In today’s episode, I’m going to be covering nine practical stages to achieve financial independence. This subject is really, really close to my heart for a number of reasons. In series one we talked about Maslow’s Hierarchy of Needs and how there are distinct stages through wealth creation.
When I speak to women on their wealth journeys, a lot of the time they’re stuck in procrastination, massive amounts of fear, and comparisonitis: comparing their financial journey to where they are now and where they want to get to in the future.
Financial independence is everybody’s ultimate dream. To be in a position where you could have financial independence for yourself, not co-dependence, and be in a position where you have choices and freedom and options.
Ken Okoroafor, CEO of The Humble Penny and the Financial Joy Academy, is going to be sharing with you some of the different stages to achieving financial independence and his own journey as well, to how he is going through those stages in his own life. If you look up the definition of financial independence in the Oxford dictionary, it says;
The are three things I would pick out from that. The first is the freedom to organise your own life.
For me, that’s a massive part of financial independence. It’s about living life on your terms, understanding actually, what does that future life and what does your present life actually look like and feel like? Then once you’ve understood how you want your life to be, is then making your own decisions.
Decision making around money can be challenging because sometimes we tell ourselves, I’m not good enough with money, I’m not worthy of making decisions, I’m not worthy of wealth, I’m not good with managing money. All of these things that we tell ourselves, the brain looks for evidence to support that belief. So when you think of that definition of financial independence, making your own decisions is a really key part of that journey.
The final step is without needing help from other people. In this interview, I actually talked to Ken about the benefits of having people to support you on that journey, that it doesn’t have to be just alone by yourself and the power of having a team of people around you that can support you in that journey is really, really important.
What’s interesting for me is that definition of independence is more about independence, not co-dependence. For example, as a woman, we often in the past have relied on our partners to provide that financial stability, to provide that income in retirement. Traditionally if we’ve had periods of time off work we tend to rely on partner’s pension provisions, maybe he’s investing in the household, but you’re not.
I really believe that in order to be financially empowered and to have financial independence and freedom, we need to be making those decisions. We need to be crafting a life for ourselves, Not by ourselves, but for ourselves. In order to do that, we need help from other people to be able to create that journey.
So it’s, without further ado that I give a massive warm welcome to Ken from The Humble Penny.
Welcome Ken to the podcast today.
Thank you, Catherine. Really excited to be here.
Ken and I met at the UK SHOMO awards 2 years ago. Ken was speaking on stage and talking about his journey towards financial independence and how he’s created this for his own family in his own life. I was completely blown away also because Ken’s in the finance world as well. We really connected.
Today I really want to get stuck into the topic with Ken about financial independence. This term financial independence and financial freedom is thrown around so much, but I want to get stuck into exactly what does financial independence really mean and what are the different stages that you may be at and what could you need to do next in order to create financial freedom for yourself.
Ken, for those that don’t know about your work or your journey, could you just share a little bit of information with the listeners about your journey into financial independence?
Thank you for that. I run with my wife a platform called Humble Penny and another called Financial Joy Academy. We started our financial independence journey in 2009/10 when we actually met. We met learning about property investing at a property investing seminar. It was all about building a portfolio of properties to work towards financial independence.
We had quite a similar mindset, me and my wife at the start of this journey. The journey has taken us a period of about 10 years to get to. It has been a mixture of learning how you actually get there because not many people tell you that financial independence is actually a stage on a money journey.
It requires a particular mindset to actually realise that this is something that I might want to achieve for myself, and then therefore come up with a bit of a strategy around how you might be able to do that. So for us financial independence involved a mixture of property investing, building side hustles and businesses, working on our mindsets, working on debt freedom, various things that we’re going to talk to you about on this particular podcast, just to share some insights on how you might be able to take a step yourself to start to work towards that goal. If it’s something that you’ve got for yourself.
Amazing. You had a significant step in your own financial independence journey in April didn’t you?
Yes. I had a career in finance as a chief financial officer. I’ve been doing it for 12-13 years in London, but in April 2020, I took a big leap of quitting my job right in the height of pandemic because so many things came together at that time.
