HomeOpinionWhat is financial freedom?

What is financial freedom?

Nigel Chimhofu auditor
The definition of financial freedom differs from one person to the next. I define it as having the means to meet all my financial obligations as they fall due and having excess to cover unplanned financial emergencies.

To me, it means still being able to maintain my standard of living in the event of job loss or being able to choose to voluntarily leave my employment to follow my passions. For some, financial freedom means the ability to retire early or being able to take that family trip abroad without going into a financial frenzy. It is all about that peace of mind when dealing with financial matters.

It is also important to note that the financial concerns of a person living in a developed country are different from the ones of a man living in a developing country. A developing country is characterised by both high levels of unemployment and a high rate of inflation.

This means that despite being employed, there is the concern of a low purchasing power of your salary after the effects of inflation. Increasing levels of inflation if not proportionate to salary increments result in the lowering of your standard of living. This means that a person may not earn money that is sufficient to sustain himself and his family.

This inhibits saving and makes investing unfeasible. The journey to financial freedom for a person living in a developing country becomes almost impossible. Whilst a person in a developed country concentrates on how to invest their savings, the majority of the population in a developing country are concerned on how to provide the next meal for their families.

In continuing with the discussion on financial freedom, we must appreciate that the environment that one stays in has an influence on their view of financial freedom and thus ways of achieving financial freedom should be tailored to the environment a person stays in.

Per the survey we conducted, we noted that people view financial freedom differently, where 75,6% of the people all agree that financial freedom means having enough to spend and still save. This perceives that there are two key words in financial freedom, being SPEND and SAVE. Hence, to attain financial freedom, there must be key lessons on how to spend, and how to develop a saving culture.

Most people highlighted that not living from paycheck to paycheck and being debt-free is financial freedom. A debt-free person is free from anxiety, free to choose how to spend his money and can increase his marginal propensity to save. However, it is of importance to note that there are good debts and bad debts.

Good debt is the debt that one incurs and is deployed in productive investments that yield income streams for self-financing and growing personal income. The writer discourages any form of debt that does not enhance capacity to earn more in the future; such debt will only enslave you. The important condition of debt is it must be used to finance productive investments. We should never borrow to consume.

Threats to financial freedom
External factors refer to inconsistent monetary and fiscal policies by the government, high levels of inflation, and lack of employment. In Zimbabwe, the government is the largest employer. As the nation’s largest employer, the government must model effective economic policies that provide opportunities for any average Zimbabwean.

The current economic status of Zimbabwe is a good illustration of why it is important to address the issue of financial freedom, or simply, have a positive discussion about money aside from the common grumbles and fracases we associate with money talks. Living in a country penned by continuous currency shifts, as well as rising levels of inflation, it becomes a necessity to not only rely on your salary to meet your needs but to also find ways to cushion yourself so that you can live a comfortable life now as well as after retirement.

Per the survey we performed, we noted that most people believed that external factors were the biggest threat to financial freedom. We did not see this as a way of blame-shifting, but rather accepting that the government, which is the main responsible party to the economic environment, has a greater task of improving its economic policies to empower any average citizen to own his or her economic life.

Below, we delve into some of the effects of the external environment on the average Zimbabwean:

Unemployment
The high unemployment rate in Zimbabwe has some detrimental effects on the financial well being of Zimbabwean citizens. The impact of this is destructive in the present and future of a person. The future danger being created by unemployment in our society is detrimental and shocking at the same time. Here is why:

The lag time to get a job means that the time a person contributes to the Nssa pension fund is short, meaning when the same population gets older, they will not have contributed enough to sustain themselves.

Most young people are not formally employed and are thus not contributing anything to the social security fund meaning that by the time they reach retirement age, they would not have invested enough to be sufficiently taken care of by the Nssa pension. This could translate into an ongoing cycle of financial slavery and an upsurge in the already high dependency ratio.

Formal sector employment is uncommon in most African countries; only in South Africa does it account for most jobs. In Zimbabwe, most of the population is employed in the informal sector. Much informal employment is precarious and unprotected.

Labour regulations often fail to improve the lot of the average worker, and although most African countries have ratified the international labour standard conventions, their impacts are muted because they apply only to the limited formal sector.

