As I continue my trip in Seattle, I was having trouble sleeping and I turned on the radio in the middle of the night to some financial talk show. The host was going on and on about the need to be financially worry free. He was encouraging his listeners to invest in real estate and use leverage to buy more and more. Then he said after a few years you will be able to “live the lifestyle that you always dreamed about.”
People tend to define financial independence in a multitude of ways but I am going to stick to the definition used by Wikipedia: “financial independence is having sufficient personal wealth to live indefinitely without having to work actively for basic necessities. In the case of many individuals whose financial circumstances fit this description, their assets generate income that is greater than their expenses. Under such circumstances, a person is financially independent.”
While many individuals believe that you need to be rich in order to be financially independent – meaning a job with a salary of $250,000 and savings of millions of dollars – in reality, you just need to be able to cover your expenses with passive income to fit the definition. It’s not all about your assets; your expenses play a huge part in the equation as well.
If you scale down your lifestyle, you can achieve independence on much more modest sums of money than you ever dreamed was possible. Here are three tips that can help get you on the path to financial independence.
Target date I am a firm believer that people need to set goals in order to achieve sought after milestones. If you want to effectively lose weight, you set a goal of how much you want to lose. If you say to yourself that you want to “just lose weight” without any goal of how much, you are primed to achieve minimal weight loss (if any at all). This is speaking from experience! It’s important to set a realistic date for when you’d like to be financially independent. As a guide for how much money you will need in the future, I like to tell clients that they need about 20 years worth of this year’s expenses to make it.
For example, if you spend $30,000 a year, you will need $600,000. Now keep in mind that any pension, national insurance or social security income that you will receive will lower the overall amount that you need. If you receive $20,000 a year in retirement income, then you will need another $10,000 as supplemental income, which means you would only need around $200,000 in savings in order to be independent.
Let your money work for you You need to make saving and investing a priority. Make a habit of “paying yourself first” every month. Whether you invest in real estate (where you get a monthly rent check) or you invest in dividend-paying stocks, focus on a slow and steady approach to building wealth. While it’s quite tempting to try and find a “home-run” stock that will make you an instant fortune, far more often than not, investors end up losing money on those wild swings.
While it may not fit with today’s remote control generation, where if you don’t like something you just click away to something else, when it comes to building assets, slow and steady rules the day.
Don’t wait Individuals often wait to begin investing, because they think that their accounts are too small. They think that if they don’t have hundreds of thousands of dollars, there is no point investing.
I recently met with a couple that has been married for a few years and had received $25,000 in wedding money. They basically took the money and stuck it into a savings account at their bank that is earning zero interest. When I asked why they never invested the money, they said that they figured that it was such a small amount that it wasn’t worth it.
With intelligent and measured investing, that $25,000 can be a really good starting point to get you on your way to financial firstname.lastname@example.org Aaron Katsman is a licensed financial professional both in the United States and Israel.
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