Your Investments: Three steps to financial independence

Many individuals believe that you need to be rich to be financially independent. In reality, you just need to be able to cover your expenses.

By AARON KATSMAN
April 15, 2010 02:48
3 minute read.
Your Investments: Three steps to financial independence

investment. (photo credit: )

 
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As the nation hurriedly stocks up on charcoal, beef and various adult beverages to celebrate Yom Ha’atzma’ut, now is a good time to focus not just on national independence but your own personal financial independence as well.

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.”

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While many individuals believe that you need to be rich 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 to attain desired 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.



Keep in mind that any pension, National Insurance Institute or Social Security income you’ll receive will lower the overall amount you’ll need. If you receive $20,000 a year in retirement income, then you’ll need another $10,000 as supplemental income, which means you would only need about $200,000 in savings 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, more often than not, investors end up losing money on those wild swings. It may not fit with today’s remote-control generation, where if you don’t like something you just click away to something else, but 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 in 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, where it’s been earning zero interest. When I asked why they never invested the money, they said they figured 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 independence.

aaron@lighthousecapital.co.il

Aaron Katsman, a licensed financial adviser in Israel and the United States, helps people who open investment accounts in the US.

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