PEOPLE ASK “HOW TO BECOME FINANCIALLY INDEPENDENT”

There are several myths and misnomers when it comes to financial planning, and individuals can take in a lot of advice from many good and not-so-good sources. Mistakes can range from confusing high incomes with wealth to not knowing the importance of tax asset placement when choosing your investments.

This article will walk you through the journey of being financially independent :

Understand That Income Is Not Wealth

Most people believe the key to wealth is a high-paying job. Yes, it’s easier to amass assets if you have more monthly income, but one key to increasing your net worth is to spend less than you make. Ultimately, spending habits are the reason a professional athlete making $20 million a year can quickly go bankrupt, while a bus driver can retire a multi-millionaire.

You need to understand the difference between income and long-term wealth in order to escape the spending trap. Income is an obvious component of wealth, but it’s not the only factor. Many people see wealth as their total net worth at any given time. In other words, wealth can be thought of as the equity on your balance sheet — your ​assets minus liabilities.

Long-Term Thinking

Thinking long-term is an important characteristic of accumulating wealth and achieving financial independence, regardless of your income level. There are several considerations for long-term wealth, and they’ll differ for everyone.

You have to put in long hours after years of education and speciality training to get a paycheck if you’re a doctor or lawyer, but that paycheck doesn’t necessarily translate to wealth. Helping to ensure your job’s security, taking initiative to achieve a promotion, or taking steps that will result in higher commissions can all be factors for wealth and ways to move toward financial independence with long-term thinking. Side gigs, private investments, and a host of other variables can also be ways to think long-term and accumulate wealth. They might include a portfolio of private businesses, stocks, bonds, mutual funds, Crypto, real estate, patents, or trademarks. Some of these cash generators can be relied on for long-term income in addition to your job, or just as cash generators that can pull in money while you take long vacations.

Assessing Your Balance Sheet

Take a look at your personal balance sheet. You might already have organic investments that you can rely on in your quest for financial independence. Oftentimes, this is wealth that generates capital gains, income, and dividends without labour. The more of these investments you can afford, the sooner you can fully achieve financial independence.

Reaching a Goal

The real value of your income is partially determined by the amount you can invest to achieve a financial independence goal. Setting this goal can be important for keeping your perspective on income in check. At your goal, you can successfully maintain the lifestyle you want without working.

Working with a financial adviser can help you to set a goal for wealth accumulation that allows you to maintain your standard of living without an additional paycheck and achieve financial independence. This goal can be lofty, however, because most people’s annual spending includes a long list of budget items, such as a mortgage, car payments, clothing, college tuition, entertainment expenses, and more.

Create Surplus Funds to Invest

The only way to take advantage of investment opportunities is to have the money to invest. There is a certain point in successful investing where you reach critical mass, and the returns generated on your assets can change your life. Earning a 10% return on $10,000 is only going to net you $1,000 before taxes — hardly earth-shattering. But the same return on a $1,000,000 portfolio is $100,000, which has far more utility despite requiring the same effort and research.

Amassing wealth and becoming financially independent is a slow process that takes time. You do small things every day — cut your expenses, generate extra income, and put the money into brokerage and tax-deferred retirement accounts. It begins to amount to something with time. You can react on a larger scale than your previous investments as each new opportunity appears. That’s called compounding. The interest, dividends, and capital gain your money has earned begin to generate their interest, dividends, and capital gains, and on and on in a profitable cycle. It’s how $10,000 can grow to $331,000 over 50 years at a 7% annual return.

Take Control of Your Time

Gaining complete control over your time is often one factor in achieving financial independence. You may not have reached the investing goal that allows you to maintain your lifestyle without an additional paycheck, but if you have the freedom to spend your time as you like, that might be the most powerful definition of wealth for you. If it feels like you’re unwrapping a gift each morning when you show up to the office, job site, practice field, or studio, you’re on track for achieving financial independence.

You have a huge advantage over your competition if you find the profession that gives you pleasure and you’re disciplined in managing the business side of it by controlling costs. You might continue to work eight, 10, or 12 hours a day for two, four, or 10 years longer because you love the process and product itself, not because you need to.

Know That Grades Do Not Correlate With Wealth

According to decades of extensive research by Thomas J. Stanley, PhD, author of “The Millionaire Next Door,” the grades one earns in school have no correlation with the economic wealth and success outside the medical and legal professions. That’s not to say education isn’t important — 88% of American millionaires did graduate with an undergraduate degree — but academic performance is not all it’s cracked up to be.

Why do parents, teachers, and counsellors continue to tell children that they won’t be successful if they don’t have a C- GPA? Statistically speaking, it’s because often these people are themselves not financially successful, They, therefore, have no idea what it takes to achieve financial independence and thus buy into the myth that good students go further in life.

These parents and teachers measure analytical intelligence only, not the creative intelligence that’s responsible for sparking innovations, societal advancements, and crafting solutions in niche markets. They fail to realize that most millionaires wear blue jeans, overalls, or work shirts, not a suit and tie. They eat at McDonald’s and Burger King. They live in ordinary, well-established neighbourhoods. Most own their businesses.

Statistically, you’d be more likely to guess right if you were to chose a self-sufficient student in shop class who pays for their car, gets decent (but not spectacular) grades, has a job, and enjoys what they do, rather than selecting someone from the honour roll.

Find a Complementary Spouse

Another interesting way on how you can be financially free is when you find a complementary spouse. Your efforts toward a better, financially independent life are going to feel like struggling in quicksand no matter how successful you are unless your spouse is equally disciplined, frugal, and investment-oriented. The emotional, financial, and social toll that marrying the wrong person can take on your life will overwhelm almost any progress you can make in your career or pocketbook.

A tremendous amount of success is based on proper temperament and psychology. How can you focus on your work and creating the life you always dreamed of if you’re worried about the situation at home? You need the kind of support that allows you to take risks because you know, no matter what happens, there will always be someone waiting for you at home who loves you and shares your overarching financial goals.

Support Your Productive Relatives

It is almost always a mistake to provide gifts of cash and support to those relatives who are unable to generate high incomes on their own, or who are constantly in financial trouble.

Consider the incentive system you set up. One son becomes a physician, and one daughter an attorney, and you say they don’t “need” your money. At the same time, you provide free rent, board, and bailouts for their sibling, who sits at home in credit card debt but refuses to look for work. You’ve managed to effectively turn that child into a financial and credit junkie. It’s unlikely they’ll ever get over their addiction.

The child might tell you that they only need one more loan, but the fundamental, underlying problem is their inability to manage money. The support you give to your relatives should help them become financially independent themselves, not create a dependence on you. That’s one way to ensure you’ll never have financial freedom.