Friday, May 29, 2015

The Basics of Financial Independence

This list is actually in order starting with the most important item first:
  1. Set aside 6-12 months of expenses in a savings account as a rainy day fund.
  2. Pay off any debts you have. Start with the highest interest debts and work down until all is paid off.
  3. Maximize your savings rate. I recommend starting with spending less since there you have the most control but finding ways (side gigs, promotions, etc) to earn more is just as important. Another angle on this is getting the most out of your employer via pension/401K contributions, tuition reimbursements for education/training that will improve your earning potential, corporate discounts on existing bills (cellphone plans, childcare, etc).
  4. Invest in a low-cost (as low as humanly possible, aim for < 0.20%), tax-efficient (bonds in tax advantaged accounts such as IRAs/HSAs/401Ks), diversified (Total Bond, Total US, Total Int'l OR a Target Date fund to save all the stress), balanced (for your time horizon, 80-20 is a great starting point) index portfolio.
  5. Time...let it marinate. The sooner you get done with #1 (you can weather storms), #2 (you are debt free), #3 (you have grown your earnings AND/OR lowered your expenses so you are investing more), and #4 (your investments are growing with very little headwinds from fees and taxes) the quicker you can be financially independent.
And the above list is such that if you just get the first 1, or first 2, or first 3 done, you are better off for it. Don't look at it as a all or none to prevent you from starting. Best of luck.