net income even while you are sleeping? You must undertake such kind of investments if you are to become financially independent and worry-free.

After reading the first F, you must review the Practical Exercise 1 below about setting personal vision and complete it. Please write your answers down.

To read the complete book, click here >>

To be continued…

Copyright Mustapha B Mugisa, 2020. All rights reserved.

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