January: The 3Ms of Financial Independence
2018 is all about taking a step by step approach every month to improve your finances, and bringing you closer to achieving financial independence.
Your first, and most important step, is to develop a financial plan. Already have a financial plan? Then January is the perfect time to review it and make adjustments, if necessary.
The 3 Ms of FI
I coined the phrase “3Ms of FI” to help simplify the mindset necessary to achieve financial independence. The 3Ms are the foundation for creating your financial plan, and a worthy mantra to repeat daily.
#1 – Maximize Cashflow
It’s hard to work towards your goals or achieve financial independence if you are living paycheck to paycheck. The first priority for your financial plan is to free up (or add) as much cash as possible to ensure a net positive cashflow.
#2 – Minimize Debt
When it comes to financial independence, you need to know and track your net worth. Net worth is determined by subtracting what you owe from what you own.
Don’t be discouraged if your net worth is negative. As you pay down debt, your net worth increases. A positive net worth gives you flexibility and more options when making financial decisions.
#3 – Multiply Your Money
The first 2 Ms are important, but to achieve financial independence, your money needs to work hard for you. You must multiply your money, not just add to it.
One of the easiest ways to get started is by investing in the stock market. In the past 10 years (Jan 2008 – Dec 2017), the S&P 500 has averaged an 8.5% annual return. Applying the rule of 72, this means if you invested in the S&P 500 index, your money would double every 8.47 years.
That means, without doing any additional work, you double your money every 8.47 years. This is what the third M is all about! Multiply your money and make it work for you.
The return used above is shared for illustration. In reality, your returns will depend on the investments you select and the length of time you remain invested (Hint: the biggest factor in becoming a successful investor, and multiplying your money, is TIME). The earlier you begin investing, and the longer you invest, the more successful you will be.
Create a budget. Use a spreadsheet or apps such as YNAB.
Identify needs vs wants. Be honest!
Eliminate wasteful, non-value added spending. For example, late fees – automate bill payments!
Negotiate lower interest rates or consolidate debt
Aggressively pay down debt starting with highest interest rate debt.
Multiply Your Money
Create an Investment plan that:
Suits your risk profile and priorities
Maximizes “free” money
Optimizes taxes and tax-advantaged accounts
Shows a path to achieving your financial goals
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