Here's How You Can Attain The Financial Independence You Want For Yourself
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Is your morning latte costing you your retirement?
I often ask my clients what their worst fear is: the one response that always tops the list is fear of financial insecurity. That fear is even more prominent amongst those who have left the corporate world, and ventured out to starting their own businesses.
Going from having a regular paycheck to the uncertainty of the entrepreneurial cash flow is a challenge that can rattle even the most seasoned and composed professionals.
Most times than not however, even those with the most solid plan make a crucial mistake when it comes down to planning their financial future: they underestimate the incredible power of compounding.
So, what is compounding?
It’s the amazing thing that happens to your bank account when you save (or spend) a little bit and often. Let me give you an example.
If you are one of these people who are used to grab a latte on your way to work every morning, then probably you are spending about US$3 per day on your caffeine habit. Not a big amount on the grander scheme of things.
Over a 20-year period though, you will have paid out $21,888 on coffee!
Now, if you assume that you saved your $3 per day, and instead invested it at a return of 5% a year, you could have earned $15,598 in interest. This would bring the real price tag of your morning coffee to a staggering $37,486!
This is the incredible power of compounding. It’s not only about the cash you are handing out in morning coffees over 20 years, but more importantly, about the $16k you have forfeited for the pleasure of your morning drink. Add to this other small spending habits that you may have.
A $50 business subscription that you barely use, can set you back $20k over 20 years, and if you are having a daily lunch for an average of $20 per day, you’re looking at $257k over 20 years! That’s a down payment for a house, or for some people, a payment for a whole house!
The moral of the story is clear.
To gain financial independence, you don’t have to earn a huge amount of money. As most successful investors know, it’s not about how much you earn, but about how much you keep. After all, that is why Starbucks is rich, and you are not!
So, if compounding is so amazing, how many people out there take advantage of it? Well, here is some shocking news.
A study published in March 2017, revealed that nearly 7 out of 10 people in the GCC countries do not have any form of guaranteed savings. The study found that the Gulf has the highest number of residents in the world that do not have any form of retirement funds. In fact, 64% of Gulf expats have no savings for the future.
At the same time, in the US, 69% of Americans have less than $1,000 in their savings accounts. Even more important than that, 34% of Americans have no savings at all, and half of US families have zero retirement account savings.
Now this is quite contradicting: if so many of us want financial independence, why is that so few of us do something about it?
The first reason is psychological.
Thinking about financial security or lack thereof, causes your nervous system to experience symptoms of anxiety; the thought of potentially not having enough to get by is quite stressful. So naturally, and quite understandably, most people will try to avoid any situations that will elicit such feelings of anxiety- who likes to feel stressed, after all!
What this avoidance does however is preventing your nervous system from “getting used to” these feelings. In other words, avoiding dealing with a situation means that the subject of your fear will remain novel; you will not get used to it, and as a result, will continue provoking feelings of anxiety. When it comes down to overcoming fear, the only way is through, not around it.
The second reason we fail to address financial security is complacency and a false level of security. Many people rely on the social security system to supplement their retirement with a pension paid out on their 65th year.
But let’s take a moment, and break down the social security myth, and explore how realistic it is that at the 65th year of age, you can get a pension that will provide a comfortable lifestyle.
Do you remember your history lesson?
In the West, social security was invented during the Great Depression, at a time when there was no social safety for old or sick people. At the time, the average life expectancy was 62 years of age, and the pension benefit was meant to kick in at 65 years, which meant that not everyone was to collect the benefits, and certainly not for a long period of time.
Fast forward to today: the life expectancy today is 78.8 years, and there is a 50% chance that among married couples at least one spouse will live to the age of 92. This is an incredible number! That’s 20+ years of retirement, and that’s only an average!
So, if you do rely on a pension fund, whether private or state funded, ask yourself, how realistic it is that you will finance more than 20 years of retirement with 30 years of work?
With the baby boomers coming into retirement, a study from E&Y has shown that 75% of Americans will see their assets disappear before they die.
If you have been counting on a retirement plan and the subsidies of a social security for a comfortable retirement, then I have news for you: unless you create alternative sources of income and take advantage of the miraculous compounding, you will end up the best-dressed greeter at Wal-Mart.
When it comes to difficult decisions, especially financial problems, many of us find them so overwhelming that we prefer to block them out and hope that the problem will go away in the meantime. And especially when it comes down to retirement, it feels so far away, and hopefully in the meantime, your earning power will change; if you work harder, a bit longer you will get your business to take off and earn more, and that will hopefully put you on track to achieve your financial dreams.
But let me reiterate the message for one more time: the only way to attain the financial independence you are after is to spend less than you earn, and to save the difference. The rich are not rich because they earn a lot of money; the rich are rich because they saved a lot of money.
Get yourself in the habit of reviewing your habits and critically analyzing them, and ask yourself: “Is your morning latte costing you your comfortable retirement?”
Related: Managing Your Personal Finances