How To Be Financially Independent?
Are You Financially Independent?
There are several myths and misnomers when it comes to financial planning, and individuals can take in a lot advice from many good and not-so-good sources. Misnomers can range from confusing high incomes with wealth to not knowing the importance of tax asset placement when choosing your investments.
People can choose to define financial independence in their own way — after all, not everyone wants a private jet and a mansion. However reaching real financial independence — the ability to live comfortably off one’s savings and investments with no debt whatsoever — could be easier than you think.
- Visualize first, then plan. Anyone’s vision of financial independence can probably use a reality check. Start by considering what your vision actually looks like and then gather some qualified financial advice to set — or reset — your course. The path to financial independence may be considerably different at age 20 than it is at age 50; the more time you have to save and invest generally produces a better outcome. But whatever age you are, start by getting a realistic picture of what options you have.
- Income Is Not Wealth. Most people believe the key to wealth is a high-paying job. Yes, it’s easier to amass assets if you have more money coming in each month, but one key to increasing your net worth is to spend less than you make. Ultimately, spending habits are the reason a professional athlete making $20 million a year can quickly go bankrupt while a bus driver can retire a multi-millionaire. It can be a cliche but it is a fundamental reality of money. To escape the spending trap, you need to understand that income is not long-term wealth. What is wealth? Income is obviously a component of wealth, but wealth can have varying definitions. Many people see wealth as their total net worth at any given time. This can be paralleled to the assessment of an individual’s balance sheet. Wealth can be referred to as the part of your balance sheet that is considered equity. Your assets minus liabilities. The wealth you have after liquidating.
- Spend money on things that grow. The leaders of industry in this world all think alike. They never waste their money on things that lose money, or depreciate. If they must, then they minimize the amount of money spent. Warren Buffet, Steve Jobs and Mark Zuckerberg don’t spend money like they’re rich. Things like real estate and energy efficient improvements to your home, even investing in your health can grow or save you money in the long run. Most of the “stuff” we spend our money on loses value (I’ll talk about cars in the next tip). In your search for financial independence, you should start calling it what it is…wasteful. If you look around your house, everything sitting around represents money that you’ve spent. Was it worth it? Were the dollars you paid worth it’s function? Maybe it was, but when you consider what those dollars COULD have represented by saving or investing them, your answer might change. Regardless, start looking at how you spend your money through this lens and it could help you to make better buying decisions.
- Build smarter safety nets. Emergency funds and insurance are part of the financial planning picture, but they’re rarely discussed in combination. The traditional definition of an emergency fund is a separate account for cash that can be used instead of credit in a sudden emergency like an unexpected car or appliance repair. But it might be wise to evaluate current deductibles on home, car and health insurance to see if those amounts should be built into one’s emergency fund – many people keep deductibles fairly high to keep premiums low. Would you have cash on hand to cover deductibles if you had a sudden claim? If not, put that money in reserve. The more effective you are at dealing with financial emergencies, the faster your savings and investments can grow.
- Buy assets that generate income. No investment is foolproof – whether you invest in stocks, real estate, collectibles or cash investments, all have up and down markets. It is important to fully understand everything you invest in and focus on assets that will make money over the long haul. Reading widely on the subject of any class of investment you’re interested in will help you buy low so you can sell higher at a later date. Don’t forget to study the tax ramifications of any investment transaction you make.
- Always know where you are financially. Financial planning isn’t about making one set of financial decisions and assuming you’re set. Lives and situations change and your financial planning must be flexible enough to withstand both positive and negative changes without derailing your hopes for financial independence. If your forte is not investing, financial planning or tax matters, by all means bring in qualified experts to help. But financially independent people generally have their money issues at their fingertips not only for their own use, but for estate purposes as well.
Not everyone inherits a fortune. Financial independence takes work and discipline, but small steps can yield big rewards over time.