Published in: Buying Stocks | Nov. 23, 2019

Want Financial Independence? Here Are Your First 5 Steps

By:  Dana George

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Financial independence is not about how much you earn, it's about how you manage those earnings. 

When we were young and first paying bills, we believed that money represented independence -- and by extension, happiness. What we would eventually learn is that financial independence is about making smart decisions that give you financial freedom. 

My husband and I grew up in 900-square-foot homes just blocks away from one another. Shortly after our wedding, we were thrilled to buy our own 900-square-foot abode. It wasn’t much, but it was cute and inexpensive. And money worries did not keep us up at night.

A young couple meeting with a financial advisor.

Image source: Getty Images

Fast forward, and many of our friends had purchased much larger, flashier homes. Ego drove us to sell our affordable home and buy a bright, shiny, and too-expensive home instead. Sleepless nights began. The fact that some of our new neighbors used lawn chairs as living room furniture and were as anxious about money as we were was no comfort. 

Consider us a cautionary tale -- a couple of kids who had to learn the hard way. If we had it to do over again, here are some steps we would have taken:

1. Forget the Joneses

Guess what all our friends with new cars and impressive houses had in common? Debt. Lots and lots of debt. Today, Americans are more than $14 trillion in debt. I'm not sure what it was back then, but we were all in over our heads. We were trying to live a dream that we hadn't earned and making ourselves sick doing so. Did you know that money is the number one source of stress for 44% of adults? Furthermore, 28% of those surveyed by Northwestern Mutual said that money makes them feel depressed at least monthly.

One more note about keeping up with the Joneses. Of all the couples we hung out with back when we thought we had starring roles on Lifestyles of the Rich and Famous, only two are still married (and we're one of them). I don't know with certainty that that's because of finances, but money is the number one issue couples fight about. 

2. Take advantage of company retirement plans

This tip is almost painful to write. My husband and I both started working early and worked our way through college. And yet, because we were so young and desperate to keep up with the now-divorced Joneses, we did not contribute to our 401(k) plans for years. Not only are there tax benefits, but most employers also match your 401(k) contributions, meaning it's essentially free money. And that's before you factor in the compound interest. 

Even when we did start to contribute, we viewed it as a sacrifice -- and its only recently that we've begun to pat ourselves on the back for those monthly contributions. 

3. Milk company benefits

My husband's company had a great tuition reimbursement program that paid for much of his undergrad work. I now know that I should have looked for a company that offered the same benefit, as it would have saved me $30,000, at a minimum. 

What older, wiser me would recommend is that you look at all the benefits offered by your company and monetize them -- whether it's tuition reimbursement, a company gym, pet insurance, a mobile spa, financial counseling, legal consultations, or free food. Use the company gym rather than paying for your own, save money at the vet by using pet insurance, and stop bringing lunch if your company provides food. 

4. Meet with a financial advisor

It's easy to get the idea that financial advisors are for people with more income, less debt, and a greater knowledge of investing. Those are precisely the folks who don't need the help. 

When you find the right financial advisor, your entire outlook on money will change. You'll worry less about how much you earn and think more about how you're going to use the money you have available.

The Vanguard Group investment advisors crunched the numbers and say a good financial advisor can add 3% to their clients' returns. Doesn't sound like much, does it? But let's see what 3% might have done for us over the years.

For the sake of this scenario, we'll assume that we have invested $1,000 per month for the past 20 years and earned 6% interest. Compounded annually, we would be sitting on $441,427 today. 

If our financial advisor could truly improve the performance of our investments by 3%, that means we would earn 9% interest. Our monthly investment of $1,000 would now be worth $613,921 in 20 years, a difference of more than $172,000.

5. Invest, invest, invest

Here's one of the primary things I remember about being young: I could not imagine getting older. Investing felt like throwing money into a black hole, with no tangible evidence that it had ever been earned. 

Investing your money is different from saving it. When you invest, you buy assets -- such as stocks, shares, or real estate -- with the intention of getting a decent return on that investment. When you save, you put money into an interest-earning account that you can access when you need it.

Investments bring higher returns, but also come with higher risks, and as such should be viewed as long-term strategies. In addition to making you comfortable in retirement, investments can help you:

  • Outpace inflation by generating a higher rate of return.
  • Earn extra income by investing in assets that pay dividends. 
  • Increase your overall net worth -- giving you a greater buying power and making you more attractive to lenders. 
  • Leverage tax advantages, especially toward your retirement fund. 

Financial independence

Here's what I wish I could tell that goofy young couple, living in a house they couldn't afford, working their way through business school: 

  • You don't have to know all there is to know about money today. Just get started and learn along the way.
  • Compound interest is either your worst enemy or your best friend. Make friends with it. 
  • You're going to be middle-aged one day and you're going to wish you'd started investing while you were still in diapers. 
  • All that stuff you're tempted to buy is going to be sold in a garage sale one day. The investments you make will be there when you're old. 
  • True financial freedom means having options. Don't want to wait until you're 80 to retire? You won't have to. Want to pick up and move halfway across the globe? You can do it. 

And that's the point. If you're looking for financial independence, it's up to you to make it happen. Not to belabor the point, but it's not how much you earn; it's how you manage that money that counts. 

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