Becoming financially free isn't far fetched as most people think. It's not reserved only for the top 1%. Anyone can become financially free, even you. What does it mean to be financially free? It means that you don't need to work anymore. You work because you want to and not because you have to. It means that you have enough money to pay for your needs and a few luxuries that you desire. You can sustain the lifestyle you want without needing to work. Does that sound like something you want? Sure it is!
Financial freedom isn't just for those earning six figures and above. You can become financially free from a much lower salary. Here's what you need to do:
1. Start NOW!
The best time to have started the process was last year, the second was yesterday and the third is RIGHT NOW! The good news is that it's not too late to start. Ever heard of the term "Pay yourself first"? This means putting aside a percentage of your income for yourself before you start paying any bills. You can start with 10% and go up from there. Whatever you save should be invested after you must have filled up your emergency fund. To know more about saving and investing, I encourage you to read THIS article.
2. Start SMALL!
You don't have to wait until you're earning 6 figures to start. If you can't save 100 F when earning 1000 F, you won't be able to save 10000 F when earning 100000 F. Both of them require the same discipline and willpower. It's better to develop the habit when the stakes are lower. Save now and save later!
3. Be Consistent!
To build up enough wealth, you have to be consistent in saving and investing. Just like little expenditures add up, little savings done consistently really add up to something substantial. You may not see the difference now, but with time, you'll be amazed at how much you've saved up.
4. Use Compound Interest
The above 3 points are the necessary conditions to tap into the power of compound interest. Compound interest is like that ally you need to win at war. To use compound interest, you need to consistently invest a portion of your earnings into income generating assets. To learn more about the Rules of Investing, read THIS article.
I'm sure you're wondering how all of this works and how much of a difference compound interest makes. Here's an interesting story to put things in perspective:
Jason and Michael are twins who just turned 65, the normal retirement age. Throughout their careers, they both invested in their retirement accounts but in different ways. Jason started much earlier than his brother at age twenty, investing $4000 every year until he was 40 when he stopped and let the money grow tax free with a 10% return. Michael, however started when Jason ended at 40 and he invested $4000 for 25 years until he was 65. He invested similarly with a 10% return, tax free.
Overall, Jason invests $4000/year for 20 years at 10% return while Michael invests $4000/year for 25 years at 10% return. Who do you think will retire with more money at 65?
What do you think? Looking at the numbers it’s obvious that Michael invests $20000 more money than Jason ($100,000 compared to $80,000) for a longer period than Jason. It’s easy to conclude that he will end up with more money, but does he? Actually, Jason ends up with more money. In fact, Jason ends up with 600% more than his brother!
I’m sure you’re wondering how possible that is. That’s because Jason took advantage of the power of Compound Interest. Though he invested less money, he started sooner and thus his money had more time to be compounded. The ultimate power of compound interest is time. Jason’s money was compounded for 45 years while Michael’s was only for 25 years. How much exactly did each of them end up with? Jason ended up with 2.5 million dollars after 45 years of compounding while Michael ended up with only $400000! See the difference! Over 2 million dollars! Feel free to do the math.
Compound interest is so powerful that Einstein called it the most incredible invention in human history. There are other examples in history showing the amazing power of compound interest. Before his passing in 1790, Benjamin Franklin left $1000 each to the cities of Philadelphia and Boston. He gave them a condition: The money should be invested in the stock market without being touched for 100 years at the end of which they could withdraw $500000 for designated projects. Then they were to leave the balance for another 100 years before withdrawing. Over these years, the stock market yielded an average compounded return of 8%. After 200 years, in 1990, each city received about 6.5 million dollars! 200 years may be long but the return of 3000% is definitely worth it.
The lessons and implications from these are clear. To take advantage of compounding, you need to start investing NOW, not tomorrow, not after tomorrow, not next year. It doesn’t matter how small the amount is, just start and grow from there. You’ll be amazed at how much you can get from just $1000 as we have seen. If you can set aside just 10% of your income weekly, bi-weekly or monthly, and invest it in a low-cost index fund, you will be set by the time you approach retirement.
If all of these sounds like gibberish to you, no worries, we’re here to help you out. You can schedule a consultation with us and we can guide you throughout the process.
It’s time to plan for your future. We hope you were enriched by this article. Don’t forget to SUBSCRIBE to our blog for more. Thank you for reading and until next time, BESTech remains your BEST bet.