The top 3 mistakes people make when trying to become financially independent
The huge popularity of the FIRE (Financial Independence, Retire Early) movement is proof that many people dream of swapping their daily commute for a more pleasurable existence. That’s not to say that the path to achieving this goal is one that many of us are truly prepared to take.
If you commit any of the following sins, you can probably kiss your dream of retiring early goodbye.
1. Continuing to spend and accumulate debt
The first step toward becoming financially independent involves doing less rather than more of something, namely accumulating debt.
This might include refraining from purchasing the latest gadget or going on holiday but it can also apply to life’s little pleasures. A £2.50 coffee purchased every day might sound trivial, but that’s at £75 a month that could go towards paying off any debt you may already have.
There are other things you can do. If you still owe money on a credit card, make sure you switch to a 0% interest balance transfer card, thereby allowing you more time to stump up the cash at no extra cost. Fail to do this and you’ll only increase both the amount you have to pay off and probably the time it will take to do so.
Once you have no debt (aside from, perhaps, a mortgage), consider jettisoning credit cards from your life completely. Separately, ensure that you move money into savings on the day that you are paid rather than waiting until the end of the month. This way, you master the temptation to spend before it even arises.
2. Not investing (according to risk)
Being out of debt is one thing but remaining in cash is just as bad.
If you always hold a sizeable proportion of your savings in a standard Cash ISA, you are extremely unlikely to become financially independent. Instead, you’ll need to take calculated risks with your capital such as riding the ups and downs of the stock market.
This is not to say, however, that those seeking financial freedom should automatically head straight for small-cap companies or cryptocurrencies. The right oil, mining or technology stock could make you very wealthy. But you could just as easily lose your shirt.
You see, with the prospect of greater rewards comes the higher probability of losing money, which is one reason why the junior Alternative Investment Market (AIM) has been punished more than the main indexes recently.
As always, what you choose to invest in should be dictated by the amount of time you’re willing to keep your money tied up, your risk-tolerance, your financial goal, and your required returns to hit that target.
3. Being impatient
Becoming financially free is a great goal to have but, like most goals worth chasing, it can still take time to get there. So, having carefully selected your investments, you also need to cultivate the ability to sit still when others are panicking.
A strategy of owning dividend stocks and reinvesting the cash dished out, for example, might take time to bear fruit, but study after study has shown that it can dramatically increase your chances of achieving financial freedom earlier than most people.
It’s both the simplest bit of advice to give and arguably the hardest to implement in practice, but your future self will thank you if you can do it.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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