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Much of what we learn about wealth, money, and income when growing up is often misleading. This is because the people we learn from are generally not rich themselves. The following is a simplified guideline outlining how you can achieve financial independence and become liberated from money-related anxiety.
Earning a high salary does not necessarily translate to wealth
A lot of people mistakenly think that having a high-paying job on its own indicates financial independence. Maybe your job pays $1 million per year, but you can lose it anytime. On the other hand, if for example, you owned a business that made you $1 million annually, that income cannot be taken from you. But while it may be easier to accumulate assets if you have good money flowing in each month, the key to enhancing your net worth is simply spending less money than you are making. To do this, it is vital to differentiate between wealth and income.
Wealth is the portion of your net worth that generates income, dividends, and capital without using any labor on your part. Examples include stocks, bonds, patents, trademarks, real estate or even running a private business like a parking garage or a car wash. Their real value stems from the fact that these wealth components can sustain your lifestyle even if you are fired or for any reason you are unable to work anymore at your primary occupation. Unlike employment where you can be fired, you can only lose wealth if you squander it.
As such, your wealth ought to be measured by how long you can maintain your living standards without an extra paycheck. This is why many people, especially those in employment, always wonder why they never seem to attain financial security and independence.
Cut costs and save consistently
In his book ‘Think and Grow Rich’, Napoleon Hill asserts that financial success begins with nurturing a savings habit. Accumulating wealth and attaining financial independence is a gradual, time-consuming process. It requires that you reduce your expenses, create extra income and invest the money in tax-deferred retirement and brokerage accounts. As time passes, the money becomes substantial and if new opportunities emerge, you are in a better position to take advantage-particularly because the process will involve compounding. For instance, a sum of $10,000 invested for 50 years at 12% interest will increase to $2,890,000.The only method that you can accumulate enough money to make these investments is either to increase your revenues(your business sales, paycheck and so on) or cut costs.
Choose where to invest; taxes matter
Income streams are not equal, and where and how your assets are held can determine whether if you will only be well off or you will become extremely rich. Basically, people with little or no wealth make a lot of taxable income whereas financially independent people make huge unrealized gains through appreciation in value of real estate, capital gains and profits from tax-free accounts or tax-advantaged accounts such as 401k or Roth IRA.
For example, a doctor with an annual income of $250,000 may end up paying taxes of $95,000 each year. The same income earned from an IRA or a pension is tax-free, which means the $95,000 will yield a whopping 23 million dollars extra income at 12% interest over 30 years.
Do what makes you happy
The simple truth is that you will only be truly wealthy if you have total control of how you spend the day. Real wealth comes from having control over your time and doing the things that make you truly happy, the things that you can even do for free or even pay to do them.
It comes from finding a profession that makes you feel as if every day is Christmas day when you show up for work- whether it is an office, studio or a practice field. This means that if you manage the business aspect of it well and control costs you can even work for 18 hours a day. This level of passion means you already have a head start over your competition.
Wealth and grades are often unrelated
It is commonly known that a higher level of education translates to higher income as we progress through life. But people do not realize that grades and wealth are not correlated. Extensive research done by Thomas J. Stanley (who wrote the book ‘The Millionaire Next Door’) indicates that apart from legal and medical professions, the grades that a person earned in school are not correlated to their economic success and wealth. But education is till crucial, after all over 90 percent of the millionaires in American have an undergraduate degree.
According to Stanley, the reason why teachers, parents, and counselors keep on emphasizing to their children that grade C- average man’s failure is that they themselves are not financially successful and they have no idea of how to be financially independent. Sadly, they ignore creative intelligence and only concentrate on assessing analytical intelligence. Creative intelligence is about innovating and crafting solutions that are missed by everyone else. In addition, they do not recognize that many millionaires own their own businesses and wear overalls, work shirts or jeans-not suits and ties.
From statistics, a student who was in wood shop class got decent grades and has a job that they enjoy is more likely to be more financially independent and wealthy than one who was in the honor roll at school.
Your spouse must complement your efforts
Irrespective of how successful at investing you are, you will not achieve financial independence if your spouse is financially undisciplined. A spouse who spends your money on buying status symbols will reverse any progress you make in your bank account or career.
To build and enrich your life you will need a partner who gives you support and loves you without any conditions. A healthy temperament and proper psychology are essential for financial success, and you cannot get if you are always worried about the situation at home.
Identify a niche and keep it simple
Charlie Munger, a billionaire investor has noted that entrepreneurs can succeed if they specialize in a market niche that has been overlooked. These niches are usually profitable but unglamorous. Think of waste management, clothing stores, shipping or even selling candles, this is where big money normally is.
Sam Walton is a good case in point. Starting from a tiny store selling flip-flops at fifty cents and cheap cologne, he built a retail empire worth over $125 billions. His business grew gradually and steadily, with minimal fanfare or showiness.
There is a huge component of business owners in the millionaire class. Most probably the owner of the largest hardware store in your town is several times wealthier than the highest-paid physician. This is because the business owner will have invested more in capitalized earnings or retirement accounts while a doctor may be pressured to buy status symbols in order to showcase their success to their patients.
When it comes to your children, strive to reward productivity
You will make a big mistake if you give financial support to relatives who are frequently in trouble or cannot create high incomes on their own.
Financial independent people, whether religious or not, follow the lessons found in the biblical parable about talents where more was added to those who invested well and increased their wealth while the one who did not invest was condemned.
The unproductive child can be likened to a financial junkie with a fundamental inability to manage their money. By repeatedly bailing them out, they postpone rectifying their life since they know you will come along to assist if they plead long enough.
Student Advocates is a privately owned company that helps consumers like you identify government programs that may be suitable to your situation, gather the relevant application documents, and then prepare those documents for your review and submission. Our services are reasonably priced and our goal is to take the frustration out of the process. If you have questions about your student loans, please feel free to contact us. We’d love to have the opportunity to help you in any way we can.