Today is a day to reflect on and appreciate the opportunities and freedoms we enjoy in our everyday lives. One of the greatest freedoms that we enjoy is the ability to add value to society and collect wealth as a result.
To help celebrate this special occasion, I’d like to share with you five simple secrets of one of the most important types of independence – financial, that is.
Secret #1: Income does not equal wealth. Too many people believe that a high-paying job will be their ticket to financial independence. Of course it will be easier to become wealth if you have a lot of money flowing to you, but you have to spend less than you make. It seems like common sense, but studies by Thomas Stanley have demonstrated that high-earning doctors are the least likely group to amass significant wealth.
The real secret to wealth is spending less than you make. If you stopped working today, how long could you maintain your standard of living? Think of it this way: if you’re earning a high income from a job, you could get fired any day, but the only way to lose wealth you’ve created is to spend it.
Secret #2: The only reason to save is to invest. Please do not save just to save. The only way to take advantage of true money-growing opportunities is to invest. Becoming financially independent can take some time, so be patient. If you continue to funnel money into your investment accounts, you’ll grow your wealth on a larger scale through the magic of compounding. You can’t get much compounding if you’re saving just to save. After all, most savings accounts are paying less than 1% right now.
Stay disciplined and keep investing until you reach the critical mass where your interest generated is greater than your expenses. $10,000 earning 8% is $8,000, but $1,000,000 earning the same 8% means an extra $80,000 in your pocket.
Secret #3: Taxes can make or break you. When it comes to taxes, get the best advice that you can afford. Interview multiple accountants and make sure that the value they provide is greater than what you’re paying. Everyone’s tax liability is different, so you must consult a professional that understands your situation.
Uncle Sam wants to make sure that you pay your fair share, but please understand that this doesn’t mean your entire income, it just means your taxable income. You can lower your taxable income through real estate, 401(k)s, IRAs and municipal bonds. By reducing your taxable income, you get a few extra dollars to keep investing, leading to huge returns as time goes on.
Secret #4: Don’t miss out on life along the way. This requires a fine balance. You don’t want to sacrifice tomorrow for today, but you don’t want to be miserable today either. Financial independence is a journey and it requires some long stretches. If there’s something that you’ve always wanted to do, don’t postpone your happiness, because you don’t know what tomorrow will bring.