Part 9: Protect Your Finances

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Now that you’re well on your way to improve your finances, this is a good moment to evaluate how you have protected yourself financially. Take a couple of simple steps described below that will greatly ensure that the wealth you build and continue to accumulate will be safeguarded even in adverse situations or setbacks.

Part 9: Protect Your Finances

When talking about financial protection, one of the first things that come to mind is the topic of insurance. Most people will at least need the following five types of insurance:

  • Life Insurance – protects others around you financially if you passed away. This is especially recommended if you have others who rely on you financially (children, a partner). 
  • Health Insurance – covers medical bills to ensure you can afford the care you need.
  • Disability Insurance – pays out money in the event of a disability that prevents you from working in the future.
  • Homeowner / Renter’s Insurance – covers damage to you house and often has a liability component to cover damage you inflict upon others or their property.
  • Car Insurance – covers costs and liability issues in case of a car accident both if you caused the accident or if somebody else was at fault. 

I highly recommend reviewing your contracted insurance policies once a year and making sure they are up to date, as your personal situation might have changed since you took out the policy. Have a look at all your insurance policies to ensure you’re well covered and check whether to contract any more (or less) insurance if needed. 

Another important part of financial protection is estate planning. Estate planning covers a couple of different things which are too important to overlook, but due to the complex and emotional decisions that often need to be made this is a topic that can be tempting to postpone.

  • A will or trust – determines what will happen to your assets upon your death.
  • A health care proxy – stipulates who should make important health care decisions about you should you no longer be able to do so mentally or physically.
  • A power of attorney –  identifies who should make financial and legal decisions if you no longer can.
  • Beneficiary designations – some of your assets will allow you to name a beneficiary for when you pass away, such as your insurance policy or savings or investment accounts. Be careful that whoever you name on these assets should correspond to the information you have in your will. 
  • Guardianship designations – possibly the most difficult decision of all a guardianship determines who will become the guardian of any underage children you have. 

Talk to the various people you would like to appoint as guardians or decision makers to allow them time to think about taking on those responsibilities. Then set up a meeting with a notary or estate attorney today and to discuss the arrangements you want to make. 

Lastly, take some steps today to protect your finances online. With the increased internet access we have nowadays, it has also become significantly easier for those with bad intentions to gain access to your money. A few ways to increase your security:

  • Choose difficult passwords and change them often
  • Use two-step verification
  • Enable email notifications when you log in to your accounts or withdraw money
  • Check your accounts regularly
  • Don’t use public WiFi accounts or public computers to access your accounts

Schedule in a few minutes today or tomorrow to implement these measures and ensure your accounts are well-protected. 

The above is an adaptation of part 9 of the 10 parts in the guidebook to Financial Independence100 Steps to Financial Independence: The Definitive Roadmap to Achieving Your Financial Dreams where you can find more details as well as action plans and guidelines to each of the 10 parts. Available in both ebook and paperback format!

Get your FREE sample of the 100 Steps to Financial Independence Book here

Coming up next: Part 10 of the Journey to Financial Independence!

Part 8: Start Investing

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Investing some money in the stock market can be a great way to get your finances working for you long term, as you work towards building a portfolio to supply you without another income stream. If you’ve never invested before, this might sound like a scary new thing to learn, but these days you can invest in low-risk investments with even just small amounts of money, so as long as you only put in money you don’t need (and not your entire savings), investing MIGHT be an adequate way to build up your assets and net worth further.

Part 8: Start Investing

Generally speaking, there are two types of investments that make up most of the stock market: stocks and bonds. Stocks or shares represent a small part of the company. Whoever owns shares of a company essentially owns part of that company. Shares give shareholders dividend payments at specific intervals (for example yearly or biannually) based on profit results.

Bonds on the contrary represent loans taken out by a company. If you buy a bond you essentially lend money to a company. Throughout the lifespan of the bond you will be paid interest and at the end of it you will be returned the original amount of money that the bond was issued for.

Both stocks and bonds might with time go up in value, meaning that if you decided to sell these assets you could make a bit of money. Unfortunately the opposite might also be the case: they could go down in value in which case if you had to sell them after their value has gone down, you would lose money.

