The Guide To Financial Independence
This guide represents the core lessons I was taught growing up around saving and investing. The way I see it, building good habits around these 3 concepts and staying committed will get anyone to financial freedom.
Over many years of practitionership, I now approach building wealth as a pyramid with 3 distinct stages.
The first stage and base of the pyramid is your cash (savings account, chequings account, the money under your mattress). A large balance of accessible cash helps with stability, emergencies and allows me to take your time for worthwhile investments. In general, when you live a stable life you can afford to make better decisions - it is the opposite of living paycheck to paycheck. I've automated this stage, so I can enjoy life and focus on other things that inspire me, and more importantly progress to the second and third stages.
The second stage represents secure investments. This is where I invest my money in index funds, ETFs, mutual funds and other diversified investments. Diversify by type of investment, by industry, by geography etc... By their very nature, the above mentioned investments are all diversified. If you don't want to think about money every day, here's some good news - you can set up your investments to run on autopilot - as much or as little as you want. I'm actively doing this now and have documented the process in detail.
The third stage (the smallest section at the top of the pyramid), after you've established a stable cash base and a well diversified investment portfolio, you can begin putting your money in speculative investments. This should only really be done by those who have built enough wealth that they are comfortable losing money through speculative investments. These are the highest risk investments available things like: stocks, real estate and foreign exchange (currencies). The reason why these are high risk, is because at this stage, your dollars are all invested in one basket e.g. you buy one house. If something happens to that house, your money is tied up in this one property. Or one company stock, or highly leveraged long or short position in the case of trading currency. If this is your first time seeing this concept of money, I strongly recommend focusing entirely on the first 2 stages. When I coach beginners, I advise they stay away from speculative investing until they are years into it. This stage cannot be automated and involves an experienced hands on approach to managing money.
Unfortunately most people start their financial journey in the opposite direction (top down). They hear about a hot stock tip, or they take on a huge amount of debt to buy a single real estate property, or they expect to get 2,000% returns in one year trading because they've outsmarted the market. A true masters of finance knows to build their wealth pyramid from the bottom up, it is the most effective and safest way to generate wealth without risking your money, over leveraging yourself or risking financial ruin. It takes years to build wealth, and it's absolutely worth it. Check out this post to see how the wealthy... get wealthy.
Automate your savings
Pay yourself first! Period.
I want you to think for a second about the order you spend your money - most people do the following: pay their mortgages, bills, groceries, clothes and entertainment, debt, put some money aside for vacation, and finally whatever is left over gets saved for that rainy day! Some months you save, busy months you don't (holiday season anyone?).
Consider paying yourself first - yes, before you even pay the bank that mortgage, or those utility bills. If your financial independence is truly priority number 1, then your money should go there first, no excuses.
Here's the strategy: When your paycheque is deposited have the bank automatically transfer a set amount (on pay day), into either a high interest savings account, or a TFSA investing account (Canadian). The key here is to make this automatic transfer happen no matter what, and before you have a chance to see or spend that money. By doing so something magical happens - you won't notice the money was taken, and you will still find a way to pay your bills and buy the things you want most. You will be absolutely amazed at how powerful this technique is for growing your savings. You will build a tremendous nest egg faster than you think, and at a scheduled pace. You will be able to calculate forward to any given year how much you'll be saving, because it happens like clockwork. For me, I personally find this technique works much better than retroactive budgeting for many reasons, most of which are psychological. Make your savings a priority by automating them and pay yourself first.
Here's where the magic happens. This is where all that money you've saved goes to work for you. When you eat, when you sleep, when you're at your day job, your investments are working 24/7 for you. Building good habits and changing the way you think about money are the hardest aspects of financial independence.
If you start looking at every dollar as having the earning potential to make you more money, it changes everything. Instead of buying that new pair of shoes, or that TV, you could have hundreds of workers (dollars) building wealth for you. If you change your mindset on how you should use money instead of spend money, it will take you to places you could only dream of.
So what should you do with your new found savings? Invest.
Got a promotion at work, how exciting - what should you buy? an investment.
Birthday cheque from grandma? Tax rebate? Sold a stock with a tidy profit? Re-invest that money.
While you do this, you're really doing 2 things: saving more money (which is great) but also keeping your spending under control (which is a critical). Just remember that lifestyle creep (keeping up with the Joneses) is detrimental to your journey.
The majority of my investments are diversified Index ETFs, also called index investing. While I have climbed the pyramid far enough to have speculative investments, I do not recommend this for beginners. This post details the exact steps I took to start investing - it is the blueprint of how I got to where I am today.