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  • Writer's pictureSamuel Rad

8 Guidelines for Achieving Financial Independence

My clients know I’ve always maintained that there’s no easy path to financial independence: it’s a goal that takes dedication and focuses over many years to attain. But there are certain steps that can help you on your way there. Below are 8 guidelines to help you achieve a financially independent lifestyle.

1. Practice thrift – within reason. Building a nest egg for retirement or other financial goals is important, without a doubt: but don’t do so at the cost of making your life in the present miserable. Besides the fact that depriving yourself of the things you enjoy is unlikely to be sustainable long term, it also defeats the purpose of earning money in the first place: the goal isn’t to enjoy yourself only when you are financially independent, but also while you are preparing to become so.

If you want to go out to a movie every now and then, do so. Watching at home may be cheaper but that’s no reason to never treat yourself to a show. While you’re out you could choose to attend a matinee to save money, or to go to a casual eatery instead of a more expensive one. In that way, you still enjoy yourself but do so in a cost-conscious fashion.

There are many similar ways to do the things you like while still saving money. For instance, instead of buying a brand new car, you might buy one that is just a year or two old: it is likely to run as well as a new one but the rapid depreciation most cars experience in value after their first year should make it much less expensive. Another money-saving method is to use generics instead of name brands when the quality is similar. Or you could split an entrée instead of buying two. There are ways to be frugal in almost every aspect of life while still enjoying the things you love.

2. Follow your instincts. In my years in the business, I’ve heard too many stories of investors who have been taken in by stories that seemed to be too good to be true and turned out to be just that. The stories differ in the details: sometimes it’s a real estate deal with an absurdly high “guaranteed” interest rate, other times it could be a foreign currency “pool” offering an astronomical “sure” return. But whatever the case, it typically involves ethically challenged individuals taking advantage of good people who didn’t listen to the little voice in their head telling them what seems too good to be true usually is.

When you hear someone promising you an outrageous rate of return on your initial investment, your best bet is to just hang up the phone. You know deep down that any “system” guaranteeing massive returns is likely a fraud. Just like someone telling you they can flip houses and make a fortune is likely leaving out many of the important details about how difficult the process really is in order to entice you to invest with them. Trust your instincts and don’t add your story to the sad tales of those who have lost money by not doing so.

3. Invest for you in the long term. Warren Buffet didn’t make his fortune day trading stocks, and very few, if any, of his fellow billionaires did either. As I tell my clients, even for those of us just trying to build a nest egg for retirement, trying to do so by rapid trading can be counterproductive – markets are notoriously hard to predict in the short term.

Over a long-term time horizon, however, it’s a different story. If you can put aside something to invest on a steady basis and let it grow over the years, judging by historical returns, you are likely to see good results.  This doesn’t mean to ignore your investments: market conditions can change from time to time, and your strategy may need to as well, but as long as you take a long term perspective you can avoid the danger of becoming disappointed during times of poor investment returns and making impulsive investment decisions as a result.

4. Buy when things look bad. The oldest mantra in investing is to buy low and sell high. But you can’t sell high if you don’t buy when things are low. This doesn’t happen when conditions are good, but when things seem bleak. When the economy looks grim, unemployment is high, and the pundits are prognosticating further economic weakness, the easiest thing to do is to wait for things to get better. However, for those who take the long-term view, these are the best times to buy.

While bad economic times are nothing to hope for, due to the cyclical nature of our economy they happen periodically. Those who realize that downturns will in time be replaced by upturns can use the lower prices seen in various assets during the downturns, from stocks to real estate, to position themselves for profits when the cycle finally turns.

5. Avoid debt. While there can be good reasons for taking on debt (buying a house, financing the growth of a small business, emergencies) this doesn’t change the general admonition that avoiding debt as much as possible is a good thing. Taking on debt can be seductive; it feels good to be able to buy things that we otherwise might not be able to afford. But like many things that feel good initially but have nasty aftertastes, overusing debt can be counterproductive in the long run.

First, paying interest to a lender takes away from money that could be used for more productive purposes, such as investing for the future. If you hope to reach financial independence someday it’s hard to do so if a significant portion of your earnings is used to pay interest on debt incurred from past purchases. Generally speaking, you should only use debt when there is no alternative, or when the purchase of debt will provide greater growth in value than the interest on the debt. Ultimately, living debt-free is an objective that is worthwhile both on a financial and peace of mind basis even if it takes many years to obtain

6. Take opportunity costs into consideration. I always advise my clients to consider the time value of money when spending it or making investments. This relates to the concept of the opportunity cost of money, which says that money spent on one item negates the opportunity to spend it elsewhere. The concept of opportunity costs is most relevant when it comes to discretionary purchases. The question to ask yourself when making such purchases is: is this item necessary?

If it isn’t that doesn’t mean it shouldn’t be purchased, of course, just that it makes sense to consider the opportunity costs of doing so. Planning for financial independence involves a carefully considered mix of investing for the future and current spending. If making a discretionary purchase takes away from funds you had planned to invest for the future, it makes sense to carefully consider whether the purchase is worth delaying your investment plans.

A good exercise to test how necessary the items you have are is to take a look around your house and make note of all the items that aren’t being put to use. If you find that there are many such items it may indicate that taking some time to consider opportunity costs for further purchases is warranted.

7. Small savings can lead to big rewards. If you consider the number of money people spend on a daily basis buying minor items such as snacks, drinks, or trinkets of one sort or another it might not seem like much money. But even $10 a day, invested wisely over the long term, can amount to a large sum given time and the power of compounding. The earlier you can start saving the more powerfully the effect of compound returns can get to work on your behalf.

8. Quality of life is more important than the quality of possessions. Between being rich and appearing to be rich, the former is the more substantial goal. Owning nice things is a worthy goal, of course, but the more important goal from the standpoint of quality of life is to have the resources to support yourself and your family, as well as your possessions.

Spending money you can’t afford to keep up with the Joneses doesn’t help achieve your long-term financial goals and is unlikely to make you any more popular with your friends. Rather than letting possessions guide your life, let your life guide what possessions you acquire. If you spend within your means on the possessions you need it gives you the ability to focus your savings on building a nest egg sufficient for retirement or financial independence – goals far more likely to secure happiness than acquiring things that may or not have lasting appeal.

Hope this guideline will help you to achieve financial independence in 2022. Wish to learn more tricks? Contact today and schedule your free financial planning session with Samuel Rad.

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