5 Steps To Financial Independence
The stair step system of building wealth, explained here, has been proven to provide the framework necessary for the average person to achieve financial independence. The steps contained in this system integrate all the basic household financial skills and personal wealth-building techniques into one easy to understand, comprehensive structure.
The value of the stair step system is that it clearly shows that the successful implementation of any single step is highly dependent upon the previous step being completed correctly. It explains clearly the path to financial independence via saving and investing your wages to create passive income stream in the future.
Based on my personal experience, I strongly recommend you aim for an investment portfolio of $1,000,000 or more. It may sound like a lot of money, but it is actually very achievable for a middle-class, working couple or even a single person. This is not an arbitrary number. Very smart people have already determined that you can remove approximately four percent annually ($40,000) from your portfolio and your nest egg will be preserved and continue to grow.
The stair step method of creating wealth allows your mind to organize, file and then apply this information to your life. Otherwise, you are stuck trying to absorb a bunch of disconnected, seemingly disparate nuggets of information. Absorbing information in this way makes it much harder for the average person to apply personal financial skills and investing skills to their maximum effectiveness. The stair step method also assumes you are starting from zero money saved. Here are the vital 5 steps to financial independence:
- Financial goal-setting: You become financially independent the same way you accomplish anything worth doing: by goal-setting and then working toward goal achievement. In this case you and your significant other are going to set financial goals and then work to achieve them.
- Create income(s) from your job(s) and/or businesses: You should save at least 20 percent of your pay to create wealth in the future, assuming you make an average wage. If you can’t save that much because of debt, then work up to that amount by reducing your debt. Remember, it is always easier to save 20 percent if your monthly income is larger. The key is not to increase your spending as your income rises.
- Budgeting your income: You will either budget and create savings that will significantly improve all aspects of your life in the future, or live frugally because you spent too much money and are now trying to stay afloat financially. Budgeting and living frugally is inevitable! Since that is the case, why not make living frugally count for something, by creating a future life of financial independence?
- Saving your money: Saving is entirely the point of working to create income. Budget that income by getting rid of most of your debt so you complete this one vital step! Save 20 percent if you make an average salary.
- Investing your savings regularly and over time: In investing, the elements of compounding interest include your principal (amount you originally invest), the interest rate (the rate of return you will receive on your investment) and the amount of time your investments have to work for you. Investing 20 percent of your salary puts you in the neighborhood of a million dollars after 30 years. You can do it sooner, but that takes a little more commitment.
The easiest and safest method of investing involves creating a portfolio of various stock and bond index mutual funds. Set a balance between stocks and bonds you are comfortable with, and maintain that mix in your portfolio. Rebalance your portfolio annually by adjusting (buying and selling your individual funds) your funds back to the original mix you choose. This action forces you to sell high and buy low.
The earlier you begin saving and investing your wages, the easier it becomes to harness the power of money, time and compounding interest to create a significant income stream. If you didn’t start early, don’t worry. You can still accomplish your financial goals. A quick search on Google will reveal that many people have become quite wealthy as seniors. You will just have to overcome a few more obstacles in order to create life-changing wealth.
The goal is to support your life with various income streams. This particular income stream uses your income to create a large portfolio of investments. In the future, this will allow you to redirect 4 percent of your investment portfolio’s profits to fund your life via a passive income stream that is both sustainable and renewable. Following the five steps of goal setting, income creation, budgeting, saving and then investing to create an investment portfolio that will support you in the future.
