Simple steps to financial independence

1. Stop spending more than you earn
2. Pay down all credit card balances
3. Set aside 6 months living expenses into a savings account
4. Put the maximum into your 401k or other retirement program
5. Buy a home, don’t rent
6. Invest your money in index funds with no loads and low fees

It’s not difficult.

Explore posts in the same categories: General

5 Comments on “Simple steps to financial independence”

  1. NS Says:

    Why buying vs. renting as a categorical vs. contingent thing to do? Outside of the coasts house prices barely keep pace with inflation. Given that you can put your downpayment into an index fund and let it compound, why should you waste it on a house if (a) rent is cheap and (b) houses don’t appreciate much?

  2. greg Says:

    Selecting a home as a good investment is also pretty easy, as long as you’re willing to sacrifice size for quality. In other words, buy a good home in your budget. A desirable home in a desirable neighborhood should always be desirable. A marginal home could swing either way.

    And if everything else is equal, owning a home gives you a tax shelter as well as a huge piece of equity you can tap in severe need. You can also improve upon the home and increase its value — I’m not talking about a huge renovation, but small improvements in appearance that will make the home more attractive to you and to future buyers.

  3. NS Says:

    Greg — you’re right that a good home should hold its value and that it should provide a tax shelter of sorts. Still, there was an article in the NYT a few months back about how, in most of America, over the last 30 years, housing prices have held basically the same once you control for inflation.

    Then the question is: does the money you save from the reduced tax load and not paying rent offset the forgone gains from putting your money in the market and letting it compound. I’d argue that the market strategy is usually higher risk, but is also often higher return. There’s alot you can do with a downpayment.

    All of the other strategies you mentioned are sure things. This one really depends on local conditions.

  4. NS Says:

    Actually — on the index funds, now that I’m earning again, do you recommend them b/c they’re the easiest cognitively, or b/c they’re the highest gain for low risk, or b/c you don’t think you can do better picking by hand (random walk argument).

  5. greg Says:

    <a href="… 80% of mutual funds underperform the average return of the stock market.</a> Buy an index fund with low fees and you are guaranteed to have a top-20% fund! It’s that simple!

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