A road trip to financial freedom

A roadmap - my 10-step plan to financial freedom

Once you've decided to head off towards your freedom and indepence, your first question is likely: what are the steps towards financial freedom? Every one's route will be different, but those who save and invest their way out of the need to work all use a similar financial freedom roadmap. The route markers below set out my own 10-step plan to financial freedom. Make sure to celebrate each and every milestone of your own journey.

10 Steps to financial freedom

1 Protect your income

I know, insurance is boring, but bear with me. For the first half of your adult life your greatest asset is your ability to earn an income. Without income, there is nothing to save and invest from. It therefore makes sense to make income protection cover your first step towards financial freedom.

2 Maximise your income

I guess this is a milestone that can never be fully reached. So, instead celebrate every time you add a new skill or qualification, expand your network substantially, change to a higher-paying job, or add a side income. Just keep on investing in your ability to earn more income from an ever-expanding skill set.

3 Get rid of ‘bad’ debt

Examples of bad debt are store cards, loan shark loans, and credit card debt. Even car finance. Anything that charges interest at a higher rate than a home loan. To free up the cash to start chipping away at your debt, you would probably need to make a few changes to get to the point where you live well below your means. Even if you have to moonlight to do it, just ban bad debt from your life for good. This is how I live below my means and stay out of debt.

4 Set up an emergency fund

As soon as your bad debt is paid off, you need to start working on an emergency fund - the first and most vital piece of your portfolio. This is where you build some security in case you lose your job or a big unexpected bill comes your way. Make it a priority to save up at least three months' expenses in a high interest earning money market or bank account. Here are some ideas on where to find the best interest rate.

5 Become debt-free

As opposed to bad debt, student and home loans are OK for a few years of your life, because they finance an asset - either your home (so you can look forward to living rent-free one day) or an education (that allows you to earn an income). Still, get rid of even these loans as soon as you can. You’re making your bank rich.

6 Save tax-free

Once your emergency fund is fully funded, you can become a 'serious' long-term investor and start to save tax free, which is available to all SA residents. Currently the law allows you to save R36 000 per tax year into a tax-free savings account. Make it your goal to max out this amount every year. Don't withdraw money from your tax-free account as you will lose part of your lifetime allowance of R500 000. (This product is not for saving for a short-term goal like a new car or an upcoming holiday. It's part of your FIRE - financial independence, retire early - pot.)

7 Use the retirement tax break

Somewhere along your journey of constantly cutting costs while increasing your income you'll reach the point where you have more than R36 000 per year to invest. That becomes the moment to set your next ambitious savings goal: alongside the R36 000 towards your tax-free account, also save up to 27.5% of your income into tax-efficient retirement products every year.

8 Sort out your older self

Make sure that when you’re 70 you never ever HAVE to work again. You don't know what your health and energy levels will be like by then. Reaching this milestone - called coast FI in the FIRE community - doesn't mean that you can stop working now; only that you no longer need to save towards retirement. It means that you have enough in the savings 'pot' so that the pot - if left untouched to grow at more than inflation - will provide amply for your 70-year old self and beyond. Your younger self needs to continue working to provide in your immediate needs from now to age 70.

9 Reduce your working days

There are many definitions of financial freedom. The most common one is: only doing the work you want to do, when you want to do it. Your financial freedom savings pot may not be enough to quit what you're doing, but maybe you feel it's grown enough that you can start working less and still stay on track with your financial goals. Maybe you want to start working only 4 days a week and march to your own work-rest, do-be-do beat the rest of the week. Or maybe you want to take a sabbatical. If you are in the financial position to do so, that counts as another milestone towards financial freedom.

9a Start a business for passive income

I call this milestone 9a because it's entirely optional. You don't need to start your own business to become financially free. There are two ways to set up passive income for yourself: 1) saving and investing, and 2) having your own business. You can use either or both to attain financial freedom, as long as your business allows you to focus on that which you really want to do with your life.

10 Work becomes optional

Listen to this audio clip to find out how much you need to be financially free.

How much do you need to save up? That depends on how much you would need per year. Click the button below that's closest to your annual expenses.

Your magic number:

My financial freedom tracker

Where am I on this journey? I started investing and (slowly) getting my act together at age 31 and only very recently made it to milestone 9. I'm aiming for financial freedom before age 52 and have saved up 75% of the amount that I would have needed to stop working at the end of 2020. In other words, I'm three-quarters towards the financial freedom goalpost.

Amount I would need to stop working now:

Rx million

% of this saved up in June 2019:

52%

% of this saved up in December 2019:

57%

% of this saved up in December 2020:

75%

Amount I would need to stop working now:

Rx million

% saved up December 2019:

57%

% saved up December 2020:

75%