Who doesn’t want to be financially independent and able to sit back and watch their assets grow and generate enough income to cover all their expenses? We all do and it’s not that difficult either!
What is financial independence?
Financial independence means having sufficient personal wealth to live on without having to work actively for basic necessities.
Financially independent people build up assets that generate an income which is greater than their expenses. Research has shown that the journey to financial independence is actually just a matter of taking the right steps early in life to develop sound financial habits.
Wealth generating financial habits
Basic wealth-generating financial habits include the following:
1. Mastering the power of money
Prevent money ruling your life by learning how to prevent and handle the all too common fear of not having money and the all too common desire to spend it when you do have it, says Robert Kiyosaki, author of the all time bestseller Rich dad poor dad. The way to financial independence is not only through financial literacy and sound financial behaviour but ultimately through using your brain to think through problems and find solutions to make your money work for you and not vice versa, he adds.
2. Setting goals
Having both short and long-term financial goals are essential in planning for the future. You need something to work toward, so sit down and find out what you really want to achieve and what is preventing you from doing so.
3. Budgeting
You will not get anywhere if you don’t know and begin to understand where your money goes to. You can’t control your finances if you do not know what you earn and what your living expenses are. Once you know this you can draw up a budget to help you manage and control your money.
4. Spending less than you earn
The real key to financial independence is to spend less than you earn. In the beginning this may force you to make some sacrifices such as living frugally and giving up some much-loved luxuries but it’s worth it in the long run. You may even have to generate more income through a second job, hobby or other venue to help reach your goals.
5. Saving
Look at saving money as a way of paying yourself first. Financial experts agree that to reach financial independence you need to prioritise saving ahead of everything else; ahead of paying the utility bills, buying food or even paying the rent. An easy way to do this is by setting up an account and having a set amount deducted from your salary and paid directly into this account without you having to handle the money.
6. Buying income-generating assets
Invest your money in assets that will generate income and will appreciate with time. This excludes purchases such as cars and other luxury items. Many successful investors built wealth by investing in property or on the stock market, a good long-term option. If you don’t know how, pay a financial advisor to help you rather than dabbling and having your fingers (and money) burnt. Many billionaires report that the secret of their success lies in employing people who are smarter than they to help them invest smartly.
7. Avoiding consumer debt
Consumer debt is the bane of financial independence. Credit is not free, in fact, it is very expensive. Credit cards, personal and car loans, etc. are money-generating machines for creditors and banks. Get rid of these high interest debts as soon as possible.
8. Avoiding the tax trap
Government taxes the income you work hard for (earned income), more than the income your money works hard for (passive and portfolio income), says Kiyosaki. He adds that it is therefore important to convert earned income into passive and portfolio income as quickly as possible.
9. Working for yourself
It’s shocking but true that as an employee you are actually working for someone else (boss/ shareholders), the government who takes its share from your paycheck before you even see it and the bank (mortgage and credit card debt). Most financially independent people started their own businesses and acquired money-generating assets on the side, while still holding down a job. With time these assets generated enough cash flow to cover their expenses and set them free from the nine-to-five job cycle.
10. Hanging in there
Rome was not built in a day and nor will your wealth. Be ready and flexible enough to adapt to the ups and downs of earning, spending and investing money. Set up a safety net or emergency fund to help you through difficult times but don’t touch your investments and savings! Rather adjust your spending accordingly or get a part-time job if you have to but make sure you are ready to pull through the rough patches.
Financially independent people initially work hard to save and invest wisely and then sit back and watch their money working for them! Sounds nice, doesn’t it?
Sources
Five good financial habits. 2015. Retrieved from: http://www.fin24.com/
Kiyosaki, R. T. 1998. Rich dad poor dad. New York, Warner Books
Magwegwe, F. 2015. Secrets to becoming financially independent. Retrieved from: http://frankmagwegwe.com/
Udo, J. 2014. Seven habits to help you reach financial independence. Retrieved from: http://money.usnews.com/