L2F 014 The 6 Practices to Achieve Financial Independence

L2F 014 The 6 Practices to Achieve Financial Independence

PODCAST

Show Notes

  • We open with several announcements
    • FinCon 2020, Long Beach CA, has been cancelled. The next FinCon will be in 2021 in Austin TX
    • Our podcast is now available on Spotify as well as iTunes, TuneIn and PlayerFM. You can begin the subscription process from the Later2FIRE home page.
    • Speaking of which, our new website, Later2FIRE is now live!
  • Our topic is the best practices to achieve financial independence
  • A practice is defined as: the actual application or use of an idea, belief, or method to achieve an objective or accomplish a goal

The 6 Best Practices to Achieve Financial Independence

1. Know your why of FI

    1. What problems do you want to solve?
    2. What are your long-term goals?

2. Examine your financial health

    • Create a statement of net worth
    • Calculate your FI goal number
    • Calculate your savings rate
    • Examine your current spending

3. Reduce spending

  • Based on examining your spending
  • Long term – live below your means
  • Question is what to do with the money not spending
    • Ensure enough saved for emergencies
    • The power of debt reduction – helps in two ways: spending less to live on frees up money to save and it reduces the amount you need to save to become FI
    • A combined approach is the best way to go because you avoid the risk of not having enough saved if you only focus on debt reduction

4. Eliminate debt, especially bad debt i.e. a loan that will not return your investment, e.g. credit cars and auto loans

    • Debt avalanche
    • Debt snowball

5. Maximize savings

    • Look for opportunities for tax deferred savings such as an HSA and plans that offer matches such 401ks and Roth IRAs (I enrolled in everything my company offered)
    • Increase income – part time work (Uncle Chucky) (The Side Hustle Show at sidehustlenation.com and smart passive income); sell items you don’t use (we sold our albums) also a great way to de-clutter (we don’t need so much stuff)

6. Invest efficiently – minimize fees and taxes

  • Important to invest in equities and be diversified
  • Minimizing investment fees increases returns
    • $10k with 2% fee will grow to $17,700 over 15 years at 6%. With no fees it would be $23,900
  • Manage taxes
    • Tax losses to offset gains
    • Loss carry forward
    • Defer taxes
    • Put the right investments into the right accounts
      • Taxable accounts
        • Investments that lose less of their returns to taxes are good candidates for taxable accounts, for example municipal bonds, government bonds and ETFs (they trigger fewer capital gains and offer low fees)
        • Stocks held for more than 12 months are taxed at the lower capital gains tax
      • Tax-advantaged accounts, e.g. tax deferred (401k) and tax exempt (Roth IRA)
        • Corporate bonds and bond funds
        • Mutual funds
        • REITS
        • TIPS
        • Stocks held less than a year
      • Keep in mind the necessity of having a taxable investment account as an early retirement bridge

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