Thanks to the magic of compounding, the stock market represents the best option for those wanting to become rich.
As an example of its wealth-generating power, imagine investing £100 every month for the next 40 years. Based on a 7% average annual return, you’d have a little under £240,000 at the end thanks just the simple practice of earning interest on interest.
Of course, if 40 years sounds like too long to wait, you’ll need to save more. Increasing that £100 by another £100 a month will give you almost £227,000 at the same rate of return. Importantly, however, this will be achieved in 30 rather than 40 years.
With this in mind, here are three things that could help get you to financial freedom earlier.
1. Pay yourself first
This first move is simple but powerful. Rather than cross your fingers and wait to see how much money you’ve left at the end of the month, get into the habit of transferring money into your Stocks and Shares ISA on payday.
Better still, set up a direct debit to automate the process, thus ensuring you’re not tempted to go back on your decision to save and instead splurge the money on things you don’t need.
Viewing saving as a typical monthly outgoing — in the same way that you would a council tax or phone bill — may be hard at first. After a few months, you won’t even question it.
2. Create multiple income streams
Having multiple income streams is a great idea, particularly if your main source of income lacks long-term security.
Unless you earn the salary of a professional footballer, it’s also essential if you’re to quit the rat race earlier than everyone else.
These streams can be anything from renting out a spare room, selling stuff on eBay (Etsy if you’re of an artistic bent) or tutoring someone, perhaps in a subject you’re passionate about or studied at college or university. The point is to start small and save everything you earn to invest. And once you’ve got a second income stream, find a third.
While this process will inevitably involve sacrificing time away from other pursuits, it will also help you realise where you might be wasting your waking hours. Binge-watching yet another (very average) box set on Netflix won’t get you rich, after all.
Remember – the more money you can squirrel away sooner, the quicker you’ll reach your financial goals. Speaking of which…
3. Get a grip on your goals
Investing even a little is clearly better than not investing at all. But investing with absolutely no plan means you’ll never know when you’ve got enough.
“I want to become financially independent,” you cry! Well, that’s fine. But what exactly does financial independence look like to you?
If we assume it’s the sort of freedom that allows you to quit work completely, you’ll need to have an idea of how much your new lifestyle will cost and whether the income you receive through your investments — in the form of dividends — will be sufficient to pay for it.
So, grab a pen and some paper and spend a while thinking about what you want to do, and when and how much money you’ll need to do it.
While a few goals will naturally change over time, it’s far more motivating to have some in mind than none at all.
