20 October 2012

Uganda: Your Pension Won't Be Enough


The past couple of weeks have seen everybody swallowed up in the euphoria surrounding the celebrations to mark Uganda's 50th independence anniversary. At a personal level, now would be a good time to ponder whether you can celebrate financial independence.

But what does financial independence mean to you?

Is it a situation where you do not rely on anybody for financial support? Or is it simply having the ability to purchase your heart's desire?

Whichever way you view this, the most sustainable way of achieving true financial independence is the capacity to increase a big fraction of your net worth without having to exchange your labour.

Most personal financial management enthusiasts agree that if you master how to accumulate assets that deliver capital gains, income or dividends (without actively working) and are much higher than your expenses, you can celebrate financial freedom.

Each of us can decide on different hallmarks for achieving targets as we aspire towards achieving financial independence as our ultimate goal.

For example, if you are not an ardent saver, you could consider adopting this habit as a start towards your financial goals.

Every time you put aside a percentage of your income for future investment, you are edging closer to financial freedom.

For some people, the habit of saving comes easily, while others struggle. Those who are not used to saving can adopt the automatic deduction via a standing order at your financial institution.

Take note of the fact that nothing beats the comfort of knowing that whatever financial mishap or emergency you face, you have a nest egg to tidy you over.

One mistake you should never make is not to get comfortable with your financial situation. Many of us are tempted to believe that we are doing well financially if we earn a good income which can cover our cost of living, own a house, have a couple of rental apartments and can service our personal debts.

Whenever you get tempted to bask in your comfort zone, think of your evening years.

To put this in perspective, compute the cost of your current lifestyle, including most of the side businesses that seem to be thriving because they are subsidised by your income. Fast forward to the future and consider the financial implications of the time when you are not active.

Remember that once you retire, you will receive a pension which will reflect a drastic drop from your current income.

Do yourself a favour and compute whether the pension and the cash flow from your 'investments' will cover your current expenses and lifestyle you currently enjoy.

If you have cash flow from assets to finance your lifestyle without having to work, you should be celebrating financial independence. If your calculations do not add up, it is time to get out of your comfort zone and make plans with a longer time horizon.

Related to that, your extravagant lifestyle is keeping you from attaining financial independence.

We often make justification for the doodads we purchase. It is easier to make excuses as opposed to managing finances prudently.

However, whenever you indulge in purchasing wants, you are taking steps further away from your goal of financial freedom.

As you look towards the next 50 years, working on increasing your earning capacity so that you can derive income from several sources other than your primary work should be your daily preoccupation.

Achieving this is a full time job and not a one off affair. To achieve this, you have to actively seek financial knowledge, polish your skills and engage mentors to improve your ability to spot investment opportunities.

If you have an open mind and are ready to drop the poor money habits, your satisfaction will be derived from being able to acquire assets that generate passive income that takes you closer to your goal of financial freedom.

The writer works with Bank of Uganda.

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