The Motley Fool

3 reasons why you haven’t yet achieved ‘financial independence’

It’s Monday morning, and if you’re back at work and reading this from your desk, the chances are that you haven’t yet achieved ‘financial independence’.

What is financial independence? In short, it’s having enough wealth that you no longer need to work actively to generate an income. Imagine being able to spend your time pursuing activities that you enjoy. Maybe you would travel the world? Play golf every day? Or perhaps even start a business in an area that interests you. The options are endless.

However right now, it’s likely that you’re sitting at your desk, worrying about your boss looking over your shoulder. Here are three reasons why you haven’t yet achieved financial independence.

You spend more than you earn

This one’s pretty simple. How can you possibly expect to build up wealth if your outgoings are greater than your income? It just won’t happen. For this reason, you need to commit to saving a proportion of your income, no matter how much you earn. The easiest way to do this? Pay yourself first.

You see, many people make the mistake of spending their paycheque first, and then saving whatever is left at the end of the month. This generally isn’t effective. Most of the time, there will be nothing left to save at month end. 

If you want to be disciplined about saving, the key is to save a certain proportion, perhaps 5% to 10%, of your paycheque as soon as you receive it. Pay yourself before you pay your rent, your bills and all your other expenses. The chances are you probably won’t even miss than small amount, but over time, those funds can build up a formidable savings pot.

Your money isn’t working for you

Next, you need to make this money work for you. It never ceases to amaze me, when speaking to friends and family, how many people have all their savings in cash accounts. While that’s obviously better than not saving at all, the problem is, with inflation running at 2% to 3% a year, their purchasing power is diminishing over time. £20,000 in 10 years time, will buy you considerably less than £20,000 today.

For this reason, it’s essential that you invest your hard-earned capital in assets that generate strong, inflation-beating returns over time. Shares are an excellent asset class for this, as in the past, shares have generated returns of around 8% to 10% per year over the long term. 

You haven’t generated a passive income

If you don’t find a way to make money while you sleep, you will work until you die,” says Warren Buffett.

If you’re serious about financial independence, a good idea is to build up a passive income stream, cash flow generated without actively working for it. Passive income is the holy grail of personal finance and gives you powerful options in life.

So how do you generate a passive income? Well, there are many ways to build an income stream that doesn’t require active work. Some people start online businesses, while others invest in buy-to-let property.

However, possibly the easiest way to generate a passive income stream is through dividend stocks. A portfolio of high-quality dividend-paying stocks can generate a reliable income stream month after month, year after year. In my opinion, dividend stocks may just be the secret to achieving financial freedom. 

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