Saving and investing money are necessary if you are pursuing financial independence, but they are not enough. In this post, we discuss what else you need in order to meet your goals.
Why Saving Money is not Enough
If you are reading this post, you are probably interested in the topic of personal finance. Therefore, you may already be doing some things well. However, it is worth asking yourself is the current path you are on will be enough to achieve those things you want in life.
When people start learning about personal finance, they tend to focus on analyzing their expenses. That leads to reducing certain unnecessary expenses in order to create a cash surplus.
The difference between what we earn and what we spend is our savings. Keeping our expenses under control will allow us to start accumulating some capital. Seeing how our savings go up will generate a positive feedback loop that will keep us on the right track.
Once we have accumulated enough savings, we can consider investing them. While keeping money in the bank can be a good way to earn interest without taking on any risk, investing usually leads to greater long-term returns.
Two popular investment strategies for beginner investors are dollar-cost-averaging into a global equity ETF or following the retail-adjusted dragon portfolio. Regardless of which strategy we decide to follow, investing is another positive step on your path to financial independence.
By then, we will be doing several positive things that will minimize the risk of any future financial stress:
- We pay ourselves first: as soon as we get paid, we save a good percentage of our income
- We plan out expenses to avoid unnecessary spending
- We avoid consumer loans as a result of not consuming unnecessary things
- We invest what we save so it grows for the future
However, if we want financial independence (IF) to have more freedom in life, we will need to do more than that. Most people will not achieve financial independence by simply doing this, unless they are willing to wait until they are 55 or older.
If we save $1,000 every month for 15 years with a 5% real return above inflation (an extremely ambitious and probably unrealistic target) we would have $260,000. And that does not consider taxes. While it would be a decent amount, it would not be enough to achieve financial independence.
Therefore, action has to be taken.
The Solution: Higher Earnings
The key to achieving financial independence is to accumulate money at a much faster rate. And if you want to save more money, you will need to earn more money. This is the only option, even if some people would object to it.
Some readers would argue they do not need to earn more if they can increase their savings rate. While saving more of what you earn may be good, you can only save 100% of what you earn, which for most people would not be enough. And that would come with extreme scarcity and displeasure.
The other argument is to seek higher investment returns. I think that is a folly. We do not know what will happen in the future. Consequently, making our future financial plans completely dependent on the stock or real estate market is extremely imprudent.
While positive returns are possible, they are by no means guaranteed. More likely than not, returns will simply be ok. A 5% after-tax return above inflation is very unlikely, not to mention something higher. And the risk also exists that returns end up being lower than inflation as it has happened many times in the past.
For this reason, we should never rely on investment returns to hit our financial goals. Investment returns can and indeed are an accelerator. They are also great once we have a large amount of capital. But they should not be relied upon to make us rich.
As a consequence of all of that, the only option is to earn more and accumulate more capital. Otherwise, we would be waiting for decades.
I would like to encourage you to continue to save and invest your money. These two steps are necessary to achieve your financial goals. But you need to take things to the next level if you want to see something meaningful happen.
Do not spend too much time researching potential investments. Definitely learn about the financial markets, how you can protect your wealth, grow it and generate income. But do not make investing your strategy to become rich.
If you want to get closer to financial independence, you need to make more money. There are many ways to do this. You can either make more money in your current job, look for a new job or start a project or business that can generate income for you.
Here is a list of things you can do to increase the value you bring to the marketplace and increase your earnings:
- Acquire new skills
- Learn languages
- Seek a promotion
- Move companies
- Move to another country
- Start a part-time project like real estate investing
- Start a business
As you can see, there is no one way to achieve financial independence. You can create your own path. And, thanks to that, you can aim for more.
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