Begin to lay out your plan. The key is to start.
What is Financial Independence?
How do you define financial independence? Is it having all the money you need or want? Or is it something else? Does money have anything to do with it?
How about doing anything you want whenever you want! Not having to do something (e.g. working) because you have to but because you want to. Getting excited about what you do! Doing something for the fun of it.
What would that feel like?
Laying the Groundwork
Before you begin your investment program, one must get their house in order.
- Create a detailed budget. Know what you can put into an investment program.
- Eliminate all non-mortgage debt. Yes, get rid of the credit cards, car loans, personal debt, student loans and any other type of debt.
- Determine your risk tolerance. How much risk will you take? Develop a risk reward model. The higher the risk the higher the potential returns, of course you could lose it all.
- Make certain you are not investing the rent and food money. If you are, then stop now. You are not ready to develop an investment plan
Develop a Plan Specific to You
This is your plan, not mine. Not someone else’s. Get yourself educated, learn about investing. Do not take investment advice from your neighbor or some other acquaintance.
- Read investment books.
- Hire an advisor. Make sure you hire one that will take the time to explain things to you. If you interview one who tells you to do what they say, run! Interview at least three. Make sure you are comfortable and vet them thoroughly.
- Will you do it yourself? Get educated.
- How much will you invest on a regular basis? Will it be weekly, monthly or annually?
- What will be your target returns based upon your risk tolerance?
- Will you be able to sleep at night or will you worry endlessly?
What Type of Vehicles Will You Use?
How will you accumulate your great wealth? Will you use retirement vehicles such as an IRA, Roth IRA, 401k, Roth 401k or some type of personal taxable investment account?
- I believe the best investment vehicle is the Roth option. Yes, this is a retirement type vehicle, but it has many advantageous features. Contributions are made after tax dollars and grow tax-free. Who does not like tax-free? Another feature is no required mandatory distributions. And in certain situations, you can take tax-free withdrawals before age 59-and-a-half.
- Next best is an IRA or other tax deferral vehicles. Contributions are made before tax and grow tax deferred. Taxes are paid when withdrawals are made. There are mandatory required distributions at age 72. Withdrawal before 59-and-a-half has a penalty of 10% plus taxes.
- Taxable investment account contributions are made with after tax dollars and any earnings either from interest, dividends or capital gains are taxed.
Decisions, decisions. While none are wrong, it depends on your situation and your financial goals. Once again, educate yourself.
Choosing Your Investment Vehicle
The types of investment vehicles will depend on your goals. Are your goals long-term, short-term or somewhere in the middle? When will you need the money you invest? Do you just want to live off of the interest or dividends? Are you seeking long-term appreciation?
- If you are seeking long-term returns, finding returns for 10% or greater should be your goal.
- Medium term would be in the 5-7% range.
- Short term most likely would be below 2%.
- How will you achieve your financial returns?
- Mutual funds
- EFTs
- Single Stocks
- Dividend stocks
- Corporate bonds
- Government bonds (municipal bonds)
- Treasury bonds
- Certificates of Deposits (CDs)
- Money Market funds or savings accounts
- There are other choices, such as large cap, mid cap and small cap as possible types of stocks or mutual funds. And I dare say Bitcoin or any other type of crypto-currencies?
- Real estate is another possibility.
As you can see, more homework will be needed. Educate yourself and pick what you are comfortable investing in.
Getting Started
The best time to start is now. There have been many factors discussed in this article. Take your time and go through them one at a time. Begin to lay out your plan. The key is to start. Begin with educating yourself, decide what consistent program you will follow. Hire a professional to teach you what you do not know.
If you do not start, you will not reach financial independence! QCBN
By Steven Calabrese, CPA
Steven Calabrese, CPA, is the CFO of Polara Health. He also is the owner/operator of a website known as thebiweeklyadvisor.com, where topics such as budgeting, investing, paying off debt and goal setting are discussed.