When it comes to investing your money in the market, there are three main ways of doing so:

  • You can pick and choose your own stocks and bonds to invest in. Handpicking your own investments gives you a lot of flexibility and means you’re in (almost) complete control of the process: which company to invest in, when to buy and when to sell. It does of course mean you need some knowledge as to how to make these decisions.
  • A second option is to invest in mutual funds where a fund manager makes all of those decisions for you. Mutual funds often have high associated costs and fees however and therefore aren’t always the most efficient way to make money on the market.
  • A third way to invest is via index funds which is a way to proportionally invest in all the companies of a specific index. This type of investing doesn’t require you to have specific knowledge and often has very low costs. 

None of the above options are without risk: investments can always go down in value and whilst you can make money on the stock market, it is just as easy to lose money.  That said, as long as you take calculated risks and invest in relatively safe investments, putting money into the market can be good opportunity to. build your wealth.

It’s worth finding some time today to check out the investing options that might be available to you, what their minimum monthly required contributions are and what their fees or costs are. This gives you a much better idea of what investing might look like to you.

Lastly, before ending this quick intro into investing, let’s look at an investing guideline that has become known as the 4% rule. This rule is based on extensive research done by Trinity University where researchers found that if you have an investment portfolio of a certain value, and take out no more than 4% annually, your portfolio will nearly always sustain itself due to market increases, meaning the increase in value balances out the money you take out. Practically speaking this means that if your investments are worth $60,000, you can take out $2.400 each year without your portfolio going down in value. Or if you build a portfolio worth $500,000, you can take out $20,000 each year! That might even be enough to live off without needing any further income? Unfortunately, whilst the 4% rule is a great initial guideline, it doesn’t always hold up, especially not in times of a recession, so before you think all you need to do is invest and then live off the proceeds, you’ll likely need a contingency plan for when there is an economic downfall scenario.

Investing can be a great way to build and maintain your wealth, but it is also complex and there can be great risks involved. This blogpost is just an introduction to the topic. Before you go off and invest all of your savings, please make sure to educate yourself further with blogs, books and / or podcasts on this so that you don’t take any unnecessary and irresponsible risks. 

The above is an adaptation of part 8 of the 10 parts in the guidebook to Financial Independence100 Steps to Financial Independence: The Definitive Roadmap to Achieving Your Financial Dreams where you can find more details as well as action plans and guidelines to each of the 10 parts. Available in both ebook and paperback format!

Get your FREE sample of the 100 Steps to Financial Independence Book here

Coming up next: Part 9 of the Journey to Financial Independence!

Part 7: Plan Your Retirement

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One of the most important, yet often ignored, parts of financial independence, is planning your retirement. It’s often difficult to know where to start, what your options are and what you should be thinking about. But without doing so, how can you feel comfortable about your future? How are you going to know what your retirement will look like? How can you be sure you can even provide for yourself when you stop working? Part 7 of the Financial Independence in 10 bite-sized parts will walk you through the essentials of this important part of financial planning.

Part 7: Plan your Retirement

Retirement provisions vary greatly from one country to the next so with this part, more than any other, you want to make sure you check the details of how the topics described below work in the country or state you live. In most cases, people have access to one or more of the following three ways to save up for your retirement:

Social security or state pensions are generally provided by the state after a certain amount of active working years. Both employees and employers might contribute to social security payments and thereby fund the retirement payments made to those who have reached the state retirement age. Social security conditions and pay outs vary greatly between countries. Find out what the regulations are regarding this type of retirement income to get a rough idea of how much you might be entitled to by the time you retire. 

A second way to save up an income during retirement is by participating in a workplace retirement fund via your employer. As an employee you can make regular contributions that in some case employers might even match, meaning they add in a certain amount of money up to a certain maximum too. As workplace retirement funds are often offered by an employer, it makes it easy and convenient to participate in. Examples of this type of retirement funding include 401(k) and (Roth) IRA accounts in the US. Contact your HR department or arrange a meeting with the person in charge of retirement funds in your company to find out what your options are and -if you have been participating- how much you currently have available in your retirement account. 

