Financial freedom may mean different things to different people. Yet for most investors, in the simplest terms, it means the ability to live comfortably without worrying about having enough money to do so.
For most of us, the journey to financial independence is long. Let us see which steps may help us get there.
Act sooner than later, preferably now
Many young people, in their first years of professional life, might earn a low grade when it comes to personal financial literacy, especially when it comes to the importance of starting to save and invest early. This group would likely include the younger selves of today’s seasoned investors and even financial journalists.
Financial literacy would also include appreciating the importance of budgeting, becoming debt-free, saving for buying a home, and credit score building habits.
But the very first two concepts that I believe everyone should learn for the sake of their personal finances, are compound interest and time. Compounding is possibly one’s best friend in investing. However it needs to work in tandem with a partner: time.
Here is an example
Let’s say you’re 25 with £1 in savings. If you invest £3,600 per year (deposited at the start of the investing year) and earn 8% annual interest, you’ll have £1,007,233 at the end of 40 years.
On the other hand, if you wait to start investing until you are 30, you will have £669,982. And if you wait another five years until you reach 35, at the end of 30 years, your account balance will only be £440,455, or less than half of what you could have had by investing a decade earlier.
The difference is due to the power of compound interest. This has a snowball effect on personal savings. As time goes on, interest leads to more money, over and over again. In other words, if you start saving later in life, you have to save more each year in order to make up the difference.
At The Motley Fool, my colleagues provide detailed coverage of share investing and retirement planning. They highlight that, over time, the broader stock market returns about 7% to 9% annually on average.
Determine your investing aim and horizon
The next step is to determine your investment time horizon, which depends mostly on the goals you have set for yourself. Plans can and do change. However if you have a plan, it is easier to stay disciplined, especially when the markets do not go your way.
And another crucial question: how much are you ready to invest now? Are you able to let that amount of money stay invested in the markets for several years? If you are a complete novice, you may want to start small as you can always increase the amount you invest.
Remember that the market is always right
The market always humbles me as I cannot know when it will exactly turn up or down. And yes “the market is always right”, as the saying goes. I may not necessarily like the trend or its daily effect on individual shares. However, I know that a clear focus and cool head will help me achieve my goals. The same is possibly true for you.
So in the final quarter of the year, I’m beginning to reflect on 2019 objectively and what it can teach me to help me get closer to my destination in 2020. You may want to do the same.
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