10 Steps to Financial Independence
To accumulate wealth, we recommend you focus your money mindset. You must create a closer, more frugal relationship with your money. After studying the habits and the routines of financially successful individuals, I found these ten steps to be consistent among nearly all of them:
- Know your monthly expenses.
This is something anyone can do – it’s simple. Grab a piece of paper and write down every expense you have. Document every time you spend money at a restaurant; every time you pay your Netflix bill; document everything.
Mark Bovair refers to this as creating a physical relationship with your money. Many folks don’t understand how much money you are spending every month until you create this physical relationship.
- Pay yourself first, at least 15%.
This does not mean you should treat yourself every month with 15% of your income. This means you should be setting aside 15% into some kind of investment account. If you’re in a situation where you can’t quite make that 15% (maybe you’re paying off debt) that’s fine, but you should get in the habit of saving money. Whether it’s $1 or $100 – pay yourself first.
- Utilize automatic, systematic savings plans.
If you’re like me, saving that 15% can be difficult at times. I would rather spend it. A simple way to pay yourself first, minus the mental distress, is to set up a systematic savings account. For those of us with limited self-control, this is an easy way to build your savings/retirement account.
- Get the full match through work retirement plans when available.
This is FREE MONEY! That’s it – it’s free money. Always utilize the full match through your company’s retirement plan.
- Pay cash for large purchases like cars, home, etc.
We know paying cash for a home is unreasonable for most but for those who have the ability, we would recommend considering it.
One advantage of paying cash rather than financing is it helps you create a budget and allows you to be more reasonable with spending. Paying $25,000 for a car is a major expense. By paying from savings and not financing, you’ll truly feel the cost of the purchase.
The biggest reason to do this is to avoid the cost of interest associated with financing those large purchases. Before you finance a large purchase, find an amortization calculator online or ask a professional to tell you how much interest you’ll pay if you do finance it. A lot of times, that is a scary number and you’re helping the banks build another sports field and beef up their balance sheet, not your own.
- Be the richest person in your neighborhood – don’t overbuy!
So, you got approved for a $500,000 home loan. This doesn’t mean you should go out and buy a $500,000 house, nor do you have to. Purchase a home that is adequate to your lifestyle, which allows you to live comfortably within your financial means. You will increase your cash flow and you can save more for your golden years.
One idea when determining your mortgage budget for those married people out there, make sure you can afford the mortgage based off just one person’s salary not both. This gives you extra protection if one of you loses your job or decides to be a stay at home parent.
- Drive cars for at least ten years when possible.
Depending on your financial situation, this may not be an absolute must. However, it isn’t wise to have a lot of money in depreciating assets. Frequently purchasing new cars is an easy way to dump money into depreciating assets.
- Keep six months of expenses in cash or equivalents.
Sometimes life hits. Sometimes life hits hard. Sometimes you lose your job to a robot. We hope you don’t, but we’re living in the future. In situations where you lose your job (robot or not), it is important that you have a substantial emergency fund to protect yourself and your family until you can find a new opportunity.
- Accept market volatility as a natural and positive side effect.
We saw some market volatility recently – it happens. The market fluctuates and that is OK. Successful investors understand a down market is a buying opportunity. Do not fall to the misconception that market swings are the end of the world.
- Buy term life insurance to protect your financial dependents.
A broad rule of thumb for insurance: spend as little and get as much as possible. Have it when you need it and get rid of it when you don’t. Term life insurance is generally enough to protect your house, kids, and family during your working years.
For more financial understanding, check out the Mind of a Millionaire podcast – new episodes every Monday.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
No strategy assures success or protects against loss.
All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. Please keep in mind that insurance companies alone determine insurability and some people may be deemed uninsurable because of health reasons, occupation, and lifestyle choices.