Before I Begin This Post. I should emphasize that this is strictly my opinion, based on my observations over the years. It is not based on scholarly research and there is plenty of room for disagreement. The first task is to describe my definition of financial independence and some of you may find plenty to disagree with already. My definition is that financial independence is the ability to lead a lifestyle that provides for the needs of my family with freedom from "woeful want" (I got that term from my mother who often told me that "Willful waste makes woeful want)." From that definition you can determine that financial independence can be different for two people with differing needs and wants. I can live with that. Given that definition, lets start with the most common path pursued today.
Work and Strive For Abundance. This is the path I decided on as a pre-teenager. Here are some of the things you can do if you choose this path.
Get A Good Education. While many may achieve an abundant lifestyle with little education, most parents advise their children to take this step. Statistics have shown that those among us with more education earn, on average, more income over their lifespan than those with less. These statistical methods may be somewhat flawed, still the prevailing opinion is that education is directly correlated with income.
Choose a High Paying Career Field. Some career fields pay more than others. Engineers earn more than teachers and computer scientists earn more than sociologists. Entrepreneurship pays well for those who are successful; however, starting your own business is usually a second step in a career path.
Make Aggressive Investments Using Leverage. All debt is not bad. If you can earn more on your investments than the cost of borrowed funds, you can magnify your rate of return and build wealth rapidly. Of course there is more risk. If your investment doesn't pan out, you have to pay the money back anyway.
Buy Nice Things, Lots of Them. Nice houses, cars, and other toys will give you the appearance of success and make others want to do business with you. If you don't have the cash, borrow it. There is an old saying that states, "Fake it until you make it." If you can convince yourself that these possessions mean you are competent, you will appear more confident and more people will think you are competent even if you aren't.
Thousands have become successful using this technique. Others have found themselves facing bankruptcy, prison terms, and there are some suicides among this group. It is obvious that this path can be stressful but there is no doubt that many have become very wealthy choosing it. The upside potential of this path is much higher than the other I will describe, particularly when measured in terms of total wealth accumulation. It also has a higher downside when measured in terms of overall life satisfaction.
Practice Frugality And Simplicity. There is an old saying that if you will live for 20 years like no one else will, you will be able to live the rest of your life like no one else can. I know several individuals who have achieved financial independence this way. There is no shortage of happiness among this group. Much of the benefit of financial independence arises from freedom from worry and not necessarily the expensive possessions you can buy. I have a client who achieved a windfall from a successful investment and was able to buy an expensive car and a large, luxurious house. Several months later he learned that the expensive house and car didn't bring him near as much happiness as the fact that he no longer had to worry about about how he would pay his living expenses each month.
Get the Best Job You Can Find and Keep it. You can build equity in a job by staying in one place, working hard, and being loyal to your employer. There are exceptions to this in the event that you find your loyalty isn't reciprocated. The best thing to do in this case is to move somewhere in which it is. While this isn't as easy to do as it used to be, it still pays off for a lot of employees.
Start Saving Early and Leave it Saved. Someone once asked Albert Einstein what was the most amazing thing he had learned about the universe. His reply was "compound interest." As an example, let's assume a 25 year old starts saving $200 a month at 5% interest. At 65 he will have accumulated $305,204. If he decides to draw out his $2400 at the end of year one, his nest egg at 65 will be $288,013. That $2400 withdrawal shrinks his nest egg by a little over $17,000. The $2,400 spent now costs 7.2 times that at age 65.
Remember the Buffet Rules. One of the most successful investors of all time, Warren Buffet says that there are two rules to successful investment. Rule 1. Don't lose money. Rule 2. Don't forget rule number 1. If you choose this wealth building path you will have to keep your risk low in order to avoid losses.
Shop Carefully and Buy Only Bargains. Look for sales. Don't be embarrassed to buy used, particularly cars. The new car buyer bears the lion's share of depreciation for the privilege of being the first owner. Buying used vehicles can add a considerable amount to your net worth over your life span.
Take Care of What You Have. If you walk into a lot where my father's car is parked, it will catch your eye as the nicest in the lot. It is a sixteen year old pearl white Buick with a blue cloth top that looks like it just rolled off the showroom floor. You can still have pride of ownership without laying out huge sums of money for car payments every month. The same holds true for your house. A little extra effort keeps your home value at the top for your neighborhood.
This Includes Your Health. My father has spent virtually no time in the hospital over his 91 years. He has eaten healthfully and exercised faithfully for six days each week. There is no doubt that this requires considerable time and effort. The choice is yours. Either spend your time staying healthy or waste your time being sick.
Don't Borrow. It is difficult to invest in totally safe investments and earn a higher return on investments than your borrowing costs. Even deductible mortgage interest is more expensive than most investments of equivalent safety. If you follow this strategy it is a good idea to strive for a free and clear house. This means buying less house than you can qualify for and developing a plan for early repayment.
I Know What Most of You Are Saying. You don't read this column to be told how to scrimp and save your way to success. It's not my style either but these economic times may call for different strategies. Having to cut back on your lifestyle can be painful but its not the end of the world. I have known several folks who have done well this way and, as a group, they are more satisfied with their life than the first group. Of course, the two strategies I describe are the extremes. There options between the two and you can choose the ones you want to follow. I'll go back to my normal style on my next post.
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