Ten Stepping Stones On The Path To Financial Independence

[Today’s post is from Wealthy Doc, an MD/MBA who has already reached financial independence. Who better to help summarize the path to financial independence than someone who has already made it? This article previously ran on Wealthy Doc’s blog in March 2018. -WSP]

Do you want to achieve financial independence? Do you know how to get there? There is a “best practice” to achieving financial independence. It isn’t complicated. It is simple and consistent. Follow the steps and you are all-but-guaranteed to arrive at your desired destination of financial freedom. This post was inspired by a Forbes article in 2016: The 15 Crucial Steps Needed To Achieve Financial Independence.

1. Want it Bad

Great things don’t happen through random luck. It may look like success is easy and automatic for some, but it isn’t. If you want to end up in a different financial place than you are now, you need to act differently. You can’t act the same and expect a different result. What will motivate you to change your behavior? You need a “burning platform.” Do you see the pain of your future life if you remain penniless and in debt? Do you dread the next three decades of exhausting and stressful work on the treadmill of employment? Good! Keep that image in mind and now make a better world for yourself in your mind. The contrast has to be enough to fuel your desire and help you make the sacrifices ahead.

2. Plan

I hate to plan. I can’t predict the future well. I don’t budget. I don’t like goals and am neither goal-driven nor money-motivated. Nevertheless, I realize that we all must have a plan. Especially if you want to be a “do it yourself” investor you need an ironclad IPS that you will follow when the times get tough and confusing. If you don’t have a financial advisor you will need to follow your plan and use your IPS to talk yourself off the ledge at times.

3. Have Some Cash

I have seen doctors act in panic after losing their job. I finally realized why. It is stressful to scramble quickly to replace a six-figure income. If you have no emergency fund, this becomes much more urgent. They often jump at the first job available to emerge from the crises even though it isn’t the best opportunity. They were living paycheck to paycheck. How sad. Don’t let that be you. Have 6 months to a year of expenses set aside as liquid, riskless cash equivalent for the inevitable difficult times coming.

4. Live on Less than You Earn

“If you cannot save money, then the seeds of greatness are not in you.” W. Clement Stone. How true. Before you invest, you must save. How do you save? Simple: live on less than you earn. Establish that habit and continue it forever. Find a way to automate the savings so you never see it. You won’t have to use your self-discipline and make decisions with every paycheck. It will be all done for you. You can use your willpower for something more important. Like resisting that apple pie a la mode.

5. Invest the Rest

Living below your means and saving isn’t enough. You must get out of debt. Then, you must buy assets. Assets will produce growth (capital appreciation) and income (dividends and interest). The cash flow from the investments will get reinvested (since you live on less than you earn) and the interest on the interest then grows faster. Your money will start working hard for you. You will benefit from the “miracle of compound interest.”

6. Diversify Your Investments

Why try to find a needle in a haystack when you can buy the whole haystack? You may choose to have some money in cash, commodities, alternative investments, real estate, and bonds. But most of your money should be used to buy shares in corporations. Businesses grow. Businesses earn profits. They reinvest that money or distribute it as dividends. Either way you -as the partial owner- benefit financially. Don’t pick a few companies with good sounding names either. Avoid individual stocks altogether. Buy them all. You could buy some foreign stocks or just stick to domestic. Either way, choose broad low-cost index funds (such as total stock market or the S&P 500).

7. Don’t try to Time the Markets

Markets go up and markets go down. In the short term, “they fluctuate.” In the long term, they tend upwards – beating inflation. If you think you know that the market will go up or down at a point in time, unfortunately you are delusional. I understand. I have been there. Even now I struggle with the stock values and keep saying, “Surely there is a crash coming soon.” But then it not only doesn’t come, the bull charges higher. Jack Bogle has spent decades as an investment professional. He doesn’t know anyone who knows anyone who could predict the timing of the equity markets. You likely are not the exception that he is hoping to meet someday.

8. Choose Your Friends Wisely

We choose our goals by those we choose as our friends and advisors. We become very much like our 5 closest acquaintances. If they spend money like it grows on trees and make careless financial decisions, it will influence you too. Beware.

9. Have Multiple Income Streams

One income isn’t enough. Even as a doctor. Yes, your job pays well. Yes, it may be fairly secure. Nevertheless, you will have more security if you aren’t dependent on just one stream. What if someone is trying to dry up that stream? Administrators, CMS, and insurance companies have increasing clout and power over your income. Take matters into your own hands by being less dependent on your paycheck and W-2 income. I make more from investing than from my work as a doctor. If my paycheck stopped, I would be fine. Can you say the same? If not, get to work on this. Today!

10. Insure Against Catastrophe

Insurance is there for you. Take advantage of it. We tend to get annoyed with insurance companies because they can be difficult to deal with. They have paperwork for us to fill out. They have claim forms, premiums, and multiple steps. That’s partly why we should limit our interaction with them. Save your blood pressure. Don’t spend your life on hold waiting for your “claims representative.” Use insurance only for protection against catastrophic losses. Those include a house fire, a worker lawsuit, disability, death of a breadwinner, flooding in your house. This doesn’t include a crack in the glass of your iPhone screen or a defective printer toner cartridge. Trivial insurance policies waste your time and money.

What do you think? Are these reliable stepping stones? Have you walked on this path? Are you financially free or on your way to there?