We had that optionality because we were already financially independent, I had the opportunity to take that leap and focus on running the Humble Penny and Financial Joy Academy full time.
How has that journey been for you since April, we’re speaking now in August. So how has that last five or six months been for you?
It’s been pretty challenging actually, because no one talks about transition from corporate life into doing your own thing. When you were in the corporate world, you have a structure, you have somebody to report into, you have daily tasks that you come to and you know what you’re doing. You’re part a team. You also have some money because you work for a company or you can spend the resources and make decisions.
But when you’re doing your own thing, it’s totally different. You have to recreate that for yourself whilst being very mindful of where your income is coming from. For me, it has been a transitional process of learning to think now more as a visionary, rather than thinking more as somebody who is being given information to do something.
Oh, that’s quite a big shift then. What I heard you say there, Ken, is about being set daily tasks and things to do, to actually becoming the visionary of your business.
That for me really is about mindset. And actually we were talking about this on the podcast just the other week. I was talking with my guest about that mindset shift from being employed to self employed, because obviously when you’re employed, even from a money perspective, you’re paid every month. You don’t have to think about it. Whereas when you’re self employed, your income is a hundred percent reliant on what you’re doing and generating your business.
The success of the Humble Penny has been built whilst you’ve been employed as a side hustle. Is that something that you would generally recommend? Has that been a good journey for you to make that?
Catherine it has been the best thing I ever did. We tried to prove that with two hours per day, you can not only change your life, but you can have huge impacts in the world.
Just as we know that money compounds when you invest money, time also compounds. When you invest your time into something really fruitful and beneficial, something that has a potential for scale, which is why I love the idea of online businesses, because you don’t have any cap on your capacity. It’s not like running something where your maximum income is fixed, but when you create an online business, you can use those two hours per day.
The more you keep putting that in, you notice after a year or a year and a half to two years and massive snowball actually kicks in. And the hours that you put in therefore are not in proportion. So the impact and the level of income that you might be able to generate by doing that.
For me, running the Humble Penny sideways with running my corporate life was the best thing ever because it meant that I could still earn my income in the city. At the same time I knew I was building something that had this huge potential and the potential wasn’t limited or capped. I recommend to as many people as possible, if you can, really explore learning, upskilling and learning some digital skills, because digital skills will have a huge impact in your life in the future, because it’s essentially skills for the future.
They give you optionality, which is what lots of us need today, more than ever before in this time of huge uncertainty around the world.
I love that word optionality. We had a conversation in The Money Circle membership recently about what does financial freedom mean. I asked that question, what does financial freedom mean to you specifically in order to be financially free? What would need to happen? What would you see? What would you feel? What would it look like? One of the ladies said financial options and she connected much more powerfully with that word options than she did with freedom.
What I love about what you shared there, Ken, is that having that transition between employed and self employed is exactly how I grew this business too I was working employed. Then I went to self-employed contracting and then I went to full time self employed and having that financial stability and security of some guaranteed income enabled me to then invest time in building the business.
That’s one of the stages, isn’t it, of the financial independence that you share in some of your YouTube videos. Talk us through these stages. Ken, what’s stage one?
So I’ll just walk through what they are. Stage one is financial dependence. Typically this is where you are somebody who’s depending on somebody else. That could be your parents or guardian or somebody who perhaps looks after you or maybe you live with someone, but then your entire financial life relies on that person. For most of us that stage one is simply us living with our parents. Then we want to rebel and to have our own things, we move out, want to buy a car and start our own lives and start to work.
We move on to stage two, which is the stage of financial solvency. This is a really important stage because this stage of financial solvency is where most adults actually remain because this is a stage where we do life like we know it which is to live, earn an income pay for some debt and pay for some expenses. And for most people at this stage, they typically don’t have any savings. Lots of people refer to this as the paycheck to paycheck living.
Stage two is a critical one because most people stay there because they don’t actually realise that there’s far more ahead. Some people do realise, but they just don’t know how to break away from that stage and move onto the next step.
The next step beyond that is this stage of financial stability. This is where you start to get some breathing room. You build what people refer to as the emergency fund, you build between three to six months worth of savings. That gives you a bit of peace of mind, in case you get made redundant or some emergency comes up, you’re prepared to some extent and have a bit of buffer available.
