The Basic Principles for Achieving Financial Independence (FI)
The path to financial Independence (FI) isn’t complicated, however, it does require strategy, discipline, and a certain mindset. The following are my four basic principles for achieving financial independence:
- Develop a budget
- Develop a perspective that values freedom over stuff
- Live below your means
- Invest wisely
Develop a Budget
You need to have a firm grasp on where your money is going before you can even attempt to begin your journey toward financial independence. Without that knowledge, you have no idea how much you have available for saving and investing. You may cringe at the thought of developing a budget, but honestly, its not that bad. It’s simple math. Yes, it may force you to take a good hard look at your spending habits, but it is necessary. Just keep in mind that your budget is the base from which your journey toward financial independence begins. It’s a reference tool, not a chore.
Develop a Perspective that Values Freedom over Stuff
We humans love stuff. In our defense, we are constantly bombarded with advertising and ideals that encourage us to spend our hard earned cash on more stuff. We are competitive by nature and feel the need to keep up with the Jones. As our income increases, we purchase larger homes, more expensive cars, and stand in lines to buy the latest electronics as soon as they are released. Despite the initial feelings of joy a person may experience from purchasing more stuff, how much of that stuff truly adds value to life in the long run? Owning, maintaining, and continuing to purchase all of this stuff actually represents a huge barrier to financial independence, as you must continue to work to pay your debts. We tend to imprison ourselves with material things.
Now, please understand, I’m not insinuating we should deprive ourselves. To the contrary, I feel we should always strive to live a fulfilling life, even as we move toward financial independence. However, some soul searching and, perhaps, a shift in perspective is required to identify what a fulfilling life actually consists of. Personally, I have come to the conclusion that freedom and experiences are more important than accumulating stuff.
Live Below Your Means
Income level does not directly correlate to wealth. Wealth is defined by how much we save, not how much we earn. For example, a lawyer earning $250,000 a year may have a negative net worth due to outstanding debt including education loans, car loans, mortgage, and credit card debt. However, someone with a much smaller income may actually have more wealth due to their ability to live below their means, eliminate debt, and save more.
You can increase disposable income for investing by making more money or by spending less. Ideally, you should do both. The further you live below your means, the more disposable income available for investing, the faster you achieve financial independence.
If you find yourself in a situation where you have a surplus of money to invest, you are in good shape. Hopefully, you have access to tax advantaged company sponsored investment vehicles, such as a 401(k) or 403(b). If not, there are other ways to invest your hard earned cash, such as a Roth IRA and taxable investments. I will cover those in future posts.
It is important to invest as much as you can as soon as you can. The sooner you start investing, the more the magic of compounding interest will work for you. Don’t worry if it seems like a small amount at first, just start the process. As you work through and follow the basic principles of financial independence, you will naturally develop more money for investing.
I follow the KISS (Keep It Simple Stupid) rule and invest only in low cost index funds. I don’t have a need for financial advisors and the associated fees. However, if you feel overwhelmed with the investing process then, by all means, seek the advice of a financial advisor until you can educate yourself further.