In this short blog post, I want to mention two things. Firstly, the importance of financial independence to me and secondly, my current strategy of achieving financial independence.
Financial independence means having enough money to support yourself without having the need to work for money. There are many different ways to build you wealth in your journey to achieve financial independence such as saving a portion of your income by working a job, getting a substantial sum of money through an inheritance/ gift or winning the lottery!
For many of us who do the regular 9-5 grind (or any hourly or salaried job for that matter), the only means of achieving financial independence is spend less than what you make. There are many arguments about what the ideal savings rate should be. However, if you are trying to achieve financial freedom within a short period of time, 50 percent of higher is best. The real magic starts if you can make that number 70-75 percent! Yes, this might sound like nonsense, but take quick look at the graph below.
(Graph courtesy of Go Curry Cracker)
Saving a mere 10 percent would take you about 45 years to accumulate enough wealth to achieve financial independence. At a 50 percent rate of saving, you could theoretically retire in 15 years and so on.
Being relatively new to personal finance as well as a busy young professional who just started his career, I have opted to invest in Vanguard mutual funds. To be more specific, I am currently investing about 80 percent of money in the Vanguard Total Stock Market Index Fund (VTSMX) and the remainder in my 401k. My 401k is allocated at 90 percent stocks and 10 percent bonds at the moment and is also invested in Vanguard funds.
I exclusively use Vanguard because of their low fees. The VTSMX fees are currently 0.16 percent. This means for every $10,000 invested, Vanguard only charges $16. VTSMX has a quarterly dividend as well.
I set aside a fixed amount to be invested out of my pay bi-weekly paycheck. This is called “dollar cost averaging”. Dollar cost averaging is investing regularly, in equal amounts. It’s a good idea to keep the amount constant so that you are disciplined. The beauty of dollar cost averaging is that during times when the price of stocks are high, you buy less and vice versa when stock prices are low. This is because you invest a set amount every period.
The current value of the fund is $4500 and this reflects a 15% increase from the previous month. The dividends are currently set to be re-invested. My goal is to have a balance of $10,000 by December 31st 2016.