Financial Independence

A Brief Introduction to Financial Independence and Ways You Can Achieve It!

Financial Independence

• Why Become Financially Independent? • Financial Freedom: more choice on how to spend your money

• Employment Freedom and Job Freedom

• Reduction of Stress and Healthier Lifestyle

• More Time To Pursue What You Love

• Become a Humanitarian!

• Retire!

Employment Independence

• Financial Independence leads to Employment Independence• You can choose the job that you want!

• You can choose a more fulfilling job!

• You can work more on solving humanity’s problems!

• You can quit!

Retirement

• Financial Independence contributes to your ability to pursue retirement how and when you want it

• Retirement as state of mind; financial independence as state of being• During retirement you can still work or choose whatever you wish

to do.

• Financial independence grants you that ability to ease your mind to pursue what you want

Two (Combinable) Ways For Financial Independence

Asset Accumulation Expense Reduction

• Gather revenue generating assets until the generated revenue surpasses living/liability expenses.

• Gather enough liquid assets to then sustain all future living/liability expenses

• Combining passive + active incomes to be able to generate your threshold for living a financially independent life

• Another approach to financial independence is to reduce regular expenses while accumulating assets, to reduce the amount of assets required for financial independence.

• Reducing expenses, combined with asset accumulation, allows you to achieve financial independence faster

Difference between ‘active’ income and ‘passive’ income

• Active income/Earned Income• Generated from active

work/labor

• Eg Paycheck or Salary

• Active income is extremely useful if:

• You use it to purchase assets that help generate passive income

• Using paychecks to help purchase a rental property, for example.

• Passive income assets• Is generated even when you

are not actively managing your assets

• EG collection of rent, stock dividends, bonds, pensions, etc.

• Greater tax benefits

• Designed by govt to encourage investing

Compounding

• Why save? Because of compounding!

• Save early, live below your means,

• 401K/Roth IRA/Other Tax Deferred Accounts: Good Candidates for Compounding

Active Management

• For people who like to actively trade or pick stocks

• For people who have a lot of wealth and has the desire/ability to make more money.

• For people whom understand risk and are better risk takers.

• For people who believe they (or another money manager) can beat current indexes of returns

Passive Management

• For people with busy lives• Raising children

• Working hard jobs

• For people who aren’t good with picking stocks or analyzing the market

• For those whom are hyper-emotional and swing too far with the market

A Theory I Like Right Now: Asset Allocation

Lazy Portfolios: Good Examples of Passively Managed Portfolios

4-Core Funds 3 Fund Portfolio David Swinson’s Yale Portfolio

My Personal Bias Against Picking Stocks: I’m NOT GOOD AT IT!

Benefits of Low Expenses Ratio

Important to remember: keeping your expense ratio low will allow you to save a greater amount of money for retirement.

This is due to the nature of compound interest: the less money taken from you, the more yield you receive.