Becoming Financially Indepedent
FINANCIAL independence means having the wherewithal to say to yourself: "If I wanted to, I could quit what I'm doing today and live comfortably for the rest of my life." Millions of Americans can achieve that dream. You do not have to marry well or choose your parents wisely to reach financial independence. More likely, you will gain it by investing shrewdly and boldly. Or by starting your own business. Or by working for a generous company and taking advantage of all the corporate savings plans, stock purchase programs and profit sharing plans that you can. The sooner you start saving, the easier and faster you will be able to accomplish independence, And you will have help along the way. Banks and a bewildering variety of investment firms are all clamoring for your money, and offering high real rates of return to get it. In many cases, the government will even let you shelter your savings from taxes. One of the smartest ways to begin is to put the $2,000 maximum each year into a tax deferring Individual Retirement Account. If you start doing that in 1990 and earn 10% compounded annually on the money between now through the year 20 10, you will have $128,000, Even if you cannot deduct your contribution, an IRA is still a great tax saver. Your money can grow at a surprising clip. Thanks to the law of compound interest, you earn returns not only on your original stake but on your accumulated gains as well. At a 10% rate of return, which you should be able to get, your investment Would double in just over seven years. As a start to becoming financially independent, pick the safest high growth investment you can find and then give it your undivided attention. Probably it will be in the stock market or in real estate. Real estate demands more hours and energy. You must scout around for the best property, negotiate the deal to buy it, fix it LIP if necessary and maintain it. But if you have some money to begin with, it can be most attractive to invest in single family houses that you rent out. With perhaps $ 10,000 down and a 30 year mortgage, you might get a $ 100,000 property. Later, as your earnings accumulate, aim to buy another house, then another. Eventually, try to sell off your oldest houses and use any after tax profits to pay the debt on the rest. If you have less money and time to commit to your investment program, you are better off to concentrate on stocks. Choose growth stocks, including some blue chips, scattered in several industries. If your capital base is not large, your best investment is probably a mutual fund that automatically diversifies your portfolio. Over the last 10 years, the growth funds have had total returns averaging 15.4% a year. You can also achieve financial independence long before retirement age simply by taking advantage of the liberal employee benefit plans offered by many corporations. job hopping from company to company is not the way to build a reserve of capital. Most programs do not go into effect until you have been with a company for at least a year. But an employee earning, say, $35,000 who stays with the same firm for 20 years can amass as much as half a million dollars from generous benefit plans. The most important capital building corporate benefits are profit sharing and savings plans. In both, your employer usually contributes money above and beyond your regular salary to an account that is turned over to you when you quit or retire. In a profit sharing plan, the contribution depends on the company's annual earnings and in the best years usually amounts to about 10% of your salary. In a typical savings program, the company will match each dollar you invest with 50 cents of its own. And remember: Everything the company tosses into the pot, plus all the earnings on both your own and the company's contributions, will get the huge boost of tax deferral. The money grows free of taxes until you withdraw it. A relatively new kind of savings program called a salary. reduction, or 40 1 (k) plan offers a great tax break. You put part of your pay in the plan and it is not considered immediate income so it is tax deferred and can grow with extra speed. One drawback, though: It is hard to take out any of your money before you leave the firm. Under tax reform, if you withdraw money before age 591/2, you may have to pay a 10% penalty on top of any income tax you owe. Most employers, however, let you borrow against your 40 1 (k) plan. In a 1988 survey by Hewitt Associates, employee benefits consultants in Lincolnshire, Illinois, 62% of companies offering 40 1 (k)s had loan provisions, and an additional 9% were considering them. It is usually possible to borrow all of your untaxed contributions and often the employer's contributions as well. The interest rate is likely to be lower than you would pay a bank or other commercial lender. It is a fixed rate based on a money market index such as the prime rate or the five year Treasury note. Another advantage of 401(k) loans is that they do not reduce the balance in your retirement fund. All of your money there keeps earning tax sheltered income, sometimes at a higher rate than you are being charged for the loan. Probably the most common way to try to become financially independent is to start your own business. You will probably find the widest range of opportunities in the Pacific Coast region and the Sunbelt. Before you launch any business, take a hard look at its real market potential. Do not try to start too big. The safest course is to create a firm small enough for the money you have and then make it larger. A small success is better than a big failure. Be sure you start with enough money. Under financing is as bad as over borrowing. It can choke a promising enterprise or force you to give up control to your backers. A little financial help from your friends and relatives is fine, but treat such loans as strictly business deals, complete with signed legal agreements. Handshake deals often lead to bitter quarrels. To launch and maintain almost any enterprise, you need a credit line from a bank. When you first go to a bank and begin to establish a relationship, do not rush to the highest officer. Instead, find a younger employee who has time for you. Ask him or her to review your ideas and refer you to a lawyer or accountant who can help you to write an intelligent business plan. In at least three or four pages, it should describe your product or service; the staffing, space and equipment you will need; and the reasons that your business should succeed. The plan will help you to define your objectives and to get a line of credit. Draw from it as you need the money, not in a lump sum that would saddle you with unnecessarily large repayments. Still another way to gain financial independence is to go to work for a start up company and persuade the founders to give you some stock in the firm in lieu of a large salary, But before you count your gains, bear in mind that one quarter of start ups fail to survive even two years. They tend to be undercapitalized and shorthanded, so you often work long hours for little pay. You can find many start ups among deregulated businesses, in fields such as airlines, trucking and other transportation; fast food services; real estate and personal financial services; health services, especially geriatric care; and in software and other computer related businesses. To locate start ups, watch the help wanted columns in trade periodicals and newspapers. You also can learn about new ventures in national magazines such as Venture and Inc. and in regional ones such as California Business. High tech ventures cluster around universities, so a business school professor may know of some. Another source is the management assistance officer at your district Small Business Administration office. Before you join a new venture, be sure to consider certain questions: Is the new product or service really worthy? For evidence, read the founder's business plan. What is the founder's business record of past success? For information, consult his or her business associates and rivals. Who is putting up the money? A token of an entrepreneur's commitment is the amount of his or her own money invested in the new venture. The more complicated your employment arrangement, the more you will want a contract or at least a letter of understanding. Get as much down on paper as possible, then show the agreement to your lawyer.
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