How much choice can your money buy you?

What does financial independence look like?

Perhaps it’s never having to work again. Or perhaps that sounds rather boring!

It could mean being able to walk away from a job you no longer enjoy or taking six months off. It could be starting a business or travelling more. Maybe it’s being able to pay off your bond or educating your children without worrying about how you will fund it.

Financial independence is often presented as a number to reach. In reality, the more nuanced measure may be how much choice your money affords you.

That is the premise of episode 6 of the Mastering the Basics webinar series, where Kate Robson, Head of Investec My Investments, and Kate Stannard explore the habits behind financial independence.

How can R3,000 a month really beat R25,000?

The answer lies in the power of time. It can make all the difference.

Stannard uses two hypothetical investors to illustrate the point.

Sylvia is 45, has received a big promotion and realises she has neglected her long-term financial goals. She starts investing R25,000 a month.

Zola is 25 and is investing just R3,000 a month.

Despite contributing considerably less each month, Zola reaches the hypothetical long-term goal first because she has something Sylvia can’t buy back: another 20 years in the market.

“She started early, and compound interest is a magical thing. She’s investing R3,000 a month versus R25,000 a month, but she has 20 years’ advantage,” says Stannard.

The example isn’t a promise of what any particular investment will deliver. Its value lies in showing why starting earlier can reduce the amount you may need to contribute later.

Compounding needs time.

What habits make building wealth easier?

Investing consistently every month may not feel particularly exciting, but that is partly the point.

A debit order removes having to make a monthly decision and makes investing another expense in your budget rather than something you do with whatever happens to be left over.

Stannard calls investing “a long-term relationship”. There will be periods when markets fall and staying invested feels uncomfortable. Her analogy is the well-known Snakes and Ladders board game. If you withdraw from long-term investments when markets are down, that can send you sliding down the board just as compounding is beginning to offer you a ladder to climb.

Robson suggests another small habit. “When your salary increases, increase your investment contribution too. If your lifestyle absorbs every pay rise, earning more won’t automatically make you more financially independent,” she explains.

Even directing a small portion of each increase towards an existing retirement or discretionary investment can steadily raise the amount you are putting away without requiring a dramatic change overnight.

Are you leaving money on the table?

Before searching for a new investment, understand the benefits you already have.

Some employer retirement schemes may offer matching contributions or other benefits linked to how much employees contribute. Tax-efficient structures, including retirement funds and tax-free savings, can also play a role.

Stannard describes unused employer matching as “free money, essentially, that you’re leaving on the table”.

The details will depend on the employer scheme and the individual’s tax position, but the broader lesson is that financial independence doesn’t always require finding another source of income. Sometimes it begins with making better use of what is already available.

Robson argues that tax-efficient retirement investments and voluntary or discretionary investments can also work alongside one another. “Retirement structures provide particular tax advantages but come with restrictions on access. Discretionary investments can provide greater liquidity and flexibility.”

Do women need to think differently about financial independence?

Conversations around financial independence can carry particular significance for women.

Robson talks candidly about how she outsourced much of her investment decision-making to her husband earlier in her life. What she now sees is more women seeking information earlier and taking ownership of their finances.

Stannard's experience is different but arrives at a similar point.

“As a single working mom, independence has been the hallmark of my life for some time,” she says. For her, that means being able to retire independently, educate her child, travel and decide how she uses her money.

Longer lives can add another consideration. Robson points out that longevity changes the demands placed on retirement and financial planning.  “Financial independence includes understanding your own financial position, even when finances are managed jointly within a household,” she says.

Can you enjoy your money now and still plan for later?

You should at least know what balance you are trying to achieve. Your priorities will determine where that balance sits.

Vumi Dludlu, Senior Financial Advisor at Investec and host of Mastering the Basics, describes her own version of independence as finding the “sweet spot” between planning for retirement and being able to travel and enjoy life today.

Saving every available rand for 65 could come at the expense of the life you are living now. Spending everything today creates the opposite problem.

The benefit of defining financial independence for yourself is that saving stops being an abstract exercise in having “more”. There is a reason and tangible goal behind it.

Robson puts it neatly, “If you know the why, the what and the how is much easier.”

Does financial independence require a high income?

A higher income can certainly increase your capacity to invest. It doesn’t automatically create good financial habits.

Robson's takeaway from the discussion is that, “financial independence isn’t about having the highest income. It’s about creating the habits that allow wealth to grow”. 

Those habits can be remarkably ordinary.

Start. Automate what you can. Increase contributions when your circumstances allow. Understand the benefits available to you. Stay invested through uncomfortable periods rather than reacting to every market movement. And revisit what financial independence means as your life changes.

There may never be a single moment when a switch flips and you suddenly feel financially independent.

The more useful measure could be the choices that gradually become available because of decisions you started making years earlier.