How to achieve financial independence? What would we do if we had already achieved that financial freedom that we have always wanted? What would we do?
Why do we work? While we do not achieve financial freedom, one of the main reasons why we work is precisely for money. We need to obtain income with which to pay and meet all our commitments. Conversely, it is the commitments made that force us to continue working, and the main reason why we cannot stop working. So we enter a wheel in which we end up working on something that may not be what we like or want, but we end up doing it because of the need for that wheel to turn, and above all, not to stop.
If we ask ourselves the question of what our financial independence is, and for that we divide the total of our savings between the expenses and commitments that we have contracted, we can calculate the time that we would endure without generating income. In short, it gives us a magnitude of our independence that allows us to determine the time or margin we have to live without income.
We are going to collect 8 ideas that can help us advance in this project to achieve financial independence:
1. Achieving financial freedom is not a short-term objective. It is something that we must do with a certain planning and time, but that, put into practice in a firm and consistent manner, we will achieve. Do not underestimate what you can achieve in ten years, or overestimate what you can get in one. So, this project is very feasible if we propose it with the time, determination and the necessary advance.
2. When we receive our monthly income, we must be our first creditors. To do this, we can determine the amount we want to allocate to our savings and investment plan, and commit to allocate that amount as a first payment. Before addressing any other issue or commitment, we must meet the amount committed to ourselves. An idea to put this practice in motion may be to create a new account for investment, and record a periodic and automatic payment from the usual income account to the investment at the beginning of each month for the amount that you want.
3. Let the game of “compound interest” in our favor. The multiplier factor of compound interest can surprise us because of the impact it can generate on our investment and the way our investment can multiply. As an example, we could say that if we save an amount of 1,000 Euros/ year, considering a rate of 5% interest, in a period of 25 years we will be able to reach an amount higher than 50,000 Euros. Is it possible? Yes it is. With an investment of less than 85 euros per month invested to that type, we will be able to get more than 50,000 Euros in that term. Surprising?
4. Analyze taxes well, and choose those options that minimize the tax impact. The multiplier effect of compound interest is limited and reduced by the effect of taxes. Therefore, we must consider the investment through vehicles that minimize their impact. There are interesting options to achieve this purpose, so dedicate some time to analyze this issue will generate a positive result.
5. There are two big enemies of profitability in investment. To what already commented in the previous point on the taxes, we must add the one of the banking commissions. If we have been surprised by the multiplier effect of the money that we have commented, and continuing with that same example we can say that if as a result of bank commissions the investment rate was reduced from 5% to 3.5%, the amount that we would finally get.
This shows how important it is to make the investment with a careful selection of investment products, and always controlling the bank fees that apply, which only reduce the profitability of our investment.
The financial system recommends many times to manage investment through investment funds, and it is precisely this instrument that precisely generates more profitability for the financial system, to the detriment of ours. The lack of transparency in the application of investment fund commissions is not precisely the best for our interests.
The managers “sell us” as an objective to beat certain indices, and that management, supposedly “active” they perform, is what would justify the important commissions that in some cases affect the client. When we analyze the profitability of investment funds in long-term historical series, we discover that more than 90% of the funds do not begin the reference index. And if this is the case, what would be the justification of those important commissions that have repercussions?
At this point, the question is whether it would not be more interesting to buy an investment fund that simply replicates the index with the lowest possible commissions, without the need for that supposed “active” management, which we have already seen that by more than 90% what it generates are important commissions, and low yields. It seems obvious to deduce that paying commissions for something that in a high percentage is not achieved is not too interesting.
Therefore, taking into account the important impact of the commissions on our performance, we must do very well the choice of the vehicles that we are going to use to manage our investment.
6. In the diversification of investment assets we will find the best ally to minimize the risk. Making investments in a single security, or in a small group of securities, can pose a high risk. Therefore, it is advisable to design the investment strategy with the diversification of assets in mind.
7. Historical series confirm that variable income has proven to be one of the best options for the growth of our investment. Compared to other types of investment, such as fixed income, …, equities can be a great long-term choice.
8. In the long term, the amount we want to allocate to each type of asset and the composition of our investment portfolio is usually more important than when we decided to make the investment. In the long term, it is not as important to reach the “valley” price at the time of purchase as to be positioned in certain types of assets to obtain excellent profitability.
9. We always do our expenses according to the amount we understand as available. Whoever wins the majority also ends up spending more. People with high and low incomes have at their disposal the possibility of initiating an investment plan that ends up allowing them to achieve financial freedom. In this sense, it is the will to achieve what ends up doing this goal is possible, and not the level of income. As we have indicated, this investment plan to achieve financial freedom is a feasible and accessible plan for anyone, regardless of their level of income.
The information collected here cannot be understood as a recommendation of any investment. Now, if you decide to carry out your own investment plan and start that path towards financial freedom, I am convinced that in a few years you will have nice things to share with all of us. Time will be our witness.