There are several myths and misnomers when it comes to financial planning, and individuals can take in a lot advice from many good and not-so-good sources. Mistakes can range from confusing high incomes with wealth to not knowing the importance of taxasset placementwhen choosing your investments. This article attempts to shed some light on these areas and to help provide individuals with some key insights that can lead to a more financially independent life.

This guide to financial independence is part of theHow to GetRichtrilogyfor new investors.

Most people believe the key to wealth is a high-paying job. Yes, it's easier to amass assets if you have more monthly income, but one key to increasing your net worth is to spend less than you make. Ultimately, spending habits are the reason a professional athlete making $20 million a year can quickly go bankrupt while a bus driver can retire a multi-millionaire. It may be a clich, but it is a fundamental reality of money.

To escape the spending trap, you need to understand the difference between income and long-term wealth. While income is an obvious component of wealth, it's not the only factor. Many people see wealth as their total net worth at any given time. In other words, wealth can be thought of as the equity on your balance sheetyour assets minusliabilities.

Thinking long term is an important characteristic of accumulating wealth and achieving financial independence regardless of your income level. There are several considerations for long-term wealth, and they will differ for everyone.

If you are a doctor or lawyer, you need to put in long hours after years of education and specialty training to get a paycheck. That paycheck, however, does not necessarily translate to wealth. With long-term thinking, helping to ensure your jobs security, taking initiative to achieve a promotion, or taking steps that will result in higher sales commissions can all be factors for wealth and ways to move toward financial independence.

Side gigs, private investments, and a host of other variables can also be ways to think long term and accumulate wealth. A few considerations here may include a portfolio of private businesses, car washes, parking garages, stocks, bonds, mutual funds, real estate, patents, or trademarks. Some of these cash generators can be relied on for long-term income in addition to your job or just as cash generators that can pull in money while you take long vacations or sit by the pool.

When you take a look at your personal balance sheet, you may already have organic investments you can rely on in your quest for financial independence. Oftentimes, this is wealth that generatescapital gains, income, and dividends without labor. The more of these investments you can afford, the sooner you can fully achieve financial independence.

Overall, the real value of your income is partially determined by the amount you can invest to achieve a financial independence goal. Setting this goal can be important for keeping your perspective on income in check. At your goal, you can successfully maintain the lifestyle you want without working.

Working with a financial adviser can help you to set a goal for wealth accumulation that allows you to maintain your standard of living without an additional paycheck and achieve the financial independence of your dreams. This goal can be lofty,however, as most peoples annual spending includes a long list of budget items, such as mortgage payments, car payments, clothing, college tuitions, music lessons, entertainment expenses, and more.

The only way to take advantage of investment opportunities is to have the money to invest. In successful investing, there is a certain point where you reach critical mass, and the returns generