Friday, August 21, 2009

Financial Independence (FI)

Every person on this planet will have their own definition of financial independence. To many people in North America, it means a nice home, nice cars, fancy "stuff" and trips. To someone from the African interior, it could be defined as 3 square meals a day. Yet one constant remains - the most important things for those dreaming of financial independence (FI) is manage your cashflow. In the beginning people often get too bogged down in worries about if they have invested right or tax considerations or how much money they need, when in reality managing your cashflow is much more important.

You see in the beginning you likely have a small amount of investments so optimization of your investments and related taxes is a minor issue. A 1% lower rate of return on $50,000 is a mere $500 a year or equal to about $42/month. So you could either do a ton of research and self learning on taxes and investments to get that extra 1% return or just stop buying a coffee everyday on the way to work. Guess which one is much easier to do?

So that’s why I’m suggesting don’t worry about everything else in the beginning. Your first priority is to start using frugal ideas and reduce your spending to increase your amount of money for debt repayment and future savings. You start with the big stuff of paying off your credit card debt and work you way down to $2/month savings here and $5/month there. Every dollar counts so look at everything and ask yourself, "does this make me happy for the dollars I’m spending on it or do I require this". Not “would like” or "kinda enjoy it" but rather "I love doing this" and "I need to eat something to keep breathing" kind of thing.

In the beginning you will likely go over kill and cut back too much. That is fine, once you find those areas you really miss spending on go back and put some cashflow back in. After all
FI is a nice goal, but no one should be miserable on the way to getting there. Life is a once through processes so you might as well enjoy the ride.

In the end you will find out how much you really need to spend to make you happy which then you can use to build a real estimate of how much you need to get to FI. Also after this much time you would have likely had some time to slowly learn a bit more about investments and taxes so now you can go back and investigate doing better there. Just don’t try to take on too much all at once, it is recipe to fail to get anything done.

Read books, talk to successful people (make sure they really are successful and not living on time/credit), watch shows and educate yourself. Most people tend to learn from their parents - whether that advice is good or bad does not matter. Ask around and find out what others are doing. That doesn't mean you need to become an expert. Many people do fine as do-it-yourself investors. They don't need an advisor to hold their hands and seem to come out ahead. If you don't see your self in this category, then stick to the basics:

  • Pay cash whenever and wherever possible
  • Save 10% of your income for emergencies, retirement, child's education
  • Pay your bills and live within your means
  • Decide on whether an item is a need or want
  • Do a budget and stick to it

Stay Well and Pay It Foward.

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