A few years ago, I read an interview with Arnold Schwarzenegger, the famous actor and body builder, in which he recounted a story from when he first arrived in America from his native Austria and while in the midst of pursuing his dream of becoming the greatest body builder in the world, he toiled away with a buddy laying brick to pay the bills. However, unlike most, Arnold and his pal were not laying brick for a slave driver by day and hitting the gym before and after manual labor sessions. No, the two had started their own masonry company and began to enjoy tremendous success in business long before Arnold Schwarzenegger was a household name.
“Tom and I would work all day and laugh while we were doing it. We couldn’t believe that in America we could be the boss of our own company and the harder we worked the more money we made. We just chuckled because we couldn’t believe that most Americans don’t recognize the opportunity available to them. They take it for granted.”
It is easy to take for granted the freedoms and rights that previous generations have fought and died for if you were brought up knowing only those; however, when seen through the eyes of a foreigner who never had such freedoms, we realize how special it is. In this post, I want to make sure we stop for a moment (what better time than the 4th of July) to recognize the freedoms so few in human history have ever attained, but also to share a few steps to ensure that you take advantage of financial freedom, a privilege each person must earn for themselves.
So, in honor of Independence Day, here are the three simple steps to your financial independence:
- Save 10% of what you earn…first: You cannot build financial freedom without first making and setting aside money. Whether it be in a 401k, IRA, or money market account, pay yourself 10% of anything you earn before a single dime goes out to the mortgage company, grocery store, or gas station. Learn to live on the rest.
- Invest in a broadly diversified portfolio of low-cost index funds: Once you have built a nest egg, keep a portion liquid in case that unforeseen emergency strikes and you need cash fast, but invest the rest with an eye to growth. Invest in index funds that are broadly diversified and have very low-costs.
- Leave it alone for as long as you can: The key to successful investing is maximizing the power of compounding. Compounding is the growth of the growth of your portfolio. For example, if I invest $1,000 and make 10%, the next year I will have $1,100 by year’s end. If that happens again the following year, I won’t have $1,200, but $1,210. I received an extra $10 because my growth ($100) from the first year is now itself growing at 10%, creating the effect of compounding which will furnish massive sums of money if given enough time. Don’t use your savings, let compounding work its magic, and reap the financial freedom it provides in the distant future.