How to create financial freedom and give up work forever

Sustained investment in passive global index funds yields rich dividends for this group of savvy investors

Farhan Kapadia owns multiple, fully paid residential and commercial properties in Business Bay and Downtown Dubai. Photo: Pawan Singh / The National

What is financial independence? It means not having to worry about going to work every day because you are earning enough from investments to cover your living expenses, either for the short term or long term.

While a number of savvy investors are increasingly leveraging the power of compound interest to grow their investments in a relatively short period of time, but such a goal has also been out of reach for many.

Six out of 10 US respondents surveyed by online broker TD Ameritrade in August said their financial independence has been completely derailed by Covid-19. However, 82 per cent of millennials and 87 per cent of Generation Z said they crave financial independence, the survey revealed. Many respondents admitted that they are still trying to seek financial independence, with two thirds said they are trying to forge their own path.

“Set your goals, find out about your finances [your current salary, investments, pensions, property ownership, family commitments and your ambitions], understand how your current financial situation squares with your aspirations, construct a financial plan to make your goals possible, then monitor and review your progress towards your goals,” Rupert Connor, partner at Abacus Financial Consultants, says.

We spoke to two UAE residents and a Belgian national who lived in Dubai until a few years ago about how they achieved financial freedom.

Sebastien Aguilar, founder of SimplyFI.org, primarily invests in ESG exchange-traded funds because he does not want his money to go to harmful companies. Courtesy: Sebastien Aguilar

Financially independent at 33

Sebastien Aguilar’s last day at work was in 2018 when he was 33. The Belgian national worked as a consultant and manager in the UAE energy management sector for almost eight years.

Since then, he has achieved financial freedom and spends most of his time with family in Belgium. He also dedicates time serving communities he is involved with, such as SimplyFI.org in the Middle East and FIREBelgium.com in his home country. SimplyFI.org is a community of personal finance enthusiasts who empower each other to invest well and pursue financial independence.

Although Mr Aguilar began managing his finances seriously in 2011, he started investing the right way only in 2013.

"I started investing in 2012 with a financial adviser who sold me a long-term savings plan. While it was the best I could do at the time, I realised later that it was a mistake. It cost me 25 per cent of my investments over a period of five years – that's the equivalent of 15 months of savings –and it could have been far worse if I had continued. But this mistake is what led me to learn about DIY index investing," he tells The National.

Mr Aguilar has primarily invested in stocks and bonds. His portfolio comprises only three exchange-traded funds: one developed market ESG [environmental, social and corporate governance] stock ETF, one emerging market ESG stock ETF and one bond ETF.

“I have selected ESG versions of the ETFs because I don’t want my investment to go to the most harmful companies,” he says.

Now 35, Mr Aguilar says he achieved financial independence by doing three things. Firstly, he found ways to deliver more value at work that led to promotions and pay rises. Secondly, he figured out that he did not need much money to live well and be happy.

I withdraw a small amount every six months to cover our living expenses

“I focused on my relationships and surrounding myself with people I love and who share similar values. This made a very big difference compared to some of my colleagues as I was saving far more than most,” adds Mr Aguilar, who occasionally saved more than 65 per cent of his monthly salary.

Thirdly, he learned to buy and hold low-cost index funds. He says that this investment method requires gaining knowledge and a bit of work to set up. But once it is in place, you get returns far better than what you would get with banks or most financial advisers, while also controlling the level of risk, he says.

“I continue to invest, but am not contributing anymore as I don’t have an income. My portfolio is the same and I withdraw a small amount every six months to cover our living expenses,” he adds.

Starting early is key

Farhan Kapadia prefers to live life on his own terms and this was a driving force behind his decision to pursue financial independence. After being involved in the freight forwarding and logistics business for 28 years, the Indian national decided to stop working in 2015, when he was financially free at the age of 45. He had been running a freight forwarding business in partnership with a friend in Dubai.

"Financial freedom takes away a lot of hassles. You are your own boss," says Mr Kapadia, who started investing young. When he was 18, Mr Kapadia was encouraged by his father to open a fixed deposit and recurring account to park his savings from his part-time job. During his investment journey, he was inspired by Robert Kiyosaki, the author of Rich Dad Poor Dad.

