Five facts about financial independence

Michael Yardney 6 April 2017

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As our longevity has increased over the past 100 years, so has our desire to live better lives, ones where we're not tied to a job for 40 or 50 years.

One of the greatest freedoms that we enjoy today is the ability to add value to society and collect wealth as a result.

The goal of many Australians today is to reach financial independence and this can be achieved by understanding some of the facts.

Fact 1: Spend less than you earn

This may sound simple, but don’t underestimate its importance. If you spend more than you earn, you’ll always owe other people money.

Fact 2: You need to save to invest

If you’re spending less than you earn, you should aim to save the difference. However, most Australians who save, save to consume, not to invest. Once they’ve accumulated a tidy sum, they spend it.

Of course, no one ever saved their way to true wealth, it’s just too hard with today’s low interest rates and tax eating away at the little interest you receive. The only way to take advantage of true money-growing opportunities is to invest in assets that grow in value and to recognise that becoming financially independent takes time.

If you continue to funnel money into your investment accounts, you’ll grow your wealth on a larger scale through the magic ofcompounding. You can’t get much compounding if you’re saving just to save (or to spend, like most people do).

Stay disciplined and keep saving so that you eventually have a big enough sum to invest in property or shares where your return will be greater than the paltry interest you get on your savings account.

Fact 3: Income won't make you rich

Many people believe that a high-paying job will be their ticket to financial independence, but unfortunately they’re wrong. Of course it’s easier to become wealthy if you have a lot of money coming in, but as I’ve already explained, you have to spend less than you earn to really become wealthy.

It seems like common sense, but studies have demonstrated that high-earning doctors are the group least likely to amass significant wealth. So use your income to buy assets that will grow in value and provide you with cash flow, things like well-located residential real estate or blue chip shares.

Fact 4: Get good tax advice

Wealth creation doesn’t happen by chance. It takes a good plan and a team effort, so when it comes to taxes, get the best advice that you can afford.

Everyone’s tax liabilities are different, so you must consult a professional who understands your personal situation. There are myriad tax deductions available to investors and business owners and it’s your responsibility to legally minimise your tax liability.

Fact 5: Don’t forget to smell the roses

This requires a fine balance because you don’t want to sacrifice tomorrow for today, but you don’t want to be miserable today either.

Financial independence is a journey that requires some long stretches and it certainly requires patience. Enjoy your journey, because if you don’t, it’s unlikely that you’ll enjoy the destination. If there’s something that you’ve always wanted to do, don’t postpone your happiness, because none of us can know what tomorrow will bring.

Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author and one of Australia's leading experts in wealth creation through property, and he writes the Property Update blog.

Picture: Shutterstock

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