A path to financial freedom

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Having attained a measure of financial freedom for myself I would like to outline my thoughts on how to reach this point. The path I will discuss is informed by the actual one I followed. When I set out on my journey through the world of work and earning, saving and investing over thirty years ago, I did not have any route map to read or to follow, but over that time my experience has enabled me to devise one. My writing here on this blog is intended to include providing the route map I didn’t have but would have liked to have had.

Key factors include vision, commitment, planning, earning, spending, saving, investing and time.

Once you have seen the vision and embraced the objective of financial freedom then you need to make the commitment to follow a path, and be disciplined in staying on it, so you can reach that destination.

Some planning is needed and is useful when considering the necessary ingredients of earnings, spending, saving, investing and time. The past may not be a perfect guide to the future but it may be a useful guide when planning. An interest in financial matters and an attitude and approach of trying to handle these areas of life in an effective manner is key.

In your early years it will be key to maximise your earnings as soon as possible. Above average or double the average earnings will make this journey easier. A commitment to achieving success in the workplace so as to maximise earnings is useful, but so also is the ability to consider things from one’s own perspective and not always from the employer’s or the job’s perspectives.

At this time, it will also be important to think carefully about spending habits and “lifestyle management” and how you approach the consumer society. The idea of living below your means by a significant margin, such as only spending 80% of your take home earnings, is important. An ability to stand back from the consumer society and make choices so as to maximise savings is also key.

The cost of housing and the issue of house prices will need special consideration of both the past and the future possibilities.

If you have achieved above average earnings, and have your spending under control, then you should have the savings to proceed. These will need to be deployed carefully towards eliminating any debts, dealing with housing, and setting up planned savings. A ready cash reserve is useful and necessary but in my view most of your available savings should then be deployed in growth investments where a real above inflation total return can be obtained.

A preparedness to invest so as to grow one’s savings at a rate above inflation despite the perceived risks of losing money will be critical to growing one’s wealth. My preferred investment is equities and the vehicles to be used include investment accounts, ISA’s, and pensions. It is important to establish a pension plan in order to gain any employer contribution and to gain any available tax relief. As pensions are not accessible until the age of 55 or later at present and as current and recent governments are prone to changing the rules then one should proceed carefully.

The main investment plan after pensions should be ISA’s because of their tax privileges. If you are fortunate enough to have savings that are surplus to the ISA limits and to any pension commitments, then an ordinary investment account can be used.

Various investment approaches can be utilised, such as the permanent portfolio, and passive equity index tracking. My current preferred approach is investing in income and growth equities using investment trusts.

Finally, one can consider the importance of time and timing and the influence of luck. I think you will be pleasantly surprised by the financial position you can reach after a long time following this path.

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