We often hear about people who have six figure pay checks or own a luxurious home, or drive a fancy car but what does it take to get there? We can't just wake up one morning and find ourselves to be millionaires (unless you've won the lottery, which in that case that's awesome!). Becoming financially independent is like many things in life, a journey that comes with multiple steps and a solid foundation.
I'm going to provide you with six awesome tips to help you get on your way to ensure that you provide yourself with the best possible foundation to build wealth and go full speed ahead towards achieving financial independence.
1. PAY OFF ALL YOUR DEBT
You can't begin to build wealth without eliminating what is limiting your growth, which in this case is debt. Paying off any debt you have is the first step to take on your journey, this can be from student loans, car payments, credit card debt and the list goes on. Pay it off and do it ASAP! Accumulating too much debt will push you into a vicious cycle of being unable to meet payment deadlines and impacting your credit score, which will negatively impact your financial capabilities in the future. A recent article by
Forbes indicates that in February 2020, total student loan debt is at $1.56 trillion, making it the second largest category of debt across the entire United States, only behind mortgage debt. Getting on top of this early will only help achieve your financial goals in the years to come.
By paying off all your debt you provide yourself with the opportunity to choose where you can invest your money and how to make it work for you! This is just the beginning of achieving financial independence.
2. HAVE AN EMERGENCY FUND
Especially in today's society, unemployment rates have been volatile throughout 2020 and may continue to do so in the near future. Have you got a plan of attack if you lose your job? Would you be able to live the way you currently do if you lost your job tomorrow? This is the reason I would suggest that once you pay off all your debt, create an emergency fund.
The amount you place into this fund is based on personal preference, you can deposit enough money to allow you to live your current lifestyle for 1 month, 3 months, a year and so on. If you're searching for a more logical backed way of approaching this, the
Bureau of Labor Statistics noted that as of May 2020, the average duration of unemployment is 7.7 weeks, or nearly 2 months. Based on this, you can take less risk and place 3 to 6 months' worth of living expenses into your emergency fund in the unfortunate event that you lose your job.
Having this allows you to also feel safe knowing that even if the worst case scenario occurs with your job, you have enough money saved to figure out a plan of action and not worry about how you need to quickly sell your car or furniture for cheap in order to live your current lifestyle
3. INVEST IN YOUR RETIREMENT
I can't express how important it is to set aside money for your retirement out of your pay check each month. Applying this strategy will ensure that you have sufficient funds to live comfortably when you eventually retire. Luckily, in Australia it is compulsory to invest in your retirement through what is called superannuation. Employers pay a percentage of your earnings into your superannuation account and then the superannuation fund invests your money until you retire.
If you're in the US, you can take advantage of a
401(k) plan. As an employee, you can make contributions to your 401(k) account through automatic payroll withholding, with some employers often having the ability to match a portion or all of your contributions. Depending on the type of plan you choose will depend on how the money is invested, however, the main thing is that you're making the effort to put in money now to ensure you have a happy retirement.
4. INVEST IN ETFs (Exchange Traded Funds)
Exchange Traded Funds is a form of security that holds an array of other securities, which tracks an underlying index such as the S&P 500. The beautiful thing about investing in ETFs is that you're not just investing in one company but a wide range of companies, which in turn reduces the volatility related to investing in the stock market as a huge drop in one company will only have a minor effect on an ETF versus owning a stock in the company itself.
Investments into ETFs has skyrocketed in the last few years and a good place to start can be with
Vanguard. You can choose from a vast collection of different funds, with descriptions and past performance all available for you to see. Having cash is great to see but choosing to diversify your wealth and have an allocation to stocks is a good idea to get exposure to other forms of investments. You should still do your research into which ETF you like best and go from there.
I know from personal experience that your first investment into the stock market is always scary, but ETFs make investing a lot more simple for everyone and you can use this as a foundation to build your portfolio and invest into individual companies in the future once you become comfortable. A piece of advice with investing in the stock market:
TIME IN THE MARKET WILL ALWAYS BEAT TIMING THE MARKET
There is always the possibility that the stock market will crash at some point in the future but the last thing you should do is panic and sell, this is undo all your hard work and essentially force you to start from scratch.
5. OBTAIN MULTIPLE SOURCES OF INCOME
Working your day job will always provide you with a steady pay check but if you're really ambitious to become financially independent then creating multiple streams of revenue is something you should look into. It comes down to how much time you put into something versus what's the maximum return that you can get.
For example, if you work in an office 9-5 and are on a salary of $60,000, you're essentially trading 8 hours of the day, 5 days a week, to receive $60,000. However, if you decide to invest every quarter into a high dividend yield ETF that pays dividends quarterly, you are being paid every quarter for simply purchasing a stock.
Now, I realise that investing in ETFs or stocks in general won't make large amounts in the beginning (a post on compounding will be coming shortly). Yet there are still so many ways for you to make unlimited amounts of money and trade less of your time. Examples include:
- Create a Youtube channel (a lot of hours in the beginning but consistent revenue once you build your brand);
- Start a blog (receive revenue from advertisements on your blog);
- Write a book (get paid royalties every time someone around the world purchases your book);
- Rent a property (owning an investment property will allow you to receive rent from tenants without having to lift a finger);
- Affiliate marketing; and
- Become a qualified fitness instructor and host group sessions (one on one sessions will for example provide just $25 for one session, however, hosting a group session with 6 people will provide you with $150 revenue for the same amount of time
The list goes on but I think you get the point, have multiple sources of income!
6. REDUCE YOUR LIFESTYLE EXPENSES
An aspect that often gets overlooked is our living expenses, this can be blown way out of proportion if not looked at. Sometimes you spend so much time trying to make more money through increasing the number on your pay check that you forget that simply reducing your expenses will provide with more cash anyway!
What I would look at first are your subscriptions. Go through your bank statement and list what subscriptions you're paying for and how much each is costing you per month. You may find that you're paying for two music services such as Spotify and Apple Music but you really only need one. Simply cancelling a subscription like this can easily provide you with $10 - $30 extra money in your pocket every month! Even more if you see other services that you don't use!
Another way to reduce your living expenses is to shop at times where there is likely to be huge sales. For example, every year I know that Black Friday will have huge sales on most clothing brands and consumer goods, so I plan what I want beforehand and purchase on Black Friday instead of paying full price during other times throughout the year. Other periods that you may find sales include financial year end (June) and Christmas.
SUMMARY
Those are my 6 tips to be on your way to become financially independent. There's a reason why this is called the sleeping investor! I like to go to bed knowing that I have other sources of revenue being paid to me other than just my daily job. It provides a great sense of accomplishment and I hope you can utilise these tips in your investing journey!
As always, leave your comments or reach out to me at thesleepinginvestor@gmail.com with questions regarding personal finance and the economy that you would like answered.
Cheers,
TSI
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