Enjoying what you do for a living can be a really nice thing. Having positive feelings toward going into work each day is a nice place to be. Of course, no matter how much we like our work, the reality is that we won’t be doing it forever. We probably can’t work as long as we might expect, due to future health reasons and simply being older and in the workforce – which is not the greatest place to work.
Do we even want to work forever in the first place?
I think that there is much to life that can be enjoyed that doesn’t involve going into work every day. To that end, financial freedom is a really enticing goal! More than that, having the ability to someday retire is a necessary goal!
Since we are individually responsible for our finances, it’s a good idea to have a game plan on how to get to where we want to go. Of course, we first must have the goals in mind, as wandering through life hoping for the best with money won’t get us too far. Once the vision is there, and the goals are set, what’s the plan?
Here’s what I’m thinking about when it comes to steps to reach financial freedom:
The first thing that we need to focus on is earning income. While we can save our way to wealth, we can’t save money that isn’t made. Without income, we simply can’t pay the bills – much less get a start on even building a nest egg.
The three aspects of making money to reach financial freedom are:
- Securing income. We need to get the right skills to find work. A great start here is getting a good education. Beyond that, we need to learn how to make sure we learn how to market ourselves to employers – or for entrepreneurship, if that’s our path. Regardless, first thing to think about is getting an income stream!
- Keeping income. So we have a job and career, or a business. This can be taken from us very quickly. So, it’s important for us to keep up our skill, make ourseveles indispensible to our employer, and be aware of the landscape in our company and the job market.
- Growing income. Okay, so we have a job, and it’s stable. Why not focus on making more? This can be done through great performance at work, or finding a different job that pays more. Or, perhaps it could mean starting a side business to supplement things or perhaps take a different direction eventually. Diversification of income can be a good thing!
So we have made money. That’s a start! But spending everything we make, and assuming that the income will come in forever, is not the way to go. Salary in perpetuity isn’t exactly too common, is it? Thus, it’s a good idea to save a sizeable percentage of our income.
Saving isn’t always easy, but it can be much easier if we do a couple of things.
- Understand wants and needs. What we really need is pretty clear: food, shelter, health care, etc. But we don’t need lavish dinners, we don’t need a McMansion or overpriced house, and we don’t need cosmetic or vanity “health care”. There are things we need, and there are things we want. Of course life is to enjoy and it’s fun to get the things we want too! Let’s just pick our spots and be smart about it, while remembering the long-term goal of freedom!
- Make it Automatic. When we have to make decisions constantly, and think about things, it can complicate matters. When saving money is automatic even moreseo that habits such as, say, brushing your teeth – your’re in a good place! This type of regularity of investing can be done by automatically scheduling a portion of our income to be saved. This can be in multiple accounts for multiple goals, too. Another way that technology has made saving so easy to do in recent years.
Money is made, and money is saved. That’s a great start! If those savings are earning miniscule rates of return, it just might lose value relative ito inflation. That’s why it’s important to focus on rate of return of investments, and practice smart asset allocation with our goals and risk tolerance in mind.
Here’s an example, where we assume that somebody has a lump sum of $100,000 that he or she will invest over the course of 25 years. There are two paths we can consider: low rate of return, and high rate of return.
Low rate of return: at a 3% annual rate of return, a $100,000 lump sum will – when earnings are reinvested – equal over $209,000 after 25 years.
High rate of return: at a 10% annual rate of return, a $100,000 lump sum wil – when earnings are reinvested – equal over $1,083,000 after the same 25 years.