You must first buy a lottery ticket if you want to win.
This rule is as simple as the rules to ensure financial independence. If financial independence is important, it is even simpler. My father taught me that I shouldn’t rely on anyone, especially not the government, if I want to live as long as I did when I was working.
Many people in my age group believed that they could rely on Social Security to pay their retirement. But today, we should all realize that this possibility is not possible.
For financial independence, there is one rule: start early. It’s relatively simple to ensure your financial future by building your next nest egg in your twenties. However, it’s almost impossible to do so if you wait until your fifties.
Financial independence doesn’t require you to be a financial wizard. I am living proof of that fact. You do need to be disciplined enough to follow some simple rules. These rules were taught to me by the best and brightest. These rules are free. These rules are free and almost guarantee your financial future.
1. Understanding the fundamental principle of COMPOUNDING of Wealth is key to financial independence. To be financially independent, you’ll most likely need to understand the basic principle of COMPOUNDING OF WEALTH.
Financial success starts with a commitment to living on 80% to 90% (with 10% reserved for giving and 10% to invest) of your take home income. Then, you must save 10% each month.
The stock market has grown at an average rate of 11% per year for the past 100 years. In other words, $1,000 that I had invested in 1963 (my first year of work) would have been worth $88,897 in 2006.
Even if I had only invested $500 (5% of my take-home salary in 1963), this investment would have been worth $44,449 by 2006.
Consider what it would be worth to invest $1,000 each year between now and 65. Wow! It is easy to become financially independent if you get started early.
Go to http://www.moneychimp.com/articles/finworks/fmfutval.htm for a compounded calculator and do the math yourself.
This principle could not be more clear.
Are we done talking enough about compounding wealth?
These are just a few more rules.
2. Reduce your investment in assets that are likely to depreciate.
For most people, automobiles are an essential part of our lives, but they can be costly investments. A $25,000 new car or truck will appreciate between $2,500 and $5,000 within the first year. People who drive luxury cars such as a Mercedes, BMW or Lexus will see a $5,000 to $10,000 annual depreciation ($400 to $800 each month).
You can live with a pre-owned vehicle, and you’ll be able to reduce your monthly investment.
Furniture and clothes are also examples of depreciable assets. These assets will not be worth much no matter what price you pay. They are only good for a few days use.
3. Maximize your investment for assets that appreciate.
Long-term, investments in real estate (i.e. your home, stocks and bonds) will increase in value. If you are able to manage your finances to maximize these types of investments and reduce your investment in “fluffy” assets, you will be much more likely to achieve financial independence before it is too late.
4. Pay cash as much as possible and, except for the first mortgage on your house, avoid debt. To avoid interest costs, this means paying your credit card bills each month and paying cash for furniture, automobiles, etc.
5. You can create a personal spending plan and stick to it. A spending budget is a great tool to control spending and live within your income.
Many people go crazy when they start their business careers and try to make some extra income. They end up spending more than they earn. The first sign they are in trouble is when they start to accumulate credit card debt they don’t have enough income to repay each month. They start to make minimum payments, pay exorbitant interest rates and dig a deeper hole each month.
Recognize what’s happening. The second step is forcing yourself to plan your spending to not exceed your after-tax income. A budget should contain a category for saving and giving. My personal experience is that people who are able to discipline themselves to save 10% and give 10% to charities or the church can manage other financial aspects equally well.
As a contingency plan, ensure you have at least six months’ salary in an emergency fund for the case that you lose your job or experience an equal-major emergency.
A broad portfolio is the key to investing success. Don’t speculate. Do not try to time the market. Even when the market looks grim, stay invested. Your portfolio will not grow at historical compounded rates if you miss the rare day when the market is up 300-500 points. No one can predict the stock market.
It is important that your spouse and you are in agreement about your investment plan and the goals.
Stay the course once you and your fee-based advisor have agreed on a plan.
