Those who attain financial freedom usually work hard to get there. While financially free parents can bestow financial independence on their children, research shows that 70% of these families lose their wealth by the second generation and 90% by the third. These statistics make it clear that you need to make a choice to attain – and maintain – financial freedom. It doesn’t happen by accident.
“When asked, most people will say they want to be financially free. Yet very few people are,” says Marilize Lansdell, CEO at PSG Wealth. “Even after a lifetime of saving, many people arrive in retirement with a fair-sized lump sum only to discover the dream of financial freedom remains as elusive as ever.”
Why is this the case?
“Saving is only one part of the equation,” says Lansdell. “Your own spending habits – that is, your decisions along the way – are the other part.”
“Savings decisions taken in isolation of spending ones are unlikely to deliver the desired long-term outcomes. But the reverse is also true – you cannot be a slave to your money and not spend it either – money by itself is just a means to an end,” says Lansdell. Financial freedom depends on finding the right balance between the two.
Consider the questions below to figure out whether the financial decisions you are taking right now will bring you closer to your goals.
Was this part of the plan?
Your financial plan should change when major life events occur. Sticking to an outdated plan can be as destructive as making too many changes to your plan along the way. Reaching financial freedom is about carefully distinguishing between legitimate reasons for making changes to your plan, and reasons that are merely rationalisations not based on real needs. A salary increase might seem like an easy justification to upgrade to a bigger house or better car, but before you decide to do so, it is worth remembering that some of the wealthiest people have not followed this logic. For example, investment guru Warren Buffet continues to reside in his pre-wealth home.
Has something fundamental changed, or is it just noise?
Investor behaviour is the biggest destroyer of value. This is often in response to market crashes, and when people are confronted with their money losing value, they panic and sell at the wrong times. “It is crucial to remember that markets are inherently volatile,” says Lansdell.
The recency bias is well understood in behavioural economics, but investors need to understand it too. In a nutshell, it means we attach more importance to recent events, and less importance to events that happened long ago.
“Before being swayed by noise, ask yourself whether something fundamental has changed – or whether you are just falling prey to your own biases and giving easily accessible, recent data more weight in your decisions than you should,” advises Lansdell.
When it comes to countering the noise factor, few things are as powerful as patience. It’s not always easy to wait it out, but unless your answers to the two questions above point to a clear need to make changes for materially sound reasons, the best course of action is to be patient. Time is powerful: it allows noise to die down, markets to recover, compound interest to work, and us to distinguish real needs from nice-to-haves. Use it to your advantage.
Remember the bigger picture
It is easy to be lulled into a sense of complacency by the balance on your investment statement. But are you invested in the right things? Does your statement hide the fact that you are in fact invested too conservatively, and are steadily losing ground against inflation? As with many aspects of investing, deciding on the right benchmark of what financial freedom means to you, and frequently measuring your plan against it, is key. A trusted financial adviser can help to ensure that you remain on course in becoming and remaining financially free.