“Financial independence occurs when you’ve saved enough to support your current spending habits for the rest of your life without the need to earn more money.” – JD Roth, one of the original personal finance bloggers. This may be true for some and different for others, but why is financial independence so important? The “how” and the “why” behind wanting to achieve financial independence varies from person to person. By being financially independent, not only have you gained greater financial security, but you also reduce stressors revolving around your finances and are able to work and live on your own terms (i.e. you have a good grasp of your own emotions surrounding money). Thinking long-term curates a mindset of accumulating wealth to achieve financial independence. Our paychecks do not directly translate to our wealth. In other words, our income does not define our wealth. There are a variety of factors that allow one to accumulate wealth including: seeking a promotion, ensuring job security, diversifying income sources and seeking private investments, to name a few. However, accumulating wealth should not be synonymous with damaging yourself emotionally. When investments and financial plans overtake your daily routine, that is when you know it is time to re-evaluate your relationship with money.
Investing is a great way to make your money work for you. Similarly, it is a way to gain control of your financial security and grow your wealth to generate an additional stream of income. To get good returns, it is common to invest in a savings account, liquid funds, land, gold, and even artwork. Additionally, investing in the financial market is also a common occurrence for all ages, starting with high school or college students, to retired elders. While it may have a sophisticated ring to it, it can be psychologically damaging to continue a certain lifestyle that fits the “ideal” investor stereotype. Overconfidence, when investors are excessively self-assured about their decisions, can be one of the causes of a poor lifestyle surrounding money where no decision is being doubted or questioned solely due to the fact that a confident individual has made the choice. On the other end of the spectrum, fear of losing money may override any kind of rational thinking. Prioritizing financial gain over emotional, physical, or cognitive health can be dangerous and may lead to establishing many unhealthy habits surrounding money that would lead in the opposite direction of financial independence.
Although investing to increase your wealth is important for financial independence, as discussed above, it is just as important to invest in yourself. It is easy to invest “externally”, gaining tangible returns; however, investing “internally” can be just as beneficial.
Just like investing “extenterally”, investing “internally” can manifest in a variety of forms. By investing in yourself, you are developing a mature mindset and preparing for an unknown future. Once it is understood that lifelong learning is needed to grow, adapt to become accustomed to potential new seasons in your life, you will be amazed at the strides you make financially and within yourself. By developing a growth mindset, you rid yourself of the fear of failure. This is because you know that valuable lessons will be made in the process and may better prepare you for circumstances down the line. Not only will this leave you better equipped to handle conflicts in your relationships, but also in the workforce and in day-to-day life.
Our financial decision making is influenced by cognitive processes. Research in behavioural finances demonstrates that the decisions we make dictate individual investors’ wealth. However, the psychology that generates the observed patterns of saving, trading and investing behaviour remains unclear. Investing into your wellbeing now can reap long-term benefits. For example, by investing in better habits, you may increase your 1. health (allowing for a fuller life) 2. enhance your sleeping habits (impacting your cognitive health and energy levels) 3. change your attitude and outlook (increase your mood and better relationships) 4. adapt your mindset (spending time being creative, learning a new language) 5. make time for others (volunteering, enhancing relationships). Most importantly, you have a better understanding of your own emotions, which is where financial behaviours stem from.
Similarly, investing in your future can slip into the category of internal investing. Working toward your education and career can be considered investing. Although education does not guarantee wages or wealth, it forms connections, betters oneself and makes one better equipped to face obstacles. The realization that one’s self worth carries more value than any aspect of financial worth can be learned from experience but also through education and gained knowledge. From a student perspective, you may be financially independent by supporting yourself. You do not need to be a billionaire to understand what it means to be financially independent. It acts as a cycle: if you cannot invest “internally”, and manage your emotions surrounding money, it becomes extremely difficult to understand or apply investments outside of yourself. Those investments translate into quantitative and qualitative aspects that you may use as assets in the future.
Overall, external investing is simply not enough to reach full financial independence. Independence is not just about having enough money to sustain yourself or make ends meet. Likewise, great finances do not ensure happiness or fulfillment. Investing is not inherently evil but without care and by only looking for external investments, it can become emotionally taxing.
Investing “internally” is just as important as investing eternally. Some ways to invest in yourself include:
– Keeping money and self-worth separate
– Have an emergency plan
– Learn to accept your emotions before questioning your judgements
Therefore, there must be a balance of both external and internal investments. In other words, investing in both your finances and yourself, will lead you to the point of financial independence without money becoming a burden in the process.
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