Looking for a way to achieve financial independence early?
Financial independence is a goal many strive to achieve, yet only a few accomplish. Why is this the case when we live in such a prosperous country? The most common reason is lack of knowledge in how to create financial independence, while others lack the desire or confidence in their ability to obtain the knowledge.
Interestingly, many people are willing to spend years studying to gain a formal education with the expectation that they will obtain a job that will pay enough to enable them to sustain their desired lifestyle. Yet when it comes to educating themselves about how to create wealth, they never quite find the time. Instead the majority of Australians seem willing to live from pay cheque to pay cheque, or work harder and for longer hours to create the extra income that will satisfy their needs.
The desire to have whatever we want now and pay for it later means that many forego the planning required to obtain financial freedom before retirement age. By simply implementing what I like to refer to as the 'three laws to wealth creation', you can build a solid foundation that will allow you to grow your own investment nest egg.
That said, in my experience many people only give these principles a fleeting glance, believing they already understand them and therefore do not give them the attention they deserve. But let me ask you - are you on your way to financial independence?
The three laws to successful wealth creation are:
1. Spend less than you earn
Unfortunately, the majority of people do not get past the first rule of spending less than they earn and are therefore unable to move on. For those who struggle with this one there is a solution, simply start by setting a budget. If you are like most people, you probably think a budget will restrict your spending, hamper your lifestyle and generally make you miserable. However, none of this is true - a budget is simply a financial plan to succeed. In fact it actually frees you from money worries as it allows to you spend more on what you want and less on the impulse spends that you don't necessarily need.
2. Invest your surplus wisely (at least 10% of your income)
For those who have their spending under control and go on to invest their surplus cash, many fail to do their homework and consequently, through lack of knowledge, do not invest wisely. In fact, in my experience all too often people do what is easy rather than what is wise when it comes to investing. A wise investment, however, must have two components - it must give you capital growth (your assets appreciate in value) and income (cash flow). Investments that do not have both components are considered average investments in which you must accept average returns.
3. Leave it alone so it can grow.
Finally, some people, even when they do invest wisely, are unable to leave their investments alone long enough to compound. Instead they prefer to spend their money (profits from capital gain or income) on assets that depreciate in value to satisfy their short term needs rather than continue to invest in 'financial assets' that create growth and income.
Where to invest
The most appropriate investments to achieve both income and capital growth are direct shares and property. Remember, if your investment is not getting both of these components then someone else is benefiting from the component you are not getting. Although I am a property investor, for this article I will concentrate on my personal area of choice and that is shares. Why? It can be simple and easy to get into especially for those new to investing, and unlike property it does not take much money to get started.
Direct share investment is an important part of any wealth creation plan and the great thing is that technology has made it even easier for individuals to learn how to run their own portfolios. In my experience, what investors need is a practical framework that will allow them to select stocks for their portfolio that have a higher chance of ensuring they are consistently profitable. Below is a set of guidelines to get you thinking about how to construct a portfolio of shares that will have you well on the way to achieving your investment goals.
Golden Rule 1
Irrespective of the amount of money you have to invest, you should always take the same amount of time researching your options to ensure you are protecting your capital on each and every occasion. This could also read don't just buy any share, do your research and buy the biggest and best shares on the market, they are low risk and generally perform well.
Golden Rule 2
You should aim to have between 8 and 12 stocks in your portfolio when investing in the share market. The trick is to not have lots of stocks with small amounts invested in each. This rule actually lessens your risk and increases your returns because:
" Smaller portfolios are easier to manage and represent lower risk. The more stocks you have in your portfolio the more work you need to do to manage your risk level.
" It is far easier to select a smaller number of stocks that are rising in price and this gives you the opportunity to increase returns.
" You will have less transaction costs in buying and selling stocks simply because a smaller portfolio will have fewer transactions.
Golden Rule 3
Never invest more than 20% of your total capital in any one stock, which will not occur if you follow Golden Rule 2. But more importantly, learn how to set a stop loss to protect your capital in the event a share falls in value. Here I suggest that if a share falls by more than 15% of the price you paid for it then you should sell to protect your money. If you invest in the share market you need to accept that some stocks will fall in value. However, this rule will help reduce your exposure to risk, while allowing you to achieve good returns simply because you are minimising the amount of capital you could lose at any one time.
CEO of Wealth Within