Tuesday, July 06, 2010

How To Achieve Financial Independence

Because this economy has thrown so many family financial plans into chaos, we can focus so much of our energies onsurviving this storm--and forget that what we are really seeking to accomplish in wealth-building requires us to keep our head on straight, and to avoid all of the negativity which surrounds us.

After all, what is it we are trying to accomplish by earning wealth? For me - and for many others - the answer is Financial Independence.

Here is what I mean by that: "having an income sufficient for your basic needs and comforts from sources other than paid employment". Financial independence implies freedom. It is the condition of having saved enough money that you can do whatever you choose. Whether you elect to keep working doesn't matter - you have enough saved and invested to follow your dreams.

But is financial independence just a pipe dream? Is it something only for the lucky and the strong?

No, it is a goal that anyone can fulfill as long as they are armed with some basic knowledge; as long as you make the smart choices.

As I see it, there are four keys to accumulating wealth:

1. Start investing as early as possible. It takes significantly less money to accomplish what you want, and you have more time working for you.
2. Be determined to save on a regular basis. It is an easy way to accumulate wealth.
3. Begin investing with the largest possible sum you can. You will have more money working for you over a longer period of time.
4. Reach for the highest rate of return you believe you can safely receive on your money over time. Each additional percent is important. The higher the rate, the less money it takes to accomplish what you want.

Financial independence is built upon these four guidelines. Now, of course this is all more easily said than done! So, let's examine what keeps us from doing this!

Confronting your financial challenges

In order to save money, you must obviously fight to keep from spending it too much! I encourage you to set goals, to actively prioritize wants--and not just make willy-nilly decisions about what you are spending.

To do this, it may be helpful to place a value on each of your wants. So...here is an exercise for the week: Pull out a piece of paper and list your wants.

Depending on your income and net worth, these can range from a new house to a hot tub to a trip to London to a new blender for the kitchen. Next to each item, write why you want it. (You might want a hot tub, for example, because it would allow you to relax with family and friends.)

When you have finished, take another piece of paper and re-order the list based on how important each want is to you. If a trip to London tops the list, are you still willing to delay it by spending $100/month for that gym membership you rarely use?That's how you can use this list of prioritized desires.

Confront this issue first (keeping in mind those four keys mentioned above), and I will be back with more thoughts for you next week.