The informal sector does not contribute anything to Nssa, this means that the largest working population in Zimbabwe is not preparing for the future in terms of having pension earnings that will sustain one when retired.

The biggest question becomes, who will take financial responsibility for this demographic when it reaches the age of retirement?

Some may argue that some of the people employed in the informal sector would have made investments sufficient to sustain them in the future. This may only apply to a few as most of them are struggling to earn enough to meet their needs currently, let alone have extra money to invest for the future.

For those that were formally employed, the pension benefits they are getting are still not enough to maintain their standards of living before retirement. According to a survey carried out by Mywage.org across sectors in Zimbabwe, it was revealed that monthly pensions range from the RTGS equivalent of US$10-US$100. It is unfortunate that most people realise the importance of financial freedom and being in control of their finances after retiring.

Working Poverty
The quality of employment is often poor, especially for the majority of Zimbabweans, and this increases the rate of working poverty. Working poverty is a state where a person is employed, however, his/her state of employment is not bettering his state of life.

While he is employed, he still cannot afford a comfortable life. Working poverty has been a growing concern in the country. It has been further worsened by the economic difficulties being faced in the country.

An example is that of Mr X who is employed in the public sector and earns an average of ZWL35 000. He has a wife, two kids and he is living a basic life. We deliberately used an employee who is in the public sector because the earnings of people employed by the government reflect the country’s economic status and furthermore the government employs the greater part of the population.

The dream of financial freedom for Mr X is a farfetched one. His main concern is providing the basic needs of his family. Sadly, Mr X’s experience has become the reality for most Zimbabweans, who are living in financial slavery while they are employed. Their state of employment has failed to provide financial freedom for them. If such is happening while a tree is green, what will happen when it is dry?

Money illusion
This refers to the failure to distinguish money framed as nominal from money framed as real that is after inflation. For example, a 100% increase in your salary, say from ZWL5 000 to ZWL10 000 would be a 150% decrease in real annual salary when the annual inflation is 250%. Hence at the end of the day, the earnings of individuals in an inflationary environment do not reflect real growth, as the purchasing power is depleted yearly. In such an environment, you will discover that all year round, your purchasing power has been depleting despite a supposed salary increase that does not match the rise in inflation.

 Internal threats
To put all the blame on the government and other external factors regarding our financial misery, would not be appropriate. There are countries where the economic environment is favourable, and yet we have people in that same country suffering from financial misery.

Most respondents agreed that lack of financial discipline is the number one threat to financial freedom. Discipline is in two forms. There is external discipline and internal discipline. Let me explain this by way of illustration. When you have a child at home, you tell them what to do, what not to eat, what not to touch. However, when they grow up, they will start to make the same decisions on their own without any external influence.

When they are a child, they need someone to guide them on what is good and bad because they have not developed an internal stimulus to know what is wrong and how to restrain it. However, a clear indication that one has matured is when he starts to decide on his own regarding what is good and what is bad. Having that internal discipline reviews the maturity level of any individual.

The same applies to monetary issues. If you spend unnecessarily or carry out a lot of impulse buying only because you do not have money, you are still relying on an external form of discipline. The internal form of discipline entails that you have money in your bank account, but you still do not buy an item because it is not on your budget, or you are eligible for a bank loan, but you do not apply for it because you do not have a productive use for it.

You can thus determine your needs and your wants. Most people are in financial slavery because they lacked financial discipline at some point in life. By either spending unnecessarily instead of saving or borrowing to meet wants and not needs.

Conclusion
Achieving financial freedom is a goal yet to be attained by many people. Unfortunately, most people are still in financial slavery, burdened with increasing debt, national problems and lack of motivation to free themselves. A good scenario to help stress why this conversation is of utter significance is to imagine yourself years from today, having reached retirement age and not having changed a single of your current money habits. If that future looks bleak, and all you have to rely on to fend for yourself is your pension, then it is not too late to turn your financial life around. The question becomes, “How do I achieve financial freedom?”

Note to the reader — We conducted a survey where we asked people six questions pertaining to financial freedom. 170 people managed to respond. We have shared the first sections of the responses in this article, the last parts will be shared in our next article on financial freedom.

Chimhofu is an auditor at Deloitte and Touché. Website: www.nigelalbert.co.zw.

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