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Published July 2005
Are
you heading toward
financial independence?
It's
Independence Day time for fireworks, parades and picnics. Of course,
it's enjoyable to celebrate this national holiday. But why not also use
this occasion to think about achieving more kinds of freedom in your own
life? Specifically, why not begin taking the steps necessary to attain
your own financial independence?
What practical moves
can you make? Consider the following:
- Reduce your
debt load. Try to do whatever you can to pay down your debts
especially the high-rate credit card debt. The more you have to pay
on your credit cards or other consumer loans, the less you have to invest.
- Build an emergency
fund. Try to create an emergency fund consisting of six to 12 months'
worth of living expenses. Because you may need quick access to these
funds, you'll want to put them in a liquid vehicle, such as a money
market account. If you don't have an emergency fund, you might constantly
end up dipping into your investments to pay for big-ticket items, such
as a new appliance or a major car repair. And the more you cash out
your investments for short-term needs, the slower your progress toward
your important long-term investment goals.
- "Max out"
on retirement plans. Ultimately, your financial independence should
culminate in a retirement in which you can do pretty much what you choose.
But to reach that point, you will need to accumulate sufficient financial
resources. Consequently, you will want to try to contribute the maximum
amount each year to a traditional IRA, which provides tax-deferred growth
of earnings, or a Roth IRA, which offers tax-free earnings, provided
you meet certain conditions. Also, try to contribute as much as possible
to your 401(k) or other employer-sponsored, tax-advantaged retirement
plan.
- Pay yourself
first. After paying all your bills, you may find it hard to come
up with extra money to invest for the future. So, pay yourself first.
Consider setting up a bank authorization to automatically route a certain
amount of money each month into an investment. As you get salary increases,
increase the amount of money you put away.
- Build a diversified
investment portfolio. Many people think they can become financially
independent by buying "hot" stocks and getting rich quick. But, in reality,
that hardly ever happens. By the time you buy a hot stock, it may already
be cooling off. Furthermore, if you're constantly selling some types
of stocks in pursuit of those big gainers, you'll rack up big commissions
and other fees. I believe in building a diversified portfolio of quality
stocks, bonds and other investment vehicles and then holding
them for the long term. Consider selling if your investment goals change
or the investments consistently fail to meet your needs.
- Try to protect
yourself from large financial risks. Injury, illness and infirmity
can rob you of your ability to earn income and preserve your assets.
That's why you may want to purchase the appropriate protection vehicles,
such as disability insurance to replace lost income or long-term care
insurance to cover the enormous costs of an extended nursing home stay.
It will take many
years for you to reach the point where you can truly feel as if you've
reached financial independence. But by following the suggestions listed
above, you can speed up the journey.
Eric Cumley is a Certified
Financial Planner and investment representative with Edward Jones in south
Everett. He can be reached at 425-353-2322.
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