Principles of Financial Independence – Part I

Sam has spent a lifetime mentoring others to financial independence and success. Here is the first half of his list of his favorite principles:

1. Daily choices add up. How you spend your money now determines what you will have in the future. It takes many "daily" bricks to build the financial fortress that will protect you for a lifetime.

2. Small savings over a long time creates more wealth than big risks. Slow and study wins the race. The turtle will outrun the hare. Small savings continuously made over a long period are more likely to create substantial wealth than taking big risks. Remember the miracle of compound interest.

3. Pay yourself first. Your savings should be your primary goal. To make sure that your savings account is paid, pay it first. Take your savings portion off the top of your income, not the bottom of your income. What remains is what you live on, day to day. Below is a short form of these principles that can be carried in your wallet as a reminder.

4. Separate wants from needs. Concentrate on needs. Distinguish between wants and needs. Until you are financially independent, concentrate solely on needs.

5. Toxic debt is poison. It constricts your financial wellbeing by burdening you with interest payments and dependence on further debt. Toxic debt also prevents you from investing and achieving your financial goals.

6. Credit is for emergencies. Pay cash until you reach your goal. Until you are financially independent, use credit only for emergencies. Only buy that for which you can pay cash.

7. Windfalls are capital, not income. Capital is for wealth investment. Surplus cash and windfalls, such as bonuses, financial gifts, etc., are capital not income. Capital is for making investments that will produce income or increase wealth.

8. Never take a risk or purchase an item you cannot afford. Calculate if the risk or the purchase will keep you awake at night. Remember, if you are careful now, you will be able to afford more things you want eventually.

9. Put your own oxygen mask on first. When it comes to giving, you must put your own oxygen mask on first. You cannot help others if you are not okay yourself.

10. Inexpensive gifts can show you care. Expensive gifts give a false impression and are motivated by insecurity. The purpose of a gift is to show you care. An overly expensive gift can give a false impression and indicate insecurity. What is expensive is relative, depending on your income.

11. Enjoyment of luxury is brief. However, the anxiety can last a long time, at least until the debt is paid. The pleasure you get from buying a luxury item is short-lived (usually just a few days or weeks). However, the anxiety and insecurity caused by the debt go deeper and last longer.

12. Get fulfillment from personal relationships, not material things. Love people and use things; do not love things and use people.

13. Why are you shopping? Know the reasons. This will help you make better decisions. Do not shop because you feel bored or insecure.

14. Resist the urge to indulge in instant gratification. Invest instead. Resist seeking satisfaction from impulse purchases, even if they are small. Whenever the desire strikes, pay down debt or set the amount aside to invest instead.

(Written by Samuel K. Freshman and Heidi Clingen, authors of TheSmartestWay™ to Succeed Series and TheSmartestWay™ to Save—Why You Can’t Hang on to Money and What to Do About It.)