Financial independence can be defined in a number of ways. However, when most think of financial independence they dream of a time in their lives when they are generating enough income to cover the essential expenses so that they never have to work again. For some, financial independence is far off in the distance, for others, it's within close reach. Wherever you fall on the spectrum, here are 10 financial rules to never break if you want to achieve full financial independence someday:
1. Begin a Savings and Investment Plan
If you are new to the financial planning process, it’s important to remember you don’t need to go from zero to sixty overnight. Just like a fitness trainer would be hesitant to recommend an all-out body-straining routine on your first day in the gym, I wouldn’t expect someone to start implementing advanced planning techniques in the first week. Pick a reasonable and attainable goal, and get used to achieving small wins on your track to financial independence. Start slow if you must, but save something each month. If you are new to saving, you don’t need to immediately put aside half of your paycheck, start small maybe 20 or 30$ per pay period - and increase it as you get more comfortable with the process, and as your income increases so should the savings amount. Starting out slow will help you build the confidence needed for long-term success.
2. Make a Budget and Stick to It
You cannot live within or below your means without knowing what your expenses are and where you can start cutting. Learning to live beneath your means is one of the central costs of learning how to become financially independent. If you’re currently struggling with your finances, there'll be no easy way over this hurdle. The path to that higher knowledge is a budget. There are dozens of free budget templates online. Fill in the template blanks and you’ll learn some rather eye-opening facts about where your money is going. Follow that budget and see how spending discipline gives you an immediate leg up on financial independence.
3. Get Into Daily Financial Awareness Habits That Result in Wealth Accumulation
If your daily habits include a stop at the coffee shop for that $5 latte, you are spending $100 a month — another $1,200 a year. Make your own frothy caffeinated beverage from the mixes on sale at your grocery store. Look for ways to save costs and expenses through coupons and sales. Keep track of your monthly bills and look for ways to cut down on energy expenses, for example. Take a harsh and critical look at your budget. Are you spending over $100 on cable TV, for example? Cut the cable and save an extra $1,200 a year. Look everywhere and be ruthless.
4. Pay off Your Debts
It's hard to make a case for being financially independent when you owe money to credit cards, student loans, banks, or other people. You should have a goal of getting out of debt as soon as possible. You can create different time horizons for getting out of debt with each debt category. For example, you can commit to eliminating your credit card debt in 2 years, while paying off student loans in 7 years, and a mortgage in 20 years. While this is not an overnight solution to your current debt problems, but it sets you heading in the right direction. If you are bogged down in heavy debt and your monthly expenditures are beginning to leapfrog your income, it may be time to consolidate your debts. There are many pathways to debt consolidation. Check around on the web. There is help out there.
5. Avoid Money-Making Schemes and Scams
No matter what the slick infomercials and bombastic websites shout out, there is no shortcut to wealth. Anyone who advertises that buying their plan or paying to attend their seminar is mainly only interested in making money from you. That meets their financial goals but detracts from yours.
6. Shield as Much Income From Taxes as Possible
Taxes represent a major reduction in your income, which means you will have less money available to save and invest, ad pay off debt. By using strategies that reduce income taxes, you'll be able to keep more of your income rather than turning it over to the tax authorities. The easiest and best way to shield your income from taxes is through retirement plans. If your employer offers a 401(k) plan at work, put as much of your income into it as you can afford. At a minimum, invest up to the amount that will get you the maximum employer matching contribution. For example, if your employer offers a 50% match (3%) up to a 6% contribution by you, you should contribute at least 6% – and of course, more is always better.
7. Insulate Yourself in the Short Run - Creating a Safety Net
If you have been living paycheck-to-paycheck up to this point, your first savings goal should be to create a safety net. You can do that by creating an emergency fund. An emergency fund should be held in a perfectly safe account – like a savings account, money market account, or a short-term certificate of deposit. It's not for investment. The Certified Financial Planning or (CFP) board recommends one accumulate a sufficient amount of cash in the account to cover between three months and six months of living expenses. At Davinci Capital Partners we strongly believe that it is unwise to navigate life without any sort of financial cushion.
8. Invest Everything Above That
Once your emergency fund is adequately stocked and any debt other than a mortgage is paid, you can begin thinking about investing your money. This is important because investing is about using your money to earn more money. The larger your investment portfolio becomes, the closer you get to financial independence. Ideally, your efforts to save money should never slow down once you have built your emergency fund. Instead, increase your efforts to fund your investment accounts. That should be easier to do once you have an emergency fund in place and little to no debt.
9. Invest No Matter What the Market is Doing
In hindsight, it's obvious there have been better times to invest than others. But since no one knows what the future holds, you can't know when that will be in the future. Plan to invest no matter what the market is doing. If you're investing periodically, you'll be dollar cost averaging into the market, which will minimize the risk you're taking should the market decline. If you do feel it's a bad time to invest, then simply cut back on how much you are investing in equities. But at the same time, continue accumulating cash and fixed income investments in your portfolio, that way it'll be there to buy when the timing looks a little bit more favorable. If you are unsure how to invest or what to invest in contact us so that we can put together a personalized investment plan to help you gain financial independence.
10. Commit to Refocusing on Your Goal Regularly
In order to become financially independent, you will need to become fully committed to your plan. You should have a written plan – that includes goals for each financial category – and plan to review them annually. This will ensure that your goals are on track, and keep you focused on your ultimate goal of becoming financially independent. Think of it as an affirmation, in which you renew your commitment. You should do that at least annually, but in reality, you should do it as much as you need to.
Becoming financially independent isn't easy. That's why you need a detailed plan, and a financial advisor to help you stick to it. Most people who achieved financial independence did not do it alone. They had a support network, made sacrifices, and started saving early as possible.
Use this list as a guide, and remember that there is no one-size-fits-all approach to achieving financial freedom. It is paramount to work with an experienced financial advisor so that you give yourself the best chance of achieving financial independence. Contact us today to get started on your journey.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.