To me, the ultimate goal of personal finance is to become financially independent. While there is no set definition for reaching financial independence, I like to think of it as reaching a point where you have saved enough to live off of for the rest of your life. In other words, you’re free to do what you want, where you want, and when you want.
It’s not easy and it takes time, but that doesn’t mean it can’t be done. Here are 10 easy tips to help you get there.
- Be an Exceptional Saver, Rather Then a Good Investor - It’s better to be able to save 25% of your income and earn 8%, rather then saving 10% of your income and earning 9%.
- Keep A Crossover Chart - A crossover chart is a line graph that lists your income, expenses and investment income. Once monthly investment income has crossed over monthly expenses, you have become financially independent. Keep this chart on a monthly basis. For more info on the crossover chart, read Your Money or Your Life.
- Understand the Reverse 4% Withdrawal Rate – If you can withdraw 4% of your portfolio each year, that means you would need to save $1,000,000 if you had expenses of $40,000 a year. If you reduce your expenses to $30,000 you only need to save $750,000. If you reduce your expenses to $20,000 a year, you only need to save $500,000. You get the idea.
- Earn Side Income – Find a way to earn extra money (extra job, sell stuff, residual income, etc.) and invest 100% of it into becoming financially independent.
- Know What You Can Control – You can’t control inflation, market returns, or a tree falling through your roof. However, you can control asset allocation, investment expenses, and most importantly your savings rate. Optimize what you can control. Don’t worry about the rest.
- Monetize Your Passion – What do you love to that you can get paid for once you become financially independent? If you want to travel, think about starting a travel blog. If you like sports, try coaching a high school sports team. Remember tip # 3. If you can earn just $500 a month, that’s $150,000 less you need to save!
- Think About Relocating – Is moving an option? You may be surprised how cheap it is to live in a nearby city, another state, or even another country.
- Insure What Needs to be Insured and Self-Insure the Rest – You would be surprised how many people insure their washer and dryer, cel phones, televisions, and computers, but don’t properly insure their health, income, car, or home. As a general rule of thumb you should purchase insurance on anything that would cause you financial disaster and self-insure the rest by building a larger emergency fund.
- Take Care of Your Health – Around 60% of bankruptcies are caused by medical bills. Luckily, you can help mitigate a portion of this risk by taking care of yourself.
- Start Today – No matter how old you are, define what age you want to become financially independent and start working towards your goal today. It doesn’t matter your age. As the old saying goes, “The best time to plant an oak tree was 20 years ago or today.”
- Stop Buying Crap – Not much explanation needed.
Good luck in achieving financial independence.
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