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Personal financial adviser:Some steps to financial independence

Published:Sunday | August 3, 2014 | 12:00 AM

Oran Hall

The season of Emancipendence is opportune to examine ways in which financial independence can be achieved. As challenging as it sounds, the evidence suggests that it is possible.

Both emancipation and independence include the condition of being free - free from the control of circumstances and the support of others. Depending on their circumstances, needs, goals and outlook, people see financial independence in different ways. Thus, it could mean freedom from debt, the ability to retire early, having the resources to address emergency needs or being able to support their preferred retirement lifestyle from their various sources of income. In the classic sense, the financially independent person works not out of necessity but by choice, based on the ownership of the resources required to live comfortably.

A frugal lifestyle is a basic requirement for financial independence. This requires keeping expenses low relative to income, thereby making resources available for savings and investment. This has to be deliberate and is best achieved by crafting a budget and sticking to it.

It is advisable to set a savings target - 20 per cent of gross income, for example. Although it is important to opt for safe instruments, it is just as important to use savings instruments that yield competitive returns at a particular risk level. Likewise, it is important to invest wisely. Invest for the long term in a diversified portfolio.

It is important to avoid excessive risk in an attempt to make phenomenal returns and to stay clear of unfamiliar investment instruments and programmes. Investment returns can be increased by reinvesting investment income and gains rather than choosing to increase consumption.

Having multiple sources of income is one means of building and stabilising income, thereby reducing the shock which usually results from the disruption of income from a major source - employment, for example.

Debt, when used effectively, can enhance wealth. It should therefore be managed well and, if possible, be avoided. Every effort should be made to be debt-free, particularly in the later stages of life. In much the same way that an investment portfolio should be reviewed periodically to ensure that it is meeting its desired purpose, a debt portfolio should also be reviewed periodically to determine what changes, if any, need to be made.

Savings and investment programmes that start early tend to grow more, and with less fuss and hassle but to generate the required funds, it is critical to have a budget. This approach obviates the need to make large investments as the time to achieve a particular goal approaches.

Improving net investment returns by capitalising on tax-advantaged accounts, investment products and life insurance policies can help to boost financial independence. Enhancing the ability to make good investment returns through education by learning about investment instruments and markets by reading relevant material and watching valuable programmes on finance and investment can also help.

An emergency fund comprising liquid savings and investment instruments can go a far way in enhancing financial independence by reducing the need to turn to others in cases of emergency. Adequate risk-management measures, including insurance, can also enhance financial independence in cases of disaster.

Financial independence in retirement is a primary goal of many persons. At this stage of their lives, they generally want to cover their expenses without having to call on others for assistance. A well-structured and diversified investment portfolio is the best way to achieve this goal, but the preparation must begin early and with consistent discipline.

The world does not have to know what is happening in the life of any person. It pays to be inconspicuous - in spending and living, generally. Being inconspicuous and financially secure and independent - that is, being invisibly rich - is an option to ponder in the season of Emancipendence.

Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of' 'The Handbook of Personal Financial Planning', offers free personal financial planning advice and counsel. Email finviser.jm@gmail.com