The Fundamentals of Financial Independence

November 1, 2024

Here are some essential strategies that will help you achieve financial independence. It is important to get solid advice to design a plan incorporating planning values such as those noted herein.

Separate your savings from your investments. Before investing for a long-term financial goal, you’ll need to save up to six months’ worth of your salary for an emergency fund. 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 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 your future income cannot service. 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 procrastination if you focus on paying yourself first. A rule of thumb: save 10% to 20% of every paycheck. You can achieve such investing by systematically purchasing units in a potentially promising investment fund using an 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 devalue over time. Acceptable debt can help you achieve an education or mortgage a home.

Differentiate your risks. Inflation risk will compete with long-term investment risk. Equity investment funds or the stocks of many companies are not guaranteed, meaning there is a risk. Yet equities have a much better chance to outpace the adverse risk of inflation—or as some have humorously termed shrinkflation—compared to a savings account over time. Inflation is the single most significant 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 diversify among the various sectors. One sector may gain while another may lose some value, balancing 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 from a professional who studies funds as a specialty. To diversify in a balanced manner, one needs to weigh many factors concerning economic sectors, managers’ styles, company size, and foreign economic conditions.

 

Publisher's Copyright & Legal Use Disclaimer

All articles are a legal copyright of Adviceon®Media.

The particulars contained herein were obtained from sources which we believe are reliable, but are not guaranteed by us and may be incomplete. This website is not deemed to be used as a solicitation in a jurisdiction where this representative is not registered. This content is not intended to provide specific personalized advice, including, without limitation, investment, insurance, financial, legal, accounting or tax advice; and any reference to facts and data provided are from various sources believed to be reliable, but we cannot guarantee they are complete or accurate; and it is intended primarily for Canadian residents only, and the information contained herein is subject to change without notice. References in this Web site to third party goods or services should not be regarded as an endorsement, offer or solicitation of these or any goods or services. Always consult an appropriate professional regarding your particular circumstances before making any financial decision.

Mutual Funds and/or Segregated Funds Disclaimer

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investment funds, including segregated fund investments. Please read the fund summary information folder prospectus before investing. Mutual Funds and/or Segregated Funds may not be guaranteed, their market value changes daily and past performance is not indicative of future results. The publisher does not guarantee the accuracy and will not be held liable in any way for any error, or omission, or any financial decision. Talk to your advisor before making any financial decision. A description of the key features of the applicable individual variable annuity contract or segregated fund is contained in the Information Folder. Any amount that is allocated to a segregated fund is invested at the risk of the contract holder and may increase or decrease in value. Product features are subject to change.