So how do we go about achieving financial independence for ourselves. Whilst you may assume that it involves some complex financial jargon, accountant speak and lots of boring research, in reality it comes down to three very simple concepts:
1 – Spend Less Than You Earn
2 – Invest Savings Into Income Generating Assets
3 – Repeat
That’s It! It really is that simple. Most people spend their entire lives, trading their time for money (IE a job). They then spend this money on all sorts of things, most of it generally frivolous Think fancy bottles of spring water, when tap water will do just fine. Or brand new cars which lose half their value driving out of the lot.
This pattern continues living paycheck to paycheck with never any consideration really given to where all their money is going. This way of life lacks one very important factor which will help you achieve financial independence.
Making Your Money Work For You!!!
By making your money work for you, it makes more money, and that money makes more money, and so on and so forth. This is money that you, the reader, does not have to trade your valuable and finite time for. So by embracing this philosophy you achieve a number of things:
1 – You begin to generate wealth without sacrificing time.
2 – This wealth will begin to grow with very minimal effort (or time investment)
3 – At some point in time, the growth in this investment will eventually begin to outpace anything you could achieve even working 1000 hours a week.
4 – When this occurs you can stop trading your time for money and start trading your time for experiences, learning, friends & family and all the other good things in life we would rather be doing rather than working.
So let’s have a look at this 3 step process then shall we…
STEP 1: Spend Less Than You Earn
So Step 1 is fairly self explanatory, spend less money than you earn. This is the first step and the key to this process, without achieving this you have nothing left over to invest.
Now you may ask, how much money do I actually have to save?
Well this all depends on when you wish to achieve financial independence, you may wish to live an incredibly frugal live to minimise the time it takes. Or you may wish to save a few dollars here and there with the knowledge that it will take you additional years to achieve independence. Typically however at least 50% is the target if you want to retire in a reasonable time frame.
If you would like to figure out what % of your earnings you would need to save to achieve FY out I would recommend the calculator created by Networthify.com to help. Feel free to play around with these numbers to see what best suits your particular scenario.
Living frugally can be difficult for some, and a savings rate of +50% may not necessarily achievable for everyone considering your circ*mstances. However do not be discouraged, even increasing your saving rate by 10% can have a huge impact on when you. This is because it has two effects:
1 – Saving more means that you have more left over to invest in income generating assets
2 – Your lifestyle now costs you less money, which means that the income you generate from your investments now funds a bigger portion of your lifestyle.
Now there are a lot of different methods that you can use to help boost your savings rate which we will run through in further detail in the future. However, now it’s time to invest the money you do save.
STEP 2: Invest Money Saved Into Income Generating Assets
So now this is where things can get a little complicated, investing your money can seem like a fairly daunting process. However there are a few simple ways to invest your money with limited risk and decent returns without going through too much hassle, and this is through an ETF.
Now please let’s take a moment to recognise that I am not a financial advisor, I’m just a guy who has a passion for the FIRE moment and for helping others achieve their own independence. With that being said please do consider your own circ*mstances when making your investment decisions and consider speaking to a professional before you do so.
Now with that out of the way, you might be asking what is an ETF?
An ETF or Exchange Traded Fund is essentially a bucket of shares that are traded on the market as a single stock. This means that you are able to buy a piece of hundreds of different companies by purchasing a single share.
Now there are a huge range of ETFs with lots of different options so I recommend doing your research on which option is best for you. However Investopedia provide an excellent explanation of what they are and provides a breakdown of the various types of ETFs.
Investing in an ETF or any other stock will mean that your wealth has the ability to grow much quicker than what it would do if it was just sitting in the bank account. For example since 1900 the Australian Stock Exchange has achieved a return of 11.8% per year on average!!!
Based on that a $10,000 investment would be worth approximately $93,000 after 20 years!! Leave the money sitting in your bank earning 2% and it would only be worth $15,000. Thats a $78,000 difference!!
STEP 3: Repeat Steps 1 & 2
That’s pretty much it, once you have the basics down the next step is to continue to feed money into your investments. Growing that investment snow ball until it becomes an unstoppable force of financial growth crushing everything in its path…..
At some point the money that your investments generate will reach a stage where sacrificing time for money is no longer required. Your investments will be able to provide sufficient income to fund your lifestyle meaning you can retire and live the life that you want.
This is the goal of the FIRE movement to have the ability to choose freely what we will do with the finite time we have on this earth. How long it takes is entirely up to you, however the most important thing is to take that first step. So onwards and upwards on the journey to financial independence!
