Declare Your Financial Independence
Patience, persistence lead to long-term success
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To celebrate July 4, declare your financial independence.
Independence Day is the perfect holiday to think about your financial freedom — and the freedom to pursue whatever gives you happiness and your life meaning. Not that money alone provides happiness or meaning. But without enough money, you may be working the rest of your life, or living a life far from your dreams. So whether you’re in Independence, Ohio, or Independence, Ill., here’s a simple (but not so easy) guide to getting there.
First and foremost, live below your means. Research indicates that spending more money isn’t going to make you much happier in the short-run. Saving money, on the other hand, is likely to make you happier long-term, and even help you live longer.
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Here are a few ways to spend less:
Automate. Direct some of your paycheck to automatically go to savings or toward paying down your mortgage at a faster rate. Increase the amount with every raise.
Keep your ride. My research reveals you can save $1 million or more over a lifetime by buying a modestly priced vehicle and keeping it for a decade, vs. buying or leasing a luxury car every few years. I kept my Pontiac Grand Prix for 11 years and gave it to my son four years ago. I plan to keep my new car a long time.
Pay with cash. It’s easy to make purchases with your credit card. Trying making it harder. Research shows that paying by cash will cause you to spend less.
Hunt for the best deals. It pays to shop around. The internet makes it ultra-easy. Stay in four-star hotels for less than $100 a night; save 40 percent on a computer; try that new restaurant with a BOGO coupon. I have. In fact, finding bargains is one of my favorite games. Maybe it can be yours.
Save more. Maximize contributions to your 401(k) savings plan. Make sure you’re getting your full employer’s match — it’s free money. And if you’re 50 or over, make as much catch-up contributions as you can afford.
If you’re able to save, the hardest part is over. The key is being a smart investor. Some tips:
Minimize expenses. Higher investment fees generally lead to lower investment returns. Check the annual expenses on your mutual funds, which can eat into your returns. A full-service broker may also charge you higher transaction fees than a discount broker. And you should never pay a front-end load fee or sales charge when you purchase a mutual fund. This is your money, so use it for your financial independence rather than enriching others.
Maximize diversification. Investors can own virtually every stock on the planet with a total U.S. stock and total international stock index fund, and most U.S. investment grade bonds with a total bond index fund. It’s so simple, in fact, that my son created a second-grader portfolio when he was 8. On Dow Jones MarketWatch, it’s among the best performing of eight lazy portfolios.
Minimize emotions. Many investors tend to sell mutual funds and stocks when markets plunge. Yet even the most experienced money managers can’t time the market. So if you’re a long-term investor, maintain your investment strategy. Don’t panic. Reject the instinct to sell. Set an allocation between stocks and bonds and stick to it. When stocks surge, have the discipline to take profits and reallocate to get back to your target allocation. And when stocks plunge, look for opportunities to snap up bargains.
Remember that money is freedom to allow you to live your life as you want. That may be golfing, spending time with the grandkids or doing charity work. You should decide whatever that freedom should bring. I define financial wealth as the number of years your portfolio will support your desired lifestyle. The more frugally you can live and be happy, the richer you are.
So enjoy this Independence Day. And here’s wishing you success in achieving your financial independence.
Allan Roth is the founder of Wealth Logic, an hourly-based financial planning firm in Colorado Springs, Colo. He has taught investing and finance at universities and written for Money magazine, the Wall Street Journal and others. His contributions aren't meant to convey specific investment advice.
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