Money Management
November 11, 2024
Allow me to throw you into the deep end immediately. What would your life be like if you lived comfortably off of your investments without ever needing to depend on a paycheck? This is what financial independence is.
To achieve financial independence, you have to invest enough so that you can live comfortably off of the proceeds from your investments.
When people have such conversations, they throw around big numbers. However, in this article, we want to consider how someone making about Ksh50,000 per month would go about achieving financial freedom.
Remember, financial freedom is not about the millions and billions, it is about not having to depend on a paycheck ever again.
In our consideration, we shall use a Ksh50,000 net salary (about Ksh65,000 as gross salary) but you can use the logic in the article to tailor it to your situation, whether you are making more than Ksh50,000 or less.
If you are making Ksh50,000 a month, you need to squeeze your expenses to Ksh30,000 a month to free up Ksh20,000 per month for investment. The math also applies to someone with a Ksh70,000 net salary (Ksh95,000 gross) practicing a frugal lifestyle for 5 years.
Living off Ksh30,000 is not easy. It means you will have to sacrifice some wants. You will only be able to take care of your needs. However, this will not be the case for long. The logic of frugal living is not eternal discomfort, it is making sacrifices for financial independence in the long term, which in this case could be five years from now.
If you are 25 years of age, you will achieve financial freedom at 30 years, if you're 30, you will achieve financial freedom at 35 years. Not a bad bargain.
While living on a Ksh30,000 income, your rent should not exceed Ksh10,000. Utilities plus food should use another Ksh10,000. The remaining Ksh10,000 should be for your transport and miscellaneous expenses (clothing, etc.).
On top of living below your means, you need to work extra hard by getting a side hustle that makes you at least Ksh20,000 per month. The writing is on the wall that one cannot be financially comfortable with only one stream of income. Logic follows that if you are daring to undertake the goal of being financially independent in five years, you will need to supplement your income.
With savings worth Ksh20,000 and Ksh20,000 in earnings from side hustle, you now have Ksh40,000 to invest.
Investing is a risk play. The more you risk, the better the return. There are risks you can take and double your money within a year. However, since we are looking to create financial independence, the best investments to go by are low and medium-risk investments. These investments return, on average, about 12% per year. This means your money earns about a percent per month. Factoring in compounding becomes very enticing, especially longer down the road.
If you invest Ksh40,000 per month for 12 months, you will have invested a total of Ksh2.4 million in five years.
However, understanding the power of compounding, if you invest Ksh40,000 per month for five years, you get to earn on interest because compounding is applied both to the invested capital and earned interest.
With an average return of 12% per annum compounding, Ksh2.4 million will turn to Ksh3,339,454 by the end of five years.
Five years of savings, earning from your side hustle, and living frugally, you will get about Ksh3.3 million.
After five years of stashing away, it is time to shift gears and play the long game. The 3.3 million can now be invested in higher-return investment products. Examples of investment products that return upwards of 17% per annum include Central Bank Bonds, some fixed deposit bank accounts, Sacco Shares, and select NSE stocks.
If you were to lock in the money for a 17% return on investment, then the Ksh3.3 million would be earning you Ksh611,000 every year - which translates to Ksh50,916 per month.
Thus, after five years of living a frugal lifestyle, your Ksh50,000 salary would have earned you enough money to match your monthly salary. In the sixth year, you could upgrade your lifestyle and re-invest your passive earnings on other investments.
This means that in the 5th year, you would now be saving the entire Ksh50,000 (the full amount coming in from your 17% investment vehicle). By the 10th year, your savings would have risen to Ksh4.2 million shillings - assuming you went back to a regular investment product, such as an MMF that returns 12% per annum.
Understandably, this is an extreme version of what you can do to achieve financial independence. Achieving financial independence does not have to take 5 years, it can take as long as it suits your goals. However, what this article highlights is:
All the best in your financial independence endeavors.
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