How to Secure Your Financial Future in Four Simple Steps

magic bulletThese days most people want an easy painless method to achieve financial security and get to an early retirement. Sorry, but that magic bullet simply doesn’t exist. Having now written two books on this topic I can say there are four essential steps to getting your finances in order.

Let’s review:

Step one:

Commit to saving for the future. I’m not going to sugar coat this, if you don’t save money today you won’t have security for the future. You must strive to save ten percent of your gross income. If you have too much debt to save for the future you are going in the wrong direction.

There’s no complicated math needed, simply take your yearly gross income (before deductions) and move the decimal point one position to the left. So, if you make $50,000 gross per year, you must strive to save $5,000 per year. If you can’t do that, you need to cut back on your wants and focus on your needs. If you won’t commit to step one, stop reading right now.

Step two:

Open an investment account to buy both registered (RRSP & TFSA) and non-registered investments. Link the investment account to your bank account so you can view and supervise your investments. Give yourself the title of personal portfolio manager.

Step three:

Since you’re already saving at least ten percent of your gross income (step 1), use those savings to buy investments. Purchasing shares of a fund is no different than any other online purchase and the internet now makes this task very simple.

The BalanceI recommend exchange traded funds and a few examples are given in my book “The Balance”. These funds make it ridiculously easy to invest in a globally diversified mix of stocks and bonds at very low management fees of approximately 0.2%. Too many people are still paying fees of 2-3% for actively managed funds that deliver mediocre performance.

Step four:

Use leverage to maximize available free money. Yes, there is such a thing as free money. Here are two examples.

  1. Investing in a Registered Retirement Savings Plan (RRSP) reduces your taxable income and sets you up for a tax refund. Reinvest that tax refund into next year’s RRSP. Repeat this process yearly, and add more to your RRSP contribution every time you get a raise or bonus.
  2. If you have a company pension plan check to see if you have employer matched contributions. Don’t deny yourself this free money; your goal must be to maximize this perk offered by your employer.

Both these examples allow you to invest more money earlier, which allows your investments to grow and compound longer (read larger retirement nest egg and earlier retirement).

In summary there is no shortcut or magic solution. A secure and possibly early retirement requires a solid understanding of these four critical components.

Water BarrelThe BalanceIn my E-books (“Water Barrel” and “The Balance”) I discuss simple methods to live sensibly for today, take charge of your financial affairs, and invest safely for the long term. For more information please visit David Penna Amazon.

As always, I am not a qualified financial advisor. I just relate financial management to my own experience which may not resemble yours at all. Advice is frequently worth exactly what you paid for it. Most of mine came from expensive experiences.

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