How To Become Financially Independent
This cartoon is a symbol of ways the rich act. America and most of the western world live in a materialistic world.
Although, doing better in terms of wealth than ever in the history of mankind the average American person is in debt and has no money saved in 401Ks or pension plans.
This is seen not only to the average income of $40,000–$50,000 dollars but surprisingly those at an average age of 40–45 (20 years worth over saving) with an annual income of $150,000 only represented 5% of millionaires. Even, more shocking, is that the most in debt profession are Physicians. Okay, doctors have a lot of medical bills to pay, but these, if saved probably on the average salary of $175,000, would be paid in 5 years. They have often come bottom on financial literacy tests.
So why are these people that earn a substantial amount of money still in debt?
- People spend more than they earn
- They have high debt levels
- Don’t budget
- Have too many credit cards
- They live a high lifestyle for their needs (join country clubs, nice gyms)
- They don’t save
- So what can you do to change this
First, change your mindset in regards to spending
How is this done?
- Personally think Rich Dad Poor Dad explains this well (his other books try and capitalist on this success).
- Define what is an asset and what is a liability.
- Assets are something that gains in value
- Liability this is something that devalues in worth for example cars.
- You need to keep your liabilities less than your assets.
Here are the six lessons to become financial Independent
1) Combat your spending– Don’t spend more than 80% of your salary and save the other 20%. Researching in the U.S found that the wealthiest people saved 20%. But less than 5% actually do this.
If you want to be wealthy be in the 5% saving.
2) Start budgeting — I met client X, he was worth $1 million, yet his salary never topped $75,000 he was retired at the age of 50. When I met client X he showed me a spreadsheet of his spending, this was done to the day and how much he could spend for the next 30 years and what it could be spent on. Client X lived in Thailand, had enough money to live comfortably for the rest of his life. I have met numerous Clients (I would say in their 100s) that earn more than double what client X has but live in the earn hard spend hard. When they have seen me at 55 have less than $30,000 to their name.
If you want to be wealthy be like clients X, budget your needs.
3) Live below your means– The average millionaire has a salary of just $60,000 a year. Why they live below their means. They don’t buy expensive watches live in a modest house and save towards their 401k.
This is the richest man alive wearing a watch that cost $55.
So if you want to become financially independent live below your means.
4) Become financially literate– The richest people spend more time looking at investment options than shopping online. The most successful people, spend the most time picking their advisors. The people, that I know have done the best have spent their time picking a good financial advisor. The most financially independent people I know spent months studying if I was suitable to look after their life savings. And look at the options. This is said for a study of average millionaires. Spend 20 hours a week reading and learning about investments.
If you want to become wealthy, spend more time learning how to become wealthy
5) Lower your tax– The average millionaire only pays a 3% tax. How is this, most in fairness do have their own business? But even if you don’t and have a set income make use of tax-efficient saving pension scheme, lower tax region, reduce your Inheritance tax.
Lower your tax legally though saving and pension plans.
6) Invest for the long term and don’t try and time the market- Note that 70% of personnel fail when investing. 80% of fund managers, don’t beat the S&P 500. So what are your options, use compound interest, and dollar-cost averaging these are the two magic rules of investing that nearly no one uses?
The S and P has an average growth of 8% a year over the last 20 years
It also outperforms most hedge funds
THE YOUNGER YOU START THE EASIER IT BECOMES.
The table below shows if you start at 20 you will need to save $61 a month while if you start at 55 you will need to save $4,749.
- Use the 80/20 rule
- If you are a safer investor (3%) go into bonds 80% and 20% equities low-cost index funds work best.
- If you are going for a higher level go 80% in equities global large-cap and 20% bonds and fixed interest.
- For really high risk 10%+, go 80% in the index and 20% in some sexier.
For information more information on why people are choosing to invest their money, save their disposable income, and retire earlier with the option to work, read our article on the FIRE movement. Don’t worry it’s not the same as the Fyre Festival.
The FIRE Movement & What It Stands For — Investments for Expats
