LIFE CYCLE OF BUILDING WEALTH
Financial health just like preventive healthcare, requires proactive planning – forging consistent financial lifestyle that produces wealth; Start Saving and Investment early, master Asset Allocation, and Diversification skills. https://meritfinancialconsultants.com/forging-savings-and-investing-habits-that-produce-wealth/
Rule of the thumb – depending on what time you wish to retire (having freedom and flexibility to pursue your calling, whether or not it makes any money) you need to have saved and invested 25-28 times of your annual living expenses. Do the MATH…
We know navigating this complex process of wealth creation can be intimidating, the thought of where to start, the risks and uncertainties may hold you back. Worry not. This guide is for you, as well as anyone else who is intentional about financial freedom and early retirement.
1. Early-stage – in this stage, the most crucial determinant of your financial outcome is your intentionality and the saving rate as a percentage (%) of your income. The strategy in this stage is to aggressively save/accumulate and invest as much money as early and frequently as you can, then shift to let your accumulated money grow/compound.
Let’s say “James” a 25-year-old professional earning Kes. 80,000 per month is intentional about achieving financial freedom by age 45. He enlists help of a financial advisor, and together they come up with a Financial Policy/Plan below;
Monthly Income (Net) = Kes. 80,000
Saving Rate = 40%
Monthly Saving = Kes. 32,000
Accumulation Account > Money Market Fund @ 10% interest per annum
Period > 10 years (until he is 35 years)
In 10 years, his total savings will be Kes. 3,840,000 (40% x 80,000 x 120months), and earned compound interest of Kes. 2,715,040.
At age 35, James has Total Accumulated Funds = Kes. 6,555,040
2. 2nd Half stage – the primary determinant is your investment return net of inflation. The essential skill for success in this stage is Asset Allocation. Where to park your money and how to divide it up among different available asset classes. It’s all about being more efficient and more effective with your portfolio selection to speed up your wealth creation through compounding magic. Compounding increases the value of your money over time, even if you don’t increase your investments.
Continuing with James……. Let’s assume at age 35 responsibilities increase and James can’t afford to save 40% of his income any more. He decides to reduce the saving rate to 15% (I.e. Kes. 12,000 per month to MMF account), and seeks help of a financial expert to create a diversified portfolio for the accumulated funds (Kes. 6,555,040) as below;
| Asset Class | Allocation | Amount | Rate of Return | Period |
Value (Incl of interest |
|---|---|---|---|---|---|
| Money Market Fund | 15% | Kes. 983,256 + 12,000 per month | 10% | 10 Years | Kes. 5,119,855 |
| Multi-Asset Fund | 40% | Kes. 2,622,016 | 17% | 10 Years | Kes. 12,603,580 |
| Stocks | 20% | Kes. 1,311,008 | 15% | 10 Years | Kes. 5,303,760 |
| Government Bonds | 25% | Kes. 1,638,760 | 13% | 10 Years | Kes. 5,111,756 |
| TOTAL | 100% | Kes. 6,555,040 | Portfolio Return = 14.55% | 10 Years | Kes. 28,138,951 |
At the age of 45 years, James has accumulated Investment Portfolio of Kes. 28,138,951 from actual savings of Kes. 5,280,000 [32,000 x 120months + 12,000 x 120months]. Time and Compounding Magic has earned him extra Kes. 22,858,951 (talk of money working hard for him).
3. Financial Freedom stage – at this level, time and compound interest do most of the work for you (money working for you literally). Financial Independence becomes a reality, and your living expenses are covered by recurring passive income that comes from your investments.
With an investment portfolio of Kes. 28,138,951, James can withdraw Kes. 1,400,000 every year and probably never run out of money.
1.4M accounts for only 5% of his total portfolio, and only 41.5% of the annual passive income (interest) the portfolio generates at a moderate annual rate of return of 12%. Depending on his desired lifestyle in retirement, James can survive on slightly over Kes. 100,000 a month. The passive income from his investment portfolio exceeds his living expenses, and James can proudly say he has won the Money-Game, reclaiming back his most precious resource, TIME.
He has freedom and choice to live as he pleases-as well and as fully as he can, for as long as he can, freedom to passionately pursue his dreams, freedom from the pressure of money, freedom to take care of his health and relationships/family.
The core concept of Money-Game is simple – Grow your savings to a point at which the interest from your investments will generate enough passive income to support your lifestyle without having to work.
“Compound interest is the 8th wonder of the world. He who understands it, earns it. He who does not, pays it”.
____Albert Einstein____
Conclusion.
The path to financial freedom begins and ends with financial planning. This begins with knowing your current financial situation and where you want to go. Simplication – as a wealth creation factor requires you consciously create a lifestyle on which you need less money to live on. This means you’ll always have more to invest and create wealth.
A Financial Planner can help you track and build your net worth. They will assist you in organizing your finances and introduce you to a variety of vehicles for saving and growing your money, provide you with tolls/skill/knowledge and recommendations to help you build the kind of investing habits that will produce wealth.
At Merit Financial Consultants – We go beyond comprehensive financial expertise, making your journey our priority to make sure your money is doing what it’s supposed to – supporting your lifestyle now and setting you up for financial success in the future.
FA Daniel Nzioki
Great stuff 👌