What is the goal this Xmas?

In the midst of our rush to earn money, our scramble to save for retirement, our focus on frugality, it’s easy to lose sight of why we’re doing this. What is the goal? What is it we’re trying to accomplish by getting rich slowly? For me — and for many others — the answer is Financial Independence.

Your Money or Your Life defines Financial Independence as “having an income sufficient for your basic needs and comforts from [sources] other than paid employment”. Financial independence implies freedom. It’s the condition of having saved enough money that you can do whatever you choose. Whether you elect to keep working doesn’t matter — you have enough saved and invested to follow your dreams.

But is Financial Independence just a pipe dream? Is it something only for the lucky and the strong? No, says James Stowers in his book, Yes, You Can…Achieve Financial Independence. It’s a goal that anyone can fulfill as long as she’s armed with some basic knowledge, as long as she makes smart choices.

The keys to accumulating wealthStowers starts with the basics. The first chapter of his book covers the history of money. (A little like this, but with a different focus.) The next few chapters briefly cover sources and uses of money, the dangers of inflation, and the extraordinary power of compounding.

Some readers might argue that this information is too basic, but I disagree; a firm grasp of these fundamentals is the foundation upon which Financial Independence is built. Stowers ends this section by offering four keys to accumulating wealth:

1. Start investing as early as possible. It takes significantly less money to accomplish what you want, and you have more time working for you.
2. Be determined to save on a regular basis. It is an easy way to accumulate wealth.
3. Begin investing with the largest possible sum you can. You will have more money working for you over a longer period of time.
4. Reach for the highest rate of return you believe you can safely receive on your money over time. Each additional percent is important. The higher the rate, the less money it takes to accomplish what you want.

Financial Independence is built upon these four guidelines.Confronting your financial challenges“In order to save money, you must fight to keep from spending it,” writes Stowers in the book’s second section. He encourages readers to set goals, to prioritize wants. “Since money can be spend only once, you need to decide which wants are most important. To do this, it may be helpful to place a value on each of your want.”Exercise: Pull out a piece of paper and list your wants. These can range from a new house to a hot tub to a trip to London to a new blender for the kitchen. Next to each item, write why you want it. (You might want a hot tub, for example, because it would allow you to relax with family and friends.) When you’ve finished, take another piece of paper and re-order the list based on how important each want is to you. If a trip to London tops the list, are you still willing to delay it by spending N10000/month for that gym membership you rarely use?

The challenge is to balance the present and the future. “Money has no value unless one has time and good health to enjoy it,” Stowers writes. He asks readers to know themselves and to make decisions based on their temperament. “If you have to be poor,” he asks, “would you rather be poor now or at retirement?” By planning carefully and investing wisely, you shouldn’t have to make this choice.

Planning for Financial IndependenceAfter covering the basics of saving and estate planning, Stowers describes the path he recommends to Financial Independence. He believes readers ought to save early and often, making regular scheduled investments in the stock market through the use of mutual funds.

Have a Merry Christmas.