My Strategy to Financial Independence
Three simple strategies to reach your financial goal
In this short article, I want to show you three simple strategies leading me to financial independence.
Pay yourself first
Many people forget to pay themselves first. The salary is gone even before it came, by paying all the bills. The only person who will get nothing of that salary is yourself. Congrats, you are social and share your salary with countless others. However, it would be best if you became egoistic enough to make it your habit to pay yourself more than everyone else.
Once you know your exact monthly spending, you should decide which amount you can easily save each and every month. This money should be completely locked away. It is not the kind of money you are taking when a month is going to be tight to pay your bills. But it is the money you can use for investing in any profitable assets, such as fonds, stocks or similar investments.
What do you do when you receive a salary rise?
You are doing a great job, or you are self-employed and your monthly earnings increase. That’s perfect, so you have more money to spend on unnecessary goods. Of course not! For every buck you manage to earn more each month, you should save 50% of it. In this way, you will keep saving your fixed amount and additionally 50% of your salary increase.
What is the purpose of it?
Let’s dive into simple math to make it clear. Assuming you earn 4,000$ each month, you will save 1,000$ of it, which is 25%. After a rise, as an example 200$/month, you save 50% of the 200$, which is 100$/month.
Your total earnings are 4,200$, and your total savings is 1,100$. In percentage, your saving increase from 25% to 26.19%.
Not only does your absolute amount increase, but also the saving rate increases. You will love playing with more significant numbers, such as 1,000$ more each month, which will already be 30% savings of your total income.
Of course, you could save your total salary rise, but after hard work, you should also be able to enjoy a bit more out of your salary :)
The 5x rule
The second rule is the 5x rule. You can change it accordingly to your preferences to the 2x, 3x or even 10x rule. In my opinion, 5x is a good middle way.
You ask what the rule is about?
Essentially, the rule determines how big your spending can be. Assuming you need to make a more extensive investment like buying a new car (even though it is not investing, strictly speaking). You look around for new cars and consider the maximum price you could pay for the vehicle. Now, the 5x rule comes into play. The fee of the car should be at most 5x your total savings. Having saved up already 100,000$, then your car should cost at most 20,000 $.
What is the purpose of it?
In this way, you will only spend a little on unnecessary liabilities. You will always have enough savings to invest in assets. On top of that, the more money you save up, the better car you can buy. So, start saving!
Debt is your enemy
Looking at the previous scenario, buying a nice car or any other extravagant spending could lead you into debt if you do not follow the 5x rule. Debt has many disadvantages. As we know, you have to pay your debt back with a salty interest rate. However, even worse is that you move in the opposite direction of your goal. And so to your financial independence.
You might think having 1,000$ debt is not as bad as it seems. However, if your goal was to own 1,000$, you are pretty far away from your goal. The absolute difference is 2,000$ now! So first, you need to make the first 1,000$ to pay your debt back and an additional 1,000$ to reach your goal.
Conclusion
Following these three simple but compelling pieces of advice are the first step toward your financial independence. Of course, there is so much more than only these three things. However, this could be the first step in the right direction.
Let me know in the comment section what financial goals you have for the year 2023.
Thanks for reading!
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