In your personal finances, financial independence doesn’t necessary mean being wealthy. Being wealthy means having assets that generate a level of income that exceeds your standard of living. Financial independence means defining how much money is enough to maintain a particular lifestyle, having the right amount of money saved and investing it wisely.
What is the secret to financial independence?
It’s a simple formula but difficult to execute: spend less than you earn and invest the difference. In simple terms, within your personal finances, you must live within your means and learn to optimize your money by investing it.
Quoting Chris Reining, famous finance consultant, “live rich: earn $ 500k, spend $ 500k and not have a single cent saved.” Be rich: earn $ 100k, spend $ 40k, have $ 1 million in the bank.
What is the 4% rule?
Managing our personal finances, we all know we should allocate a portion of our income into a savings fund, and that these savings should be invested. The 4% rule states that you should reach a sufficiently large savings level to withdraw 4% annually, adjust inflation, and never run out of money.
Your annual spending is the most important piece of information to determine your savings goals.
How to choose where to invest?
Research and study the investment schemes that work best for you, and learn about the ones that offer the most attractive returns. They can be bank instruments, government bonds, pooled funds and other investment points. There are many ways to grow your money without incurring much risk.
Remember, when investing always take into account:
Rentability: the profit you expect to obtain. It’s measured as a percentage of the uncertainty of the performance of your investment.
Term: the time you are willing to have your money invested to earn returns.
Investor profile: your preferences and needs that will define your investment decisions.
Achieving financial independence is long term commitment that requires strength and consistency, but it doesn’t have to make you suffer. Learn to have control of your personal finances and to be smarter when it comes to spending; live within your possibilities, thinking about the future and constantly looking for new projects in which to invest.
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