Thursday, January 18, 2018
10 Key Steps to Financial Independence
Financial Independence is such an abstract idea. Getting there isn’t a set path for everyone, we all have a different road to travel down. Despite this, there are some constants when it comes to achieving FI. You need to spend less than you make. You must also save money and invest. You can’t waste money on useless junk. These are all constant, but there is definitely more to Financial Freedom than just saving and frugality. In this post, I am going to give my 10 steps to Financial Independence. I know I haven’t checked them all off yet, but I have nailed down a few. See how many you can check off and how many you have thought about in the past.
1) Lower your household costs
This one seems simple and it can be. It also might be difficult for some who are living at a basic level. It is a must to save at least 15% of your income if you wish to be financially independent. In order to retire early, you have to save even more than that. Unless you make a very large income you will have to reduce household expenses. In fact, even those who make a large income must reduce household costs as it can be all too easy to spend as much as you make. Finding ways to reduce the costs of essentials will save you a lot of money over your lifetime. This can include things like hydro, heating, maintenance and the actual home itself.
2) Reduce your cell phone bill
When you think about how expensive your cell phone is and what you get for it, you should be upset. As far back as 10 years ago, cell phones were seen more of a novelty and a convenience. With the advent of smartphones, they have become expensive lifelines for a bored population. The price of some cell phone plans is borderline criminal. You can, however, find a plan at a reduced rate if you look hard enough. It may require you to use less data, but it will be worth it. You could always watch TV and movies on your, you know, television.
Missed out on the $60 10 GB cell phone plans? Experts bet more deals are coming – CBC
3) Cut the cable
Speaking of television, the proliferation of high-speed internet has made cable packages obsolete. All you really need is a fast internet connection and pretty much every television show is available to you. Not only that, all the news and sports are online as well. With the prices cable companies like Rogers and Bell charge for their packages, it’s no wonder people are cutting the cable at a record rate. Doing this, along with reducing your cell phone bill could save you thousands annually. Thousands annually could lead to hundreds of thousands over a lifetime if invested properly.
4) Buy used cars
I never really understood the mass appeal of expensive new cars. You can buy a car with 40,000 clicks on it in perfect condition and it will cost half of the original price. I think buying a car new should be reserved for certain cars that hold their value. That would be very expensive high-end autos that you hopefully can afford. Even someone like Warren Buffett, who is worth almost 82 billion and could afford to buy a tank, drives around in a reasonable Cadillac. He would rather watch his investments grow then waste money on a depreciating asset. But hey, what would the 3rd richest person in the world know anyway.
Why I Would Never Spend Money on a New Car – Forbes
5) Cut your grocery bills
Besides housing, food will be the most expensive thing you must purchase over your lifetime. Sadly, we all need to eat, and these days it isn’t cheap. Grocery bills are going through the roof and don’t get me started on eating at restaurants. You must find ways to reduce your shopping bill. That might mean buying food fresh instead of prepackaged. You may find buying in bulk helps as well. Meal prepping could help and is often a healthier option. Either way, blowing a fortune every month on food is not an option. That money could be used more effectively elsewhere.
6) Increase your income
Many people do not realize how effective making something as small as an extra $100 a week is. For example, the maximum annual contribution for a Tax-Free Savings Account is $5,500. Saving that hundred dollars every week almost gets you there. Saving that hundred dollars a week over 40 years with an average 8% return gets you over 1.4 million. Yes, small amounts add up and this is especially important if you are in debt. Take on some extra work, even if it is small, to bring in more money. It will help tremendously in the long run.
11 Money-Making Opportunities You Should Not Waste – Budget Boss
7) Use rewards for fun
I pay no annual fee on my credit card because I maintain a minimum balance in my chequing account. That means I can get a great travel rewards card for free. I put everything on my card and gain points. The key is that I also never carry a balance on my card month to month. If you have the discipline to not go into debt, you can earn some solid rewards. Imagine if part or all your annual vacation was bought with travel rewards. That would be pretty sweet! Use loyalty programs to your advantage, but remember to not get out of hand and do something stupid like going into debt.
Can I Get a Little Credit? – 7 Deadly Credit Mistakes
8) Use tax-deferred investment vehicles
Some people have no clue how much tax will hurt their investment performance. In some cases, you can lose up to half of your investment value by simply having your funds in a non-registered plan instead of a registered plan. Tax-Free Savings Accounts and Registered Retirement Savings Plans are the kings when it comes to tax efficiency. The RRSP specifically uses pre-tax dollars, so you save on tax in the front end. Some people dislike that you pay tax when you withdrawal later in life. You must remember that it is all money you never paid tax on, to begin with. Paying it later when you are in a lower tax bracket is a much better option. The TFSA is just simply amazing in my eyes. No tax on gains and no tax when you withdrawal. That just can’t be beaten. Make sure you are using these vehicles to their fullest potential.
9) Monitor your investments
Making sure your investments do what they are supposed to do is crucial to your success. That includes performance and fees. Some people knock higher fee investments. While paying more than you should is not a good thing, if the returns are there, then have you really made a bad choice? Ultimately a good balance between cost and performance has to be maintained. Make sure you are on top of things so that you don’t lose money and more importantly, time.
Download your FREE Monthly Finances Worksheet and get your monthly budget on track! – Budget Boss
10) Understand retirement
You must understand what you need to retire and have your investments tailored accordingly. There are many factors to take into consideration. These include inflation, interest rates, your family dynamic, debt and of course your income. Make sure you decide upon a standard of living for your retirement well before you get to retirement or a standard of living will choose you. Sitting down with a retirement planner can help you prepare for the day well in advance. Pushing it to the side will limit your options later in life.
These are just 10 keys parts of financial independence. The overarching theme is to spend less and invest more. Not mentioned in this post was the importance of insurance and the role it can play in keeping your plan intact. Taking the rights steps day to day and then making sure the big ones are looked after as well, will allow you to have some really exciting options later in life.
“Money won’t create success, the freedom to make it will.” – Nelson Mandela
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