Your Path to Financial Independence

Disclaimer: This post includes a bit of math! Sorry in advance!

Good Morning everyone! I want to talk about finanical independence and how to get ther today. It’s actually quite simple.

The definition of financial independence is: the state of having sufficient personal wealth to live, without having to actively work for basic necessities. The goal for financially independent people, is that their assets generate enough income and cash flow to cover their expenses. This is typically also the mindset of retirement, but you can reach FI before the average the age of retirement.

This is your path to financial independence! This simple equation will get you there:

y = (Your Money x (1 + i)^n).

Now, don’t freak out of me, yet! I will explain further. This equation only has 3 variables: how much money you invest (your money), the rate of return on your investments (i), and how many years your money is invested (n).

This is compounding interest. Albert Einstein stated that this equation was the “greatest mathematical discovery of all time”. And, it really is! Let’s put this formula to the test.

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For example: If you start with an initial investment deposit of $1,200 and then continue to contribute $1,200 yearly in the stock market for the next 40 years, you will have almost half a million dollars.

How’s that sound? That is only $100/month!

How a yearly $1,200 investment grows over time with compounding interest:

Savings Account (0.1%) Money Market Fund (1%) Certificate of Deposit (2%) Stock Market (9%*)
Initial investment $1,200 $1,200 $1,200 $1,200
5 years $7,224 $7,444 $7,695 $9,674
10 years $13,278 $14,006 $14,865 $22,713
15 years $19,363 $20,903 $22,782 $42,775
25 years $31,624 $35,770 $41,174 $121,136
30 years $37,800 $43,777 $51,829 $194,211
35 years $44,007 $52,192 $63,593 $306,646
40 years $50,246 $61,037 $76,582 $479,642

*BASED ON THE STOCK MARKET’S HISTORICAL RATE OF RETURN. Credit: The Motley Fool.

But, how do you get an average rate of return of 9%?

Answer: the Stock Market

This is your true path to financial independence.

Now, who wants to be a millionaire? If you increase your yearly investment contribution to $2,800, you will have $1 Million dollars in 40 years.

Don’t believe me? Check out this calculator at The Motley Fool.

First step, you must start investing. Remember, those 3 variables? One of them is time. Your money needs time to grow… in the stock market. The earlier you start investing, the more time your money has time to grow.

So, how do you start investing?

If your employer offers a 401(k), Roth 401(k), SIMPLE IRA, 403(b), or 457 plan – start there, especially if they match your contributions. You should always be taking advantage of an employer match – this is free money you are throwing away if you don’t.

If your employer doesn’t offer any of these plans, then you need to look into opening a Roth IRA, Traditional IRA or SEP IRA.

This might sound overwhelming at first, but opening such an account can be done very quickly and easily.

This was my first major millennial money mistake: I didn’t open a Roth IRA until I was 25, even though I knew that I should years prior. I was scared and afraid, because I didn’t know where to start and I didn’t know how to invest. I didn’t know what stocks to invest in. I didn’t know if I should also invest in bonds. And, I didn’t want to lose money if I messed up and made a mistake.

Guess what? I did lose money. I lost the potential to have more money in my portfolio now by not investing anything at all back then.

Compounding interest still works whether you have $10 or $10,000 to invest.

Unfortunately, there is no stock market fairy that will magically come along and invest your money for you. This is where you have to start learning about investing.

But, I am going to make it easy for you to begin with!

I started using Betterment over a year ago and I love it greatly. It is an easy, hands-off investing platform with super low fees. They take care of everything for you without charging the normal high stock broker/management fees. Your money is invested in a variety of ETFs and Bonds all based on your specific circumstances, goals and investment comfort level. I wish I had discovered Betterment sooner. It makes investing easy and fun!

 

      

Take Away – Your Golden Ticket:

There you have it: Your financial independence is just three variables away. Start saving and investing today (as much money as you can), and invest it well in the stock market. The sooner you get the magic of compounding interest working for you, the sooner you’ll reach your financial dreams and freedom.

 

Your Turn: When did you start investing? What have you learned along the way?

Disclainer: This page may include affiliate links. I may get paid when you click on a link and buy a product, but at no extra cost to you.
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