If either of the above isn’t available to you or is not sufficient for what you expect your retirement needs might look like, it is often a good idea to look into a private retirement fund as well. There are often many options available with banks, insurance companies or specialised retirement fund companies. Of course this requires a little more investigation and preparation work in order to find one but also gives you more flexibility to find one that better suits the needs you expect to have. If you already have a private pension fund, check out the conditions and contributions you have made to again get an idea of how much you would roughly have available upon retirement. If you haven’t got a private fund, have a look around online for some options to get an idea of what might suit you best.

Lastly the most important part is to act upon your new knowledge and plan your retirement. Try and estimate as best as you can how much money you’ll need upon retirement, which might be a lot more than currently (for example if you plan to travel a lot more) or a lot less (for example if your mortgage will have been paid off by then). Now total the predicted amount of the various retirement funds you might be entitled to (bear in mind some – especially social security / state pensions – might go through significant changes if your retirement is still a few decade away). If you have any passive income streams that you might further be receiving upon retirement (rent, dividends, royalties) then again predict how much you would get from these. Then make a plan on how to bridge the gap between what you need and what you predict you’ll receive from the retirement funds and other income streams: open a private pension plan, increase workplace retirement fund contributions etc. 

The above is an adaptation of part 7 of the 10 parts in the guidebook to Financial Independence100 Steps to Financial Independence: The Definitive Roadmap to Achieving Your Financial Dreams where you can find more details as well as action plans and guidelines to each of the 10 parts. Available in both ebook and paperback format!

Get your FREE sample of the 100 Steps to Financial Independence Book here

Coming up next: Part 8 of the Journey to Financial Independence!

Part 6: Increase Your Income

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Many people see their income as something fixed that they have little to no control over – apart from the rare moments of salary negotiations such as when starting a new job or during performance reviews. Part 6 of the 10 Parts to Financial Independence will look at how you can influence your earnings in many more ways than you might think.

Part 6: Increase Your Income

We commonly think of our income as whatever we get from our jobs. But that’s only one way to earn money, when there are actually seven different types of income streams! 

These seven different ways to generate an income are described below, along with some prompting questions and ideas to help you decide whether you can and might want to develop one of these streams further to increase your income. 

The seven income streams are:

  • Earned income from a job – money you earn through your work for a company. This income stream is generally based on getting paid for your time. 
    • To increase your income, can you increase the likelihood of a bonus by making yourself more indispensable? Can you up your earnings by doing another course or pursuing a promotion? Is it time for a new / better paid job? 
  • Profit – money you make by selling products or services as part of a business activity at a higher price than the cost price.
    • Can you start a side hustle selling things you make or offering your services? Think about an Etsy shop, tutoring or a specialised IT service.
  • Interest income – Money you get from lending money to others, such as to a bank, the government or through investments.
    • Can you increase your interest income by increasing your savings, your investment in bonds or your crowdfunding contributions?
  • Capital gains – Money you receive as a result of selling something that you acquired at a much cheaper price than what you are selling it at.
    • Can you invest more into the stock market, houses or antiques to build up a bigger portfolio and sell that later on when these assets have appreciated?
  • Dividend income – Money you get from shares if the company whose shares you own makes a profit they can pay out.
    • Can you buy more shares to increase the amount of dividend earnings at the end of the year?
  • Royalties – Money you receive on products you have made or from franchises of your brand.
    • Can you write a book, compose music, design stationary, wall paper or a new software to generate an income stream from royalties?
  • Rental income – the rent that you collect from renting out assets that you own (usually property).
    • Is buying property in order to rent it out an option for you?

Go through the above income streams and work out how much you are receiving from each of them each month. Then decide which one(s) of these you can further develop on the short-, mid- and long term to increase your income to keep progressing on your path to Financial Independence!

The above is an adaptation of part 6 of the 10 parts in the guidebook to Financial Independence100 Steps to Financial Independence: The Definitive Roadmap to Achieving Your Financial Dreams where you can find more details as well as action plans and guidelines to each of the 10 parts. Available in both ebook and paperback format!

Get your FREE sample of the 100 Steps to Financial Independence Book here

Coming up next: Part 7 of the Journey to Financial Independence!