Financial success is more than just money in the bank. It’s about peace of mind knowing that you’ve done the hard work it takes to achieve financial freedom — you’ve paid off your debts, saved along the way, and have an investment portfolio that makes you feel confident about your money.
In other words, financial success is more a way of being than a one-time win or a number to hit. It’s a lifelong process.
That said, it’s not as common as you might think. If we consider accredited investors — those people who have a net worth of $1 million or more, or have an income of $200,000 per year for two years with the expectation that it will continue — to be “financially successful,” we’re talking about barely more than 8.25% of all U.S. households. That’s just over 10 million households, according to the U.S. Federal Reserve.
But consider this: That 8% of the population holds more than 70% of all private wealth in this country, totaling some $45.5 trillion!
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Impressive, but getting there isn’t easy, and it isn’t a one-time thing. It’s an ongoing process that takes place over a lifetime.
What are the Greatest Risks to Financial Independence?
Want to get there? Here are some of the greatest risks to your financial success to correct and avoid now, before it’s too late.
- Not investing. As Warren Buffet famously said: “Find a way to make money while you sleep, or you will work until you die.” Simply put, you need to use some of the money that you are currently earning to create more for your future self, both to keep up with inflation and to reduce your need for a paycheck later in life. Even so, young people in particular are weary of investing. According to a Gallup poll, only 37% of those younger than 35 invest in stock market. This is a drop from 52% in 2006-07 before the stock market crash. When done with intention and caution, investing can be a tool to wealth, and the sooner you start the better.
- Not getting the right advice. When it comes to investing your hard-earned money, your motto should not be to go it alone. Whether your financial goals are to plan for retirement, fund you child’s college education, or to buy a really cool boat by the time you turn 40, the investment vehicles you use should be selected to help drive your pocketbook towards those goals. Not every investment vehicle is a fast car, however; some are more like slow and steady trains. And that’s okay, as long as you choose the right vehicle for you and your goals.
- Seeking big wins instead of a long-term strategy. The big win of financial independence is an admirable goal — and there are strategies to help achieve them. For example, value investing aims to identify stocks that are undervalued in order to make big gains when the stock’s value rises. Income investing seeks to generate an income stream from investments by purchasing bonds or stocks that pay dividends. And, small cap investing selects smaller companies based on a specified market cap. Everyone wants to make money in the market and those dreams are possible. However, in a balanced portfolio, there shouldn’t be only one end-all-be-all goal. Instead, it’s advantageous to mix things and try several different approaches for your different financial goals. The truth is, being thoughtful about what you buy and sell, and when you do it, will pay off in the long-run.
- Not having the patience to let your investments sit and grow. While you can be an active or a passive investor as a matter of style and strategy, time is the one investing strategy that has been proven effective over and over again. Asset values grow over the course of years, not often months. As an investor, tapping into this trend requires one thing that few of us have: patience. For those who are impatient, there are alternative approaches. Active investing is the practice of buying and selling assets on a somewhat short-term basis with the intention of making profits that outperform a benchmark or index. This strategy does, however, carry greater risk, higher fees, and minimum thresholds. On the other hand, while you won’t see the quick returns you might with active investing, a passive strategy tends to have lower costs and deliver greater long-term results.
- Being “too much” of anything. Diversifying your portfolio spreads your investment dollars across different assets, reducing volatility and potentially improving returns over time. This is what we call a balanced portfolio and it can also help to preserve assets, particularly for investors nearing retirement and generate returns even if one investment does poorly. When investing, constantly consider your entire portfolio, rather than putting all your eggs in one basket.