The ultimate financial dream is to have enough money and investments to pay for your desired lifestyle without ever having to work another day for the rest of your life. Many people reach financial security, but few reach financial independence. Many people live the good life while they are working, but in retirement are forced into a less expensive life style because they failed to plan for the golden years. Many people spend like they are wealthy, but few accumulate enough assets to become financially independent. The following are definitions to help you understand the points of this article.
Financial Independence - The ability to maintain and pay for the life style of your choosing without having to work for the rest of your life.
Financial Security - The ability to maintain the lifestyle of your choosing, but having to work to earn the money to pay for this lifestyle.
This article focuses on financial principals that will help you achieve financial independence.
Money is not a root of all evil.But love of Money is a root of all evil
1. Live Below Your Means - You cannot accumulate wealth if you live a life style more expensive than your earnings. You should set your spending below your earnings so that you can save from 10% to 20% of your pre-tax earnings. Without obeying this first principle, you need not be concerned with those that follow.
2. Budget Your Spending - Almost everyone without a budget spends more than they think they spend. You need to have a personal budget and stick to it.
3. Watch The Big Ticket Items - Real estate agents may typically tell you that you can afford a house equal to 3 times your family gross income, after considering the deduction of home mortgage interest on your taxes. But if you limit your purchase to, say, twice your annual gross income, you can cut your monthly mortgage payments by 35% freeing up cash that you can invest in growth stocks or mutual funds. The same is true for cars, boats, etc. Buy what you need but stay within your means.
4. Launch a Disciplined Saving and Investing Plan - Get in the habit of saving and investing. Pay yourself first. Each month when you pay your monthly bills, make your first payment to your savings account, mutual fund or investment account. Force yourself to develop a discipline. The earlier in your life you begin an investment program , the longer you have for your investments to grow and accumulate. If you understand the time value of money, you know that the longer you have your money invested, the larger the growth.
5. Do Not Buy a Vacation Home or Condo - Unless you plan to live in a home more that 6 months out of the year, don't buy it. Almost anything that you can buy, you can also rent, and you only pay for the time that you use the property. Even if you plan to retire and move to a particular place in 10 or 15 years, do not buy until you are ready to make the move. More exciting developments may appear before your move, and the wealth you create by having the money invested will probably far outweigh the savings you realize by buying today.
6. Don't Take on Financial Responsibility for Anything that Eats - Recognize that the more you have, the greater the cost and the longer it will take you to reach financial independence.
7. Protect Yourself From Disaster - Make sure that you have adequately insured your family for the loss of income if a bread winner dies or becomes disabled. Make sure that you have adequate life insurance, particularly during the child rearing years, and realize that you are far more likely to become disabled than you are to die. Also make sure that you have adequate health insurance for every member of your family.
8. Avoid Credit Card Debt - Use credit cards as a matter of convenience only. If you cannot pay off the entire balance when the bill arrives, you cannot afford the purchase you are contemplating.
9. Pay as Little as Legally Possible in Income Taxes - You should plan your tax situation every year and attempt to pay the lowest amount possible. One way is by keeping much of your net worth invested in growth stocks whose gains come largely from price appreciation, rather than dividends. If your employer sponsors a 401-K plan, income deferral or retirement program, max out your contributions in order to defer the taxes. Contribute to an IRA account, even if you cannot deduct the contribution. The growth is tax deferred until retirement.
10. Invest, Don't Trade - Buy investments that you are willing to hold for many years. Buy into companies that you believe will grow and prosper for many years. This appreciation in price is not taxable until you sell and you pay no taxes until that time. Very few individual investors are able to trade in the stock market on a short term basis and make money. Keep a long term focus and forget the day to day fluctuations.
11. Hire an Astute, Independent Financial Advisor - Your most trusted source of independent financial advise may not be your stock broker or financial planner, but your CPA. An astute CPA can offer you advice on everything from clever tax strategies to investment planning. Be sure to hire an advisor that is focused on increasing your wealth. Make sure that you carefully evaluate any investment where the person selling you the investment is earning a commission from the sale.
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