4-step guide on how to achieve financial freedom

Attaining financial freedom is a goal for many people. There is even a lifestyle movement dedicated to it, FIRE (Financial Independence, Retire Early), popularized among millennials in the 2010s. And although 84% of millennials prefer to find love in real life, some quickly turned to special dating sites for bringing partners that share the FIRE lifestyle together. But gaining financial independence is also a huge undertaking, no matter the age bracket. 

When you are financially stable, it opens up all kinds of opportunities — you can live in a good neighborhood, drive the car you always wanted, pick the best schools for your children, and travel the world. This article will explain the steps to generate a good income and share expert investing tips.

1. Start early

“The early bird gets the worm.”

Basically, the only way to accumulate capital is to build it over time. And the more time you have to try a variety of methods and financial products, the better. If you look at successful people, you’ll see that they spent years working to achieve big financial goals. And some of them started really young, which gave them an advantage over big spenders. 

If you didn’t buy any shares when you were 11, all is not lost. As your first step, start with education. You can take a course at school with great career prospects, monetize your hobbies, and/or become an investor! The following sections will help you explore the option of investing.

2. Invest in fixed assets

Fixed-asset investing refers to the acquisition and capital improvement of tangible assets. They can be used, sold, and help you secure a loan. You can invest in buildings, land, machinery and equipment, and infrastructure. One of the most common choices is real estate, so you can use it as an example:

You can buy or build commercial (offices, institutions, and retail properties) and residential houses (single-family houses, multi-family homes, townhouses, condominiums, co-ops). And depending on your investing goals, you can make these assets generate a bigger, one-time return (by selling them in the open market) or a lower income, for instance, on a monthly or quarterly basis (by leasing them to businesses or individuals).

Fixed asset investments are considered relatively safe. Their best advantage is that they tend to go up in value over time. But if you don’t have a lot of funds, this type of investing can be inaccessible, especially for those with higher capital growth. 

It’s not recommended to use up all your investment funds on, for instance, only real estate. Having too much of your net worth tied up in one class of fixed assets makes them illiquid, increases the risks, and prevents you from pursuing other types of investments.

3. Make passive investments

In a way, purchasing a fixed asset is also a form of passing investment. But this point specifically refers to buying index funds or other mutual funds, such as the SPDR S&P 500 ETF, VanEck Vectors Gold Miners ETF, or the United States Oil Fund. 

There are many different indices, reflecting different economies, all available to investors all over the world — DJIA (Dow Jones Industrial Average), CAC 40 (Cotation Assistée en Continu), DAX (Deutscher Aktien Index), etc. If you buy all three, you will essentially be invested in over 100 companies in different countries. You can even add Shanghai Composite and Nikkei to the mix for more geographical diversification. 

An index fund tracks specific individual investments while minimizing the amount of buying and selling on your part and freeing a lot of your time. Of course, when you buy a stock index fund and don’t do your own research into individual stocks, there are pros and cons. 

On the one hand, these investments have a low cost, require minimal financial knowledge, and offer convenience and portfolio diversification. On the other hand, you have little control over your holdings, limited exposure to different strategies, and no reactive ability.

4. Make active investments

Active investing takes a hands-on approach. You act as your own portfolio manager and makу your own decisions to buy/sell securities, research them, and assess the risk-to-reward ratio. Compared to passive investors, active investors open and close trades much more frequently. And while it sounds like a lot of work, there are many benefits to the active approach, which will be discussed below. 

Shares

Shares are financial instruments that represent ownership in a company. When you own stocks, you get certain privileges, such as: 

  • Voting rights at annual shareholder meetings;
  • Dividends paid from the company’s profits;
  • Capital appreciation when your shares increase in value.

Bonds

Bonds represent loans made to a borrower, usually governmental or corporate. The first way to get returns from bonds is to hold them until the maturity date and collect interest payments. The other option is to sell them at a higher price than they originally bought. 

Commodities

Commodities represent raw materials or primary agricultural products (oil, gas, gold, silver, corn, wheat, etc.). You can invest directly in commodities, commodities future, stocks of commodity producers, and ETFs with exposure to commodities. 

Currencies

The currency market, or forex (FX), is the largest investment market in the world. Investors buy the currency of one country while selling that of another. They can get returns when the value of the quoted currency goes up, or the value of the base currency goes down.

ETFs

ETFs are baskets of investments. Investors can get returns by buying at the bid price and selling at the offer price.

Advantages of active management

Many choose actively managed investments for significant portions of their portfolios for the following reasons: 

  • Quick reaction: You can take advantage of opportunities as soon as they arise on the market. If an asset reaches your price target, a company makes a big announcement, or there are signs of rising demand for a certain commodity, enter the trade quickly! 
  • Flexibility: You’re not required to hold specific stocks or bonds. If you want to sell off, you’re free to do so. Similarly, there is more freedom in the selection process.
  • Hedging: You can use multiple strategies to offset losses in investments, for example, by taking an opposite position in a related asset. This way, you’ll have portfolio protection along with portfolio appreciation.
  • Affordability: There are assets for any trading budget. You can start with as low or as high of a budget as you want. 

Reasons to invest

Whether you’re young and starting out in a career, middle-aged and family-building, or retirement age and self-directed, there are no barriers to making investments. You just need to be smart about what kinds of investments to make. 

There used to be enormous barriers to entering the investing world. But the financial market is no longer reserved for the Wall Street elite or the ultra-wealthy. It welcomes any ordinary person looking to earn extra income. Of course, there are no guarantees and many risks, but having the option to spread your capital across different areas other than cash is always a plus.

Looking for other reasons to invest? 

  • Your funds are “working for you.”
  • Diversify your income.
  • Save for retirement. 
  • Beat inflation (for context, $1 in 1990 is equivalent in purchasing power to $2.26 today)

Investing tips for beginners

Whether you choose to become a fixed-asset, passive, or active manager (or all of them at once), the most important thing you can do is learn. Luckily, there are resources and services that allow you to improve your investing knowledge. If you want to go deeper than free online material, you can learn from books, white papers, videos, and comprehensive courses. 

The second tip is to spread your portfolio across different types of securities and assets — i.e., to diversify. For example, invest in real estate, indices, and different stocks in the ratio that you can afford. And even if one of your investments falls in value, the gains from other ones can offset the loss.

Thirdly, have some cash savings. Don’t put all your disposable income into the financial market. While assets like stocks a liquid, you can’t access the capital generated from them as easily as withdrawing funds from a savings account. And finally, mitigate risks. Fortunately, there are many risk management strategies, from asset allocation to stop loss. You won’t be able to escape it completely, but you’ll make the risk much more manageable and reduce it to a certain predetermined level.

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