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Financial Engineering(II) Becoming Financially Independent 精选

已有 8182 次阅读 2014-7-1 19:36 |个人分类:生活点滴|系统分类:海外观察

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Other than inheriting family wealth or hitting the lottery jackpot,  “To be financially independent” is certainly one of the most important life goals for the average person who has to work for a living. Let me first give an all-purpose definition of financially independence that is  applicable for everyone regardless whether or not you are working for minimal wage or  earning a six figure salary.

Definition. You are financially independent when your unearned income  (i.e., returns from your investment) equals your earned income (from salary)

This is because at that point you can kiss your salaried job  goodbye and  tell yourboss where to go. Note this definition work for everyone  independent of your absolute net worth and income level. It does  not say anything about being filthy rich or having asset over x dollars.  It is also a realistic and achievable goal for anybody.

Thus, the question now is “how do I go about achieving this  goal?”. In my experience, there is only one secret and two tasks derived  from this secret. The secret is COMPOUND INTEREST and the two tasks are:

1.      START EARLTY. The power of compound interest is time. I have given  earlier the example of start saving from the ages 22 to 32 compared with  saving  from ages 32 to 65. The late starter can never catch up with the early starter despite the many extra years of saving http://blog.sciencenet.cn/blog-1565-505688.html ; http://blog.sciencenet.cn/home.php?mod=space&uid=1565&do=blog&quickforward=1&id=495058

2.      WATCH OUT FOR THOSE 1-2%. A small difference in Return On  Investment (ROI) can make a big difference in total accumulation over a long period of saving. Example: A difference of 2% in ROI ( say from 8%to 6%) over a 36 years working life can caused one retirement accumulation tobe double of the other. You may ask how can I achieve this 2% difference.  There are several easy ways. First, mutual fund management  and investment expense over different funds can easily be 1% or more.  Thus, find a fund with low expenses, say in the 0.5% range. Second,  look out for tax efficiency can easily add to your ROI or income/saving  (the average  American pay 33% of income in total taxes. Don’t say  you cannot reduce this figure to 32%).

So there you are.  That is all you need to know about managing  your financial life http://blog.sciencenet.cn/blog-1565-634189.html . It only requires one thing: Delay your gratification.Don’t  say I must have fun now. Tell yourself as I have told you several times in my blog pages for the past seven years that:

  1. Getting there is all the fun.

  2. Happiness is a positive derivative.

Enjoy life.




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