For lots of people, that’s a critical stage. We’ve gotten that level of savings put aside. The key thing there really that builds you up to that stage is that you’ve managed to start to live below your means. That’s a key aspect and lots of that’s only possible if you are somebody who understands where they are financially. So you’re able to review your finances on a monthly basis, for example.
I think that a lot of people, like you say, do get stuck in these stages and they often will go from one to the other. So maybe they’ll build that emergency fund and then something else comes up that’s unexpected. Then that blows the emergency fund and they’re right back at financial dependence stage again.
One of the key questions I always get asked is what happens when you’ve got debt and you want to decide between paying down those debts or building the emergency.
The next step beyond that emergency fund stage is financial debt freedom. We recommend that you build that emergency fund and have it there consistently before then targeting your expensive debts. For lots of people who have that cash buffer available have a lot more peace and their mental health is at a much better place compared to those that just don’t have any of that.
You then want to build that buffer and then your next focus is the next stage, this stage of financial debt freedom. This is where you then say, ah, what’s, what’s costing me the most money from a debt perspective. It might be your highest paying debt such as your credit cards or certain loans that you might have that it costs you a lot.
So this is where you do essentially an audit of your debt, come up with a game plan for targeting those bits of debt with any excess monies you have above that amount that you’ve put aside for your emergency fund.
Would you generally recommend in that stage things like debt snowballing, either the highest interest or the smallest amount.
Biggest to smallest amount. So you might say, actually I want to target the smallest amount because it gives me a sense of motivation and progress. I’ve paid off this small debt and I’ve now moved on to my next step to target that the next one, and then pay that off as well.
I personally prefer to focus on the highest interest because, for me as a finance person, I know it’s costing you so much. But for some people it’s more than acceptable to focus on the small bits of debt so you feel that sense of progress. Small wins are a big part of this journey.
At this stage of financial debt freedom, some people also focus on mortgage freedom. That’s not a necessity at all. Beyond that, you’re really now getting into a really exciting stage of this journey because what you’re then moving on to is financial security.
This is where you’ve built up between one year and three years worth of expenses saved. You are investing that money, it’s not just sitting in your current account. You’re investing it in an environment where you’re generating an above inflation return.
What’s really exciting about this stage is that you give yourself incredible optionality. So you might be somebody who says, well, actually I want to take a sabbatical for three months or actually I want to have a career change or something like that. But because you’ve got one to three years worth of expenses put aside and invested, you know that you’re in a much safer place, which is why we refer to this as financial security.
What’s also critical about this stage is that it’s a stage where you then start to build a strategy for the next step, which is financial independence. This is where you’re announcing. Ah, okay, what do I want my strategy to look like? Is my goal to build enough income to cover my expenses, which is what financial independence is defined as, or am I happy with my career and so on. And I just want to build my net worth over time and still carry on doing what I do in my normal day job, but building my net worth to a stage where it’s typically referred to as 25 times your annual expenses. This is where you then start to build a strategy.
I knew that my goal was not to start to build my career per se, although building a career is a very important part of the journey. My goal was to get to a stage where I can take the leap from my corporate job and do something else. The thing I needed to do, to do that, was to pay off my mortgage. I saw that as a big part of the journey, because when you do that, your expenses drop hugely. All we then have are your council tax and normal typical expenses, food expenses etc. So by dropping those expenses, you find that it’s very easy for your income from your assets to exceed your monthly expenses because you don’t have a humongous cost that’s coming from maybe your housing and things like that.
So for us, a big part of this journey, and this might not be the same for everybody. For us it’s been about getting rid of debt, including mortgage debt. As soon as we became a 100% debt free and that took us seven years to achieve, we knew then that it was so easy then to create anything else, other assets that could then start to generate income for us on an ongoing basis.
Financial independence is where we are right now in our lives we have that optionality and that time freedom. And you can carry on doing your career. That’s completely fine. Or you can say, well, actually I have always had this passion that you want to pursue, or you might go off and want to do that, which is what I’ve done when I took the leap in April to focus solely on the Humble Penny and Financial Joy Academy.
