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I considered myself to be “smart” when it came to managing my personal finances. Then I read Tony Robbins’s latest book, Unshakeable: Your Financial Freedom Playbook. It truly opened my eyes to so many new possibilities.
In his book, Robbins explains how anyone can achieve financial freedom. It’s not about saving a few dollars on grocery bills or simply putting money aside in your 401-k retirement account. The devil is really in the details.
In this article, I’ll share four strategies that I learned from reading the book. By implementing these simple yet powerful strategies, you can accelerate your path towards financial freedom.
Don’t Underestimate Compound Interest
The power of compound interest is best explained with an example. Let’s consider two friends Joe and Bob. Both invest $300 a month. Joe starts at the age of 19 and then stops when he turns 27. Bob, on the other hand, starts when he turns 27 and continues to invest $300 per month until he turns 65 years old.
Can you guess how much money they have when they both turn 65 years old? Assuming an annual 10% return on investment, Joe has $1,863,287 dollars and Bob has $1,589,733 dollars!
Even though Joe invested for a significantly shorter duration, by starting early, he was able to harness the power of compound interest and amass more financial wealth than Bob.
The earlier you can start saving and investing, you can take advantage of the power of compound interest. Also if you are a millennial, you will be doing yourself a disservice by not investing a small portion of your income every month.
Beware of Hidden Fees
Many of us are familiar with 401(k) retirement plans. The idea behind these plans is well intentioned. It helps you save money over the course of your working life. You also get to invest money that will grow over time. Finally there are tax advantages for you to participate in a 401(k) plan.
But things start to get murky when your 401(k) plan comes with hidden fees. As Tony explains, these fees can really hurt you badly in the long run. An average worker earning $90,000 a year, would lose $277,000 in 401(k) fees!
So what can you do to protect yourself from hidden fees? The first thing you need to do is check how your 401(k) funds are invested and the fees associated with each investment. You want this fee to be as low as possible, ideally less than 1% total. The next best thing you can do is to ensure your money remains invested in low cost funds such as index funds. Index funds have very low fees in comparison to actively managed funds.
For example, let’s consider an investment in a S & P 500 index fund. The annual cost for this fund is 0.05%. However your 401(k) plan provider may be charging 1.68% annually. That’s a whopping 3,260% mark-up. It’s like paying $717,200 for a $22,000 Honda Accord! One study by investor Robert Hiltonsmith found that customers are paying 17 different fees and costs. So beware of any and all investment fees.
Make Tax-Efficient Decisions
Taxes can take up to 30% or more of your investment returns.
Let’s consider an example where you are earning 8% a year on your investment. Your fees are 2% a year. This leaves you with 6%. Since actively managed funds trade frequently, you’ll have to pay 50% tax on your earning (higher tax on short term gains). This slashes your returns even further to 3% after taxes! If you factor in inflation, your net returns drop even further.
By simply avoiding frequent trading and investing in funds that don’t trade frequently, you can save a lot of money on taxes. Couple that with holding your money for more than a year, and you can benefit from a lower long- term tax rate.
Diversify and Rebalance Your Investment Portfolio
When it comes to investment, you don’t want all your eggs in one basket. In other words, you don’t want to invest all or a significant portion of your money in a certain stock, real estate or gold.
According to Tony, your goal should be to diversify across asset classes, markets, countries, currencies and time. The classification below should help. Asset Classes
Stocks, Bonds, Real Estate, Gold
Information Technology, Healthcare, Energy
America, India, Latin America
Invest a fixed amount on a monthly basis versus saving money to “time the market.”
Finally once you invest your money across different asset classes and one or more of your investments grows, you’ll want to re-distribute your earnings to maintain the right asset allocation.
Ray Dalio, founder of the investment firm Bridgewater Associates suggests that an all-season portfolio would consist of 30% stocks, 40% long term US bonds, 15% intermediate bonds, 7.5% commodities and 7.5% gold.
I have provided you with four key strategies for ultimate financial freedom. Make long-term investments, diversify your assets, opt for low-cost funds such as index funds, and make decisions that are tax advantageous. Finally, the market will have ups and downs. The key is to stay put for the long game and not let your emotions take over.
Kunal Sampat is part of Sampat Jewellers Inc., a family owned business based in San Jose and Mumbai. This article was inspired by his personal curiosity in investments.