The UAE resident’s investment portfolio is made up of real estate in Dubai and India, mutual funds, stock ETFs, non-resident fixed deposits in US dollars and stocks in Indian blue-chip companies in the IT, pharmaceuticals, chemicals and banking and finance industries.

Financial freedom takes away a lot of hassles. You are your own boss

“I accumulate stocks, don’t trade them. ETFs allow me to achieve geographic diversification in the US, Europe and other developing markets. I prefer to go with Vanguard and BlackRock ETFs, which track the S&P 500 and Dow Jones indices,” adds Mr Kapadia, 49.

He says he picked up good real estate deals in Dubai during the previous market downturn and currently owns multiple, fully paid residential and commercial properties in Business Bay and Downtown Dubai. Although he has temporarily stopped investing in real estate, he plans to eventually buy property in the UK and Canada.

“Even now, I allocate 25 to 30 per cent of what I earn every month towards stocks and ETFs,” he says.

Before embarking on the journey of financial independence, Mr Kapadia advises everyone to be debt-free and have six to 12 months of emergency funds set aside.

“Start small. Go slow and steady. Understand what your end goal is and plan accordingly. Don’t waste time and opportunities in your 20s and 30s since the power of compounding helps you grow your investments very fast over a short period of time,” he says.

Mr Kapadia also cautions people against choosing "get-rich-overnight" schemes or those that promise 20 to 30 per cent returns within a year. He advocates the need to take out critical illness policies and term insurance to safeguard your family and yourself.

“I only invest in companies whose business models I understand, those that have a solid track record and where the promoters have a good holding in the business,” he adds.

Mr Kapadia now has more time for what is important to him, such as spending time with family, exercising, meeting friends and reading. His goal is to travel to as many countries as possible in the near future. He is also planning to move to Southeast Asia as soon as Covid-19 stabilises.

Steve Cronin of DeadSimpleSaving.com says it only takes a few weeks to learn how to manage your money and take control of your finances. Photo: Antonie Robertson / The National

Index investing: A catalyst for financial freedom

Steve Cronin, founder of DeadSimpleSaving.com, says the most comforting aspect of financial freedom is knowing that he can dial the intensity of his work up or down, depending on his family’s needs. He achieved a certain level of financial independence at the end of 2017 when he was 39.

Although he started investing in stock funds in 2002, the financial independence coach admits to making plenty of mistakes since then.

“When I first started investing, it was all in active mutual funds and these have high fees. In 2012, I moved everything into passive global index funds that have very low fees, but I could not work out how to invest in this way from the UAE. It took me a while to discover offshore brokerages and ETFs,” says Mr Cronin, 42, a former management consultant.

Whenever I have invested in individual stocks, actively-managed funds or cryptocurrencies, the results have been horrible

He invests in passive global stock ETFs and bond ETFs through an offshore brokerage. He has always adopted a DIY approach to investment and does not recommend a financial adviser unless one has complex pension issues. It takes only a few weeks to learn how to manage your money and take control of your finances, says Mr Cronin, who has lived in Dubai for 12 years.

He managed to save about 50 per cent of his salary because he was not a big spender. During certain months, he even managed to save 85 per cent. However, Mr Cronin admits he was working extremely hard and it wasn’t sustainable.

“Whenever I have invested in individual stocks, actively managed funds or cryptocurrencies, the results have been horrible. It has always served as a timely reminder to stick to the sensible path of index investing, while avoiding greed and the fear of missing out,” recommends Mr Cronin.

Once you become financially independent, the vast majority of your portfolio should stay invested as before in stock and bond funds, he says. You only take out a small amount each year to live on. Sharia-compliant investors may, however, need a greater allocation to sukuk funds or gold to reduce exposure to stock market volatility, he adds.

He explains that people need to calculate their annual expenses during retirement. In order to be financially independent, their stock and bond portfolio should be worth 25 times the size of those annual expenses.

“There are some adjustments for inflation called the 4 per cent rule. The expenses that you take out every year are 4 per cent of your portfolio on reaching financial independence,” says Mr Cronin.