HomeAnalysisWhy it is important to talk of financial freedom

Why it is important to talk of financial freedom

Nigel Chimhofu
The current economic status of Zimbabwe is a good illustration of why it is important to address the issue of financial freedom.

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 are able to live a comfortable life now as well as after retirement.

The current Covid-19 pandemic has altered the way people generate income.

Companies have had to modify the way they operate.

The pandemic has brought about a slowdown of business due to restrictions that have been put in place to curb the virus as well as total shutdowns that have had to be routinely effected.

Some have introduced the concept of working from home to continue with business operations.

In all this, some people have been unfortunate enough to lose their jobs whilst some have had their salaries cut.

Zimbabwe is a country with most of the population employed in the informal sector.

People rely on being able to go out daily to make money.

This has been hindered by the pandemic resulting in no income coming in for some households.

Despite all these challenges, bills still need to be met and the basic needs of a family still need to be taken care of, thus taking us back to why financial freedom is important.

The question becomes, “How do I achieve financial freedom?”

The concept of achieving financial freedom may seem far-fetched considering the fact that some people are living from pay-cheque to pay-cheque, daily sales to the next daily sales or they require the borrowing of additional funds to be able to sustain their families for a given month.

The principle of attaining financial freedom is however not a ludicrous idea.

It requires sacrifice, commitment and above all the courage to take that first step into owning your finances and controlling your money instead of being controlled by your money.

169 people were asked on how they thought financial freedom can be attained.

The graph above summarizes the findings. 61,5% of the respondents believe that financial freedom can be acquired by starting your own business, while 47,9% of the respondents believe that accumulation of assets is a step towards financial freedom.

Continuing through this article and implementing the ideas and strategies that will be explored below is the first step to being in control of your finances.

Goal setting

It is impossible to track your financial progress without having a set of goals to meet.

Your goals should project your desired life.

When setting goals, it is important to ensure that they are “SMART”, meaning, specific, measurable, attainable, realistic and time specific.

An example would be to own a house by the time I am 30.

Here, the specific goal is to own a house.

You can measure your progress for example by buying a stand, purchasing bricks to start building etc.

The goal has to be attainable and realistic so if you know that with your current financial status, it would be virtually impossible to achieve, then start small.

The final step is to ensure that it is time specific, and here, that is by the time I am 30.

All this guarantees that you can tick off the milestones you have realised toward attaining that goal, and there is room to correct yourself and make changes to your lifestyle in order to stay on track to achieving that goal.

List down all the income you receive.

This is easy if you only have one source of income (not recommended), but if you have more than one, ensure to account for everything.

Also list down your usual expenses, no matter how small.

Budget

A budget is of utter importance as it helps you stay accountable.

Create a detailed budget using the above income and expenditure you would have tracked.

A budget is only useful if you stick to it. The goal here is to spend as budgeted or better yet go below budget.

A budget can help you cut out the unnecessary costs in life by living frugally.

This does not mean that you should not enjoy life, but instead of for example buying lunch at work, why not pack lunch from home.

This money may seem insignificant, but it goes a long way towards tackling your debt or it can be saved.

Remember to shy away from impulse buying, and when choosing to purchase luxury items, say that designer bag, if you cannot buy it twice, you cannot afford it, but there is nothing wrong with spoiling yourself occasionally.

Learn to live below your means.

If you provide for your parents or any extended family members financially, it is important to include this in your budget.

You should also have an honest discussion with your family on the amount you are able to contribute towards their welfare.

When budgeting, also remember to take note of the money illusion.

That is, an increase in your nominal annual salary by say 2% may be a 1% decrease in the real annual salary when the annual inflation rate is 3%.

A pay rise does not always mean more disposable income.

Create an emergency fund

An emergency fund consists of money that is put aside to be used in the event of financial distress, for example job loss.

The recommended emergency fund should be able to meet your expenses for three to six months.

This means that you will be able to look for another job or find other ways to generate income whilst your standard of living remains constant.

Your emergency fund should be in a stable currency that is not prone to fluctuations.

There is also a need for a sinking fund which is a great way to pay for future planned expenses.

This works great for lump-sum payments for example, your motor insurance, or that planned family vacation.

Instead of having to take out the money for a particular expense all at once, which will weigh heavily on you financially, it is recommended that when you receive your income, you start putting aside money to pay for the expense when it falls due.

An example is having to pay your car insurance of USD300 in six months’ time.

Instead of forking out the whole USD300 at once when it becomes due, you can put aside USD50 every month or more toward your car insurance.

Tackle your debt

The goal here is to be debt free. Being debt free means having excess income to channel towards your savings.

The most important thing when dealing with debt is to show commitment.

If you are unable to pay off some debts when they are due, request for a more flexible payment plan.

A starting point towards tackling your debt would be to create a list of all your debts from smallest to largest.

If possible, you can pay of your smallest debt at once and then make the minimum payments on your other debts.

You can continue with this cycle, and once a debt is cleared, the minimum payment that went towards it can be used to increase the payment of the next debt due.

