Mike Gibson

Certified Financial Planner

Chartered Retirement Planning Counselor

 

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HOW TO ACHIEVE FINANCIAL INDEPENDENCE

By: Mike Gibson (Certified Financial Planner™) Revised: 5/1/07

 

Financial Independence (my definition): “Is having the money to do the things that you want to do, when you want to do them and because you want to do them, which helps you better control your own destiny” – Below is how you achieve it!

 

  1. Save a piece of every dollar that you earn (live on less than you earn) – This is the key to financial independence.

»     Save a minimum ten cents (10%) of every dollar you earn - Live on less than you earn and allow the power of compounding work for you. The larger percentage you save the faster you will achieve financial independence. Also, the later you wait, the more you will need to save if you eventually want to retire.

 

»    Fully fund your retirement accounts first and then other investments – Your work 401k and your personal IRA are “pre-tax” dollars, which means Uncle Sam is helping you to save for retirement. After fully funding your retirement plan, save as much as you can afford in a “don’t touch” savings account so your money can grow and compound over time. If your company doesn’t have a retirement plan, call me and I will help them set one up.

 

  1. Invest your money in a diversified portfolio using a professional financial advisor and money manager – This includes stocks, bonds, and cash covering all the major asset classes (diversified mutual fund portfolio or individual assets based on personal risk tolerance). Include some real estate by owning your own home, investment properties and/or REITS (Real Estate Investment Trusts). The end result will be lower overall risk and better potential growth.

 

  1. Don’t touch your retirement savings until you retire - As you save for retirement, it is very important that you don’t use your account as a “put and take account”, where you put it in and then take it out. Retirement savings should be left alone so it can grow and compound over time or it won’t be there when you need it.

  1. Have an investment discipline and stick with it (i.e. Ride your gains & cut your losses) – Most investors buy and sell at the wrong time. The best strategy is to know your exit point when you go into an investment. Do this by determining the most you are willing to lose before you will sell a bad investment.  You may also set an upside selling price or you may simply ride your gains and move your downside selling point up as well. Say you buy a security at $10/shr and are willing to lose 15% before you sell. If it drops to $8.50 cut your losses and move on, but if it goes up, move your selling point up as well (i.e. Current price = $15.00 …. Sell at $12.75 or 15% lower). This allows you to lock-in profits without selling too soon.

 

  1. Buy a Home, but don’t buy more than you can afford – Keep payment to no more than 25% of your take-home pay and if you can’t pay cash (as most cannot), get a fixed rate mortgage with a payback period of no longer than 15 years.

 

  1. Pay Cash for your Autos and Major purchases – Never lease or finance a major expense … Save in advance and pay cash.

 

  1. Forward budget planning for financial independence – If you are to ultimately achieve financial independence, you must break the cycle of “backward budget planning for financial disaster”, where you buy now and pay later. To do this, you need to live by the philosophy your parents and/or grandparents had where “if I can’t pay cash, I don’t buy it or I wait until I can pay cash”. It means “controlling and suppressing your urge for immediate gratification”. Below are a few suggestions:

     

    • Create an Emergency Fund:  Build-up and keep 3-6 months of living expenses close to home.

    • Turn your periodic expenses into fixed monthly payments (i.e. $6,000/yr R/E Tax bill to $500/mo).

    • Go on “budget payments” where ever possible (i.e. electric, water, gas, telephone, insurance & real estate taxes) where you pay the same amount monthly year around. It makes it easier to budget and to stay on track.

    • Pay your Bills Automatically- Have bills paid through automatic checking account debits on a fixed day each month (i.e. phone bill, electric, mortgage, insurance, etc.) so you can space them out to fit your paydays and you know exactly what is coming out of your account and when. This will help your credit rating because you will never be late plus it will save postage and free up time to do other things.

    • Charge Cards – Don’t pay credit card interest. Carry a charge card with a low credit limit (< $5k) for emergencies only. Lock the remaining credit cards away in a safe place. Use these cards periodically to maintain active credit, but pay them off as soon as the bill arrives to show you are responsible with credit.

    • Give Yourself a Weekly Commission – This money is for all personal wants & needs (i.e. auto maintenance, nails, hair, etc.). Say you give yourself $50/week and you want to buy something that costs $100. Instead of charging it and paying later (backward budget planning for financial disaster), set aside $10+ a week from your allowance, wait a few weeks and pay cash. Ask yourself; “Do I really need it? or “Do I Love it?”. If not put it back and walk away. Save in advance of what you want or need and the money will be there when you find the bargain you must have.

    • Stop Those Budget Busters- Put $1, $5, $10, $20 away weekly in envelopes that are dedicated for specific wants, needs or budget-busting events (i.e. Dr & Dentist, Gifts, Sports, home improvement, vacations, dinner out, fun, etc.). If there isn’t money in the envelope, you can’t do what you want to do or you must delay until you can afford it.

    • Aggressively Pay-off All Debts (including your mortgage) – Stop using credit cards and then attack the smallest balance first, then the second and so on until all debts are paid off. Accountants may tell you not to pay off your mortgage because interest is tax deductible, but I disagree. If you pay $10,000 per year in interest and get a $3,000 refund, you still flushed $7,000 down the drain. If your mortgage is paid off, you can save $10,000 per year in an account with your name on it. Invest this money over time and you will become financially independent.


    Copyright 2007 Mike Gibson