The Fundamentals of Financial Independence






Here are some important strategies that will help you achieve financial independence.

As the graph indicates, it is important to get solid advice which can design a plan which incorporates Planning Values such as those noted.

Separate your savings from your investments Before you begin to invest for a long-term financial goal, you’ll need to save for an emergency fund – up to six months worth of your salary. Then you are prepared for an unexpected expense such as an engine job on the car, a leaky roof or loss of employment. Otherwise, you may need to tap into your investments that are intended for retirement or some other purpose.

Budget based on your income, not on your desire Plan to spend less than you earn and don’t take on debt that cannot be serviced by your future income. Budgeting is based on your income, not on your past spending habits. Total your monthly expenses such as housing, utilities, food, clothing, child-care, transportation and debt repayment. This sum should not exceed 75% of your after-tax income.

Invest by paying yourself first You will only beat the habit of procrastination if you focus on paying yourself first. A rule of thumb: save 10% to 20% of every paycheque. This can be achieved by purchasing units in a good investment fund on a systematic basis, using your bank’s automatic payment program.

Use beneficial debt to build equity Minimize and pay off consumer debts – monies borrowed to purchase cars, clothing, vacations, stereos and other gadgets that decrease in value. Debt to get an education or mortgage a home is acceptable debt. Only if the interest rate is very low, and repayment is affordable, debt for investments such as investment funds, your own business, or blue-chip stocks may make sense. The interest on such investments, if not held in an RRSP, is tax deductible.

Differentiate your risks Inflation risk will compete with long-term investment risk. Equity investment funds and/or the stocks of many companies are not guaranteed, meaning there is a risk. Yet equities have a much better chance to outpace the negative risk of inflation – – or as some have humorously termed shrinkflation — when compared to a savings account over longer periods of time. Inflation is the single greatest long-term risk. At 4% over 20 years, inflation will cut the value of today’s purchasing power by half.

Determine to diversify A properly diversified portfolio will hold several types of funds including a mix of equity funds. Equity funds should differ in terms of what sector of the economy they invest in, such as agriculture, technology, mining, or finance. Though each fund would hold many stocks, make sure they are diversified among the various sectors. One sector may gain while another may lose some value, balancing out over time. Equity funds can also diversify by country (such as holding domestic, US and global funds); investment style (such as growth funds, or value funds); or company size (such as small, mid, or large cap). Consider adding bond funds to the mix to diversify even more.

Optimize Your Portfolio If you can optimize your portfolio, you may minimize the risks, to help your return on investment. To truly optimize, one needs in-depth knowledge only obtainable from a professional whose job it is to study funds as a speciality. To diversify in a balanced manner, one needs to weigh many factors in relation to economic sectors, managers’ styles, company size, and foreign economic conditions.

Editor Re-Assessment November 1, 2018