All money that is left behind after meeting your financial obligations should go towards savings.

There are many recommended techniques to save, but it will differ on what you can afford.

Some experts recommend the 50-30-20 rule, where you save 20% of your income, whilst some recommend saving 10% of your income.

The most important thing here is just to save something.

Start a savings culture and you will reap the future rewards.

If you live in a country with high levels of inflation like I do, it is important to save your money in a stable currency like the United States Dollar.

A way to encourage saving would be to get together with a trusted group of friends in which you each contribute a certain amount of money and that money is given to a different person each month as a lump sum until you all rotate (informally known as rounds or mikando).

Invest

The concept of investing is to let your money work for you.

Instead of just saving, you need those savings to grow.

As a beginner to investing, it is important to find investing opportunities that work for you and that also allow individuals with little money to invest.

These include unit trusts/mutual funds.

These are collective investment schemes whereby funds are pooled together on behalf of many investors.

The money contributed is then invested in selected shares listed on the Zimbabwe Stock Exchange, money market instruments and unitized property.

They offer medium to long term growth of investment.

They offer the advantage of income appreciation and capital growth.

Income received is proportionate to the amount you invested.

An individual is also able to spread risk as they have a diversified asset portfolio which is managed by highly qualified personnel.

Examples of institutions offering unit trusts in Zimbabwe are Old Mutual, CBZ and Zimnat.

There are also the Old Mutual Exchange Traded Fund.

It is The Old Mutual Zimbabwe ZSE Top Ten Exchange traded fund which  was set up at the end of 2020 with the objective of giving returns that track the Zimbabwe Stock Exchange Top Ten Index.

It is the fifth Exchange Traded Fund to be set up in Africa.

Old Mutual Zimbabwe Limited is putting initial seed capital in the form of scrip in the exact weights of the top ten index in the form of scrip in the exact weights of the top ten index.

The fund was then listed on the ZSE by way of introduction.

Additional investments from other investors will be used to buy shares on the market and add to the portfolio.

Investors who wish to invest in the fund can do so through two ways, by buying units in the ETF through any registered Stockbroker or alternatively investing in kind by delivering a basket of stocks in the exact weights of the fund through an authorized participant.

The ETF offers an investment that is easily accessible: The fund will be listed on the Zimbabwe Stock Exchange and therefore units can be bought or sold through any stockbroker throughout the trading day.

It is also relatively cost efficient. ETFs are relatively passive funds and as such attract lower fees as compared to a traditional managed fund. They are also transparent.

Unlike in a unit trust (or mutual fund), the underlying assets are fully disclosed to the investors in their proportions. This is a topic that will be explored in detail.

Create other income streams

We cannot stress how important it is to have multiple streams of income.

The journey towards achieving financial freedom requires having more than one stream of income.

You could try to turn that hobby of yours into a side hustle that generates income, or if you have special skills others require, then charge for them.

The more income streams you have, the more money you have to save and invest.

Important to remember after starting your business:

Maintain financial statements — These can be basic, but should show a record of all your income, expenditure and assets.

Maintain good financial records — It is advisable to bank your money as this creates a financial trail.

It is easier to get financing for your business if there is a track record of all the money that has come into the business.

Register your business and adhere to all the statutes that govern the type of business you are operating.

A key thing to note is that starting a business or developing more income streams does not always require you to inject huge sums of monetary capital to start.

Some require your time and commitment.

You can start a garden in your backyard and sell fresh produce to your community.

This can grow and you may end up selling your produce to your local supermarket.

Carrying out proper maintenance of all your belongings can save you the unexpected costs of repair.

The goal is to try and minimise money coming out as much as possible.

This will mean that you are not set back by unexpected repairs to your property that could have been avoided.

As the saying goes, an apple a day keeps the doctor away.

Medical expenses can be very high and it is important to make sure you take care of your health to avoid emergency trips to the hospital that were not planned for.

It is also important to have a medical aid to cover those regular checks at the hospital and any unexpected visits to the hospital.

If your employer does not cover your medical aid expenses, look for a medical aid provider who provides medical aid plans you can afford.

Learning to negotiate is a great way to reduce your expenses and cut your budget.

You should always be on the lookout for good bargains and where it is possible to negotiate, do so.

Buying in bulk will also attract good discounts.

As said earlier, the money may seem insignificant but it will go a long way to secure a good financial future.

When all is said and done, it is important to have an accountability partner who keeps you in check.

This can be your partner or a friend as long as it is someone who views finances the same way as you, and is able to encourage and motivate you to keep going.

An accountability partner will help you remain accountable to your finances.

The most important step is to remember to have fun whilst on the road to financial freedom.

The steps may seem constraining but remember that you can still enjoy life without forking out a lot of money.

Be sure to also treat yourself from time to time so that you remain motivated.

The road to financial freedom is a long one and it is certainly not easy.

Stay motivated by the hope of a positive and rewarding financial future that you desire for yourself and your family.

A future where you can make financial decisions and live your life without financial distress.

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

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