6. Make Sure Your Lifestyle Costs Lag Your
Income Growth
Many new graduates find that in the first couple years of working they have excess cash flow. Still used to their more frugal student spending habits, it is easy to make more money than they need. Rather than using excess income to buy new toys and live a more luxurious lifestyle, this excess could be put toward reducing debt or adding to savings. As you advance in your career and attain greater responsibility, your salary should increase. If the cost of your lifestyle lags your income growth, you will always have excess cash flow that can be put toward paying down debt, making investments, saving for a home, or achieving any other financial goals you may have.
Many new graduates find that in the first couple years of working they have excess cash flow. Still used to their more frugal student spending habits, it is easy to make more money than they need. Rather than using excess income to buy new toys and live a more luxurious lifestyle, this excess could be put toward reducing debt or adding to savings. As you advance in your career and attain greater responsibility, your salary should increase. If the cost of your lifestyle lags your income growth, you will always have excess cash flow that can be put toward paying down debt, making investments, saving for a home, or achieving any other financial goals you may have.
Where many people get
into trouble is that they feel entitled to a standard of living that exceeds
what they can afford. However, if you keep your standard of living below what
you earn, you won't have to cut back to accumulate money; instead, you will
naturally have excess cash flow because you earn more than you need to live on.
The good life should be
a reward for your hard work, good fortune and successful planning, not
something that you are entitled to. Once you have established a certain
lifestyle, it is psychologically difficult to lower it. It is very easy to
raise it.
7. Become Financially
Literate
Making money is one thing; saving it and making it grow is another. Financial management and investing are lifelong endeavors. Making sound financial and investment decisions is important for achieving your financial goals. The more knowledgeable and experienced you are in financial matters, the fewer mistakes you will make.
Making money is one thing; saving it and making it grow is another. Financial management and investing are lifelong endeavors. Making sound financial and investment decisions is important for achieving your financial goals. The more knowledgeable and experienced you are in financial matters, the fewer mistakes you will make.
Research has shown that
people who are financially literate end up with more wealth than those who are
not. There is a strong monetary incentive for becoming financially
sophisticated. Taking the time and effort to become knowledgeable in the areas
of personal finance and investing will pay off throughout your life.
8. Seize the Opportunities: Take
Calculated Risks
Taking calculated risks when you are young can be a prudent decision in the long run. You might make mistakes along the way, but remember, mistakes are the lessons of wisdom. You often learn more from your mistakes than from your successes. Also, when you are young, you can recover faster from financial mistakes, and you have many years to recover.
Taking calculated risks when you are young can be a prudent decision in the long run. You might make mistakes along the way, but remember, mistakes are the lessons of wisdom. You often learn more from your mistakes than from your successes. Also, when you are young, you can recover faster from financial mistakes, and you have many years to recover.
Examples of calculated
risks might include moving to a new city with more job opportunities, going
back to school for additional training or taking a new job at a different
company for less pay but more upside potential. Starting a new company, working
for a small startup company, or investing in high risk/high return stocks, is easier to do when you're young.
Younger people can afford to take risk, and the same
opportunities might not be available later in life. As people get older and
assume more family responsibilities like paying off the mortgage or saving for
the kids' education, many are forced to play it safe and are unable to
capitalize on riskier opportunities that present themselves.
Taking calculated risks
when you can afford to do so is necessary to get ahead financially. Playing it
safe might be the bigger mistake in the long run.
9. Borrow Money For
Investments - Never to Finance a Lifestyle
As mentioned before with the Joneses, you should never borrow to finance a lifestyle you cannot afford. Using credit for a life you feel entitled to is a losing proposition when it comes to building wealth. The constant borrowing will assure that there is no money available for investing, and the added interest expense of borrowing further increases the cost of the lifestyle.
Borrowing money should be used only for investing - where your gain will outrun your borrowing costs. This might mean investing in the literal sense (for stocks, bonds, etc.) or it might mean investing in yourself for your education, extra training, to start a business or to buy a house. In these cases, borrowing can provide the leverage you need to a reach your financial goals faster. Borrowing to meet short-term desires is counterproductive. (To learn about your borrowing options, see Different Needs, Different Loans.)
As mentioned before with the Joneses, you should never borrow to finance a lifestyle you cannot afford. Using credit for a life you feel entitled to is a losing proposition when it comes to building wealth. The constant borrowing will assure that there is no money available for investing, and the added interest expense of borrowing further increases the cost of the lifestyle.
Borrowing money should be used only for investing - where your gain will outrun your borrowing costs. This might mean investing in the literal sense (for stocks, bonds, etc.) or it might mean investing in yourself for your education, extra training, to start a business or to buy a house. In these cases, borrowing can provide the leverage you need to a reach your financial goals faster. Borrowing to meet short-term desires is counterproductive. (To learn about your borrowing options, see Different Needs, Different Loans.)
10. Take Advantage of
Financial Freebies
Not many things in life are free. If you belong to a company pension plan, take the free money it offers and make sure that you contribute at least up to the maximum of what your company will match.
Not many things in life are free. If you belong to a company pension plan, take the free money it offers and make sure that you contribute at least up to the maximum of what your company will match.
You can also look for
(legal) ways to take advantage of tax laws. For example, making a voluntary super contribution (in Australia) or contributing to an individual retirement account (IRA) (in USA) will result in a tax savings - in effect, the government is giving you free
money to provide an incentive to contribute. There is also an incentive to
invest in stocks because of favorable tax treatment on capital gains and dividend income.
Conclusion
Achieving financial independence is a goal most people strive for. It is not necessarily easy, but it is achievable if you understand your priorities, set achievable goals and take the proper steps toward reaching them.
Achieving financial independence is a goal most people strive for. It is not necessarily easy, but it is achievable if you understand your priorities, set achievable goals and take the proper steps toward reaching them.
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