You mentioned in there Ken about 25 times annual expenses, could you just expand on that?
So looking at your financial position where you are, is a big part of this journey. So looking at it on an ongoing basis. You look at your net worth number. Your net worth is a sum of all your assets, less the sum of all your liabilities, that gives you a number as your net worth.
There’s a rule known as a 4% rule, which is essentially saying that if you’d built up a pot of money, if you withdrew 4% of it every year, you would have around 25 years worth of expenses saved. 25 times 4% gives you 100%. 4% is an above inflation number. So essentially what it’s saying is if you are generating a return above inflation return of say, 6% and you build up a pot over time and started to withdraw 4% of that pot, it would mean that theoretically you should never really run out of money because you’d have an additional 2% compounding every year.
That 4% is a proxy for people in the UK. You might choose to withdraw a lot less than that, but it varies. It’s used as one definition for financial independence, which is 25 times your annual expenses. Another definition is that it’s a point at which the income coming in from your assets, maybe you’ve got property, an online business, income from shares, whatever the income coming in, exceeds your monthly expenses. Most people tend to go with the latter definition, but both definitions can apply.
I think that’s an interesting subject because a lot of female entrepreneurs, building their own businesses, they could potentially get to where it will probably be around stage four or five where they’re starting to invest which I guess you could argue that we should be investing right from stage one.
But when we start investing they think, well, I don’t want to take any risk because the concept of risk is difficult and they don’t understand because no one teaches us about investment risks.
This 4% rule is an interesting one when it comes to calculating retirement buckets and understanding how much did you have at the time, which is another common question we get. And so the 4% rule is interesting there because the ultimate point is that we just need to be making more than inflation.
If we leave all of our money in cash, it’s not going to grow. That’s fine for your emergency funds that you might need to dip into, but for long term wealth creation, we do need to be taking and understanding what risk actually means.
Do you find that in your work too, Ken, that a lot of people don’t understand how to go about investing in the stock market, they don’t understand the jargon?
Investing is actually a mindset thing and a lifestyle. Because I worked in a financial services industry, particularly in the investment business for 13 years, everybody I met who had typically high net worth or super high net worth individuals, their language is always what’s my return on investment.
So the investor always has this idea that their money is out to go to work. It’s not just there to lose value. It’s there to generate a form of a return. I think that jargon is worth really understanding. Let’s say you’ve worked very hard. You’ve been very diligent. You’ve been budgeting, you saved your money. What you don’t want is for that money to be losing value, by way of inflation, it loses purchasing power.
What you really want is for that money to grow income, to grow over time. When we talk about money working, this is what we’re talking about because you put your money in an environment where that money is exposed to risk because without risk, there’s no return. That money is exposed to an environment where it’s being put to work more than you might do in your normal nine to five job.
So for example, you invest in the stock market and that money is used to maybe invest into companies and those companies then generate a return for you and you get that return as an investor. So for example, let’s say you invested in Apple and we heard this week, Apple is now $2 trillion. This happened in only 24 months from when they became $1 trillion, the first ever company to hit $1 trillion. If you invested in Apple, every employee of Apple, they’re working for you, they are actually your employees because you’re the shareholder who owns the Apple stock.
So if you think about it from that perspective and really that opens your mind up, you’re like, Whoa, hold on. So what you’re saying Ken is, is if I invest in Amazon, I invest in Facebook. If I do it through funds, I am an owner of those companies and what owners do, and this is what’s critical about wealth building, is that owners build wealth because they’re owners, they get a return on their money. Their money grows over time.
I love that word ownership. From a mindset perspective it’s really powerful, because like you say, when you think, I am an owner of a slice of that company’s profits. Well then why wouldn’t you want to be part of something like that?
Yes, yes, absolutely. Well, that’s a mindset you see, because, a lot of people think, Oh, that’s a rich people thing to do. But the beauty of today is that these smartphones now allow us and give us that possibility of being able to partake in what’s going on around the world. But we’ve got to be in the environment to learn how to do that which is how to invest our money to gain the confidence, to do it ourselves.
Absolutely. Financial empowerment. So from financial independence, what’s the next step.
So after financial independence follows financial freedom, which then comes about where the income from your assets exceeds your lifestyle expenses.
So with financial independence, you’re covering your essential expenses, with financial freedom you’re talking now lifestyle. Let’s say you love visiting Barcelona. And you would love one day to be able to rent or lease an apartment in Barcelona, such that you can go there every year. That’s a lifestyle decision. If your income from assets are able to cover your essential expenses, as well as that particular lifestyle expense, then you’re living a life of financial freedom.
Beyond that as the state of financial abundance, this is where you’re talking about your Warren Buffet’s, the people who are essentially giving money away to philanthropic basis, people who have made so much wealth, that they can’t even spend all the money that they’ve made. They’re now starting to give that money away. That’s a whole different ball game and that’s financial abundance.
The one that we were talking about before we went live, Ken was the ninth step, which links into abundance. It’s about that mindset because income is not wealth and money is only part of the equation, isn’t it?
A lot of the time, and this is why I spend so much time talking about this, it’s how we overcome those psychological fears, those money mindset blocks, those things that have come up for us because of our cultural influences, social media influences about wealth creation, all sorts of our personal experiences.
How important has that been for you in your journey, Ken?
For me as somebody who immigrated to the UK, the age of 14 with absolutely zero, when it comes to money, zero ownership, no inheritance, it was very difficult. I had to begin to learn that this wealth building thing could actually relate to me as a young black, African male living in the UK. That mindset shift took a while. And that mindset shift actually began with self-awareness, beginning to understand who I was and what potential power I possess as an individual and what possibilities I could potentially create.
I find that this is the piece that holds a lot of people back when it comes to building any form of wealth is a lot of people don’t have a great deal of self-awareness. They don’t actually understand who they are. Without that self awareness, how do you then start to build a life’s vision? Because all we’re talking about here is all about vision, right? How do you build a life vision if you’re not comfortable with and have an understanding of who you truly are, what you truly love, what you’re truly about and what truly matters to you. This is how you fight the resistance.
A lot of this journey to financial independence is all about fighting the resistance along the way. What I mean by that is every single day we will face competing demands for our money. Come here, come there, come and spend here, come and spend that. Give me this, give me that these are all bits of resistance that are stopping us moving forward, along that money journey. But having that core self awareness is important because if you have that self awareness, you able to say, Oh, this is who I am. This is what’s important to me. Above that, this is what’s not important to me because then you’re able to say no to various things as they come along.
Saying no is important, because then you’re able to actually say I know what my, what I call the North star goal is. I know what my life goal is. And I know that I could only win in that goal by approaching it daily. It’s almost like a marathon type of thing rather than a sprint. Every single day you have to keep putting your foot forward and be able to get ahead.
I keep coming back to that first stage, without that self-awareness, you can not start to have a life’s vision. Without that life’s vision, you could not have goals. And without those goals, you can not take action. Without action, you can not have any results.
It’s like you wouldn’t get in your car trying to get from A to B without having some direction, without having some key milestones along the way as to, what’s going to make you feel like you’re on that next stage, that next step of your journey.
What influenced you then Ken as a young boy, in terms of helping you find your vision?
My mum was a huge, is a huge influence. She’s very entrepreneurial. In this country, she only ever worked for other people a couple of times. And most beyond that, it’s just been starting her own thing. Some of them failed. Some of them have been amazing successes.
I always give this example: one year, my mum called me, she said, I’ve just bought a piece of land. She told me how much she spent as a six figure sum. I remember thinking to myself, wow, there is no way that I could ever make that move working for somebody else. Even though I was at a time making a six figure income in the city, there’s absolutely no way I could make the same move.
So for me, I knew that this game, and to accelerate my journey, I had to play this game differently to everybody else. So for me, a big part of that was exploring, starting my own business things that essentially would push and give me possibilities. I couldn’t really ever achieve by just doing what everybody else does, which is working their nine to five and then trying to save money from that because income has to increase while you keep your lifestyle the same.
That’s the only way you create a growing buffer. You have to increase income and the way you increase income is by exploring your creativity, scaling up, building your mindset, personal development, doing things essentially that give you confidence to believe that your possibilities can be different, your future can be different. And so my mum’s a huge influence.
The right friendships have been absolutely critical. Having people who I can see doing things that are just very different. I’m like, Whoa, this is really interesting. How can I learn some more? I wanna hang out with these people.
Having coaching has been hugely powerful. Getting the answers directly from the people who have been on the journey has just been mind blowing because rather than doing guesswork why don’t you just go ahead. Again, this comes down to that ROI mindset, return on investment. Why don’t you just see this as an investment in who you are, which is your biggest investment, your biggest asset. Think about how you can use that investment to get yourself a much bigger return.
Just believing I am inherently creative is a big thing. As an accountant, I struggled to believe I was creative. All I thought was I’m a logical thinker, I only think about numbers and that’s it. But believing I was creative really empowered me in many ways, because it just helped me think I can acquire new skills, I can keep learning, I can try to learn how to create an online business. I can start to speak, which is what led me to starting a YouTube channel just because you’re doing things that means that I’m pushing myself all the time outside of my comfort zone and all the while by doing that, expanding my capacity to do more.
Listening to you, Ken I really resonate with so many of those examples you’ve shared about what has led you to the stage you’re at now in terms of surrounding yourself with people that have your back, that are in that space that have maybe walked that path already that you can learn from.
Were there any particular books that you read during your journey that influenced your progression?
Absolutely. The very first book, which many people have read and what this book was really powerful for me was the book, Rich Dad, Poor Dad. I read that years ago that just influenced me from the perspective of thinking, Oh, so I could become an investor one day. I didn’t think that was even a possibility for someone like myself coming from my background as an immigrant to the UK. I didn’t think that was the thing that I could become. That’s a powerful book.
Another book was a book called Designing your Life. This book opened my mindset to the possibility that the future that I desire is a life design problem. I could from here today, begin to work towards a future version of the life that I desire and that comes through some form of life design. And it meant that I could use the money I have access to today, as a tool to help me get closer to that.
That for me was a big game changer because when I think about my parents. They worked to the age of 65, when dad retired at 67 and for them, that was it. That was like a one size fits all approach. Whereas I’m thinking with a life design mindset, you can begin to create the life you want. This is all about you. Not anybody else. You. You can begin to create the life you want by almost approaching it as a design problem.
If you have an A3 sheet of paper, if you could paint your desired life on that sheet, if you could draw it, what are the key elements in that life? What you do for work? Where are you? Who are you with? How many hours are you working, how much income are you making? Things like that are you essentially saying, ah, this is the life I think I want, okay, now I know what I want. Where am I today? And how do I navigate that journey to get me there?
What I’d also add to that is when you’re drawing that picture out is to think about how you would feel. So a lot of people struggle with this concept. Well, I don’t really know what I want to do in the future. I don’t know, but they do know what they don’t want to feel like.
So maybe they’re feeling stressed in their job. Their mental health is suffering. So I would also get people to add in their feelings around where they’re at now, where they want to be. So if they’re feeling stressed, well, what can you do today to remove some of that stress? It’s not always about adding more. It’s about sometimes removing things.
That’s really, really powerful. So for me, one of the key things I didn’t want to feel was the need for me to commute every single day, two hours from Kent into London, two hours from London, back to Kent. And when the trains are delayed frustration, that for me, it was a painful thing. I wanted to remove that from the picture, which meant that I chose to prioritise building an online business instead, because that meant I could have complete location independence I could operate from anywhere in the world and I could still have full control of my income.
Wonderful. I’m sure lots of people have been experiencing that kind of feeling of working from home most recently during lockdown.
I could literally speak with you for hours and hours, Ken, but thank you so much for sharing with us, the stages and the steps towards achieving financial independence.
I’m really happy that you shared your personal story in there as well, because I think that when we can connect it to real life scenario, actually that makes a big difference from a motivational perspective as to what is possible.
Book in a complimentary call to discuss how financial coaching can help you move from financial overwhelm to confidence and control.
Follow Ken on Facebook
The Humble Penny on YouTube
Robert Kiyosaki, Rich Dad, Poor Dad
Bill Burnett & Dave Evans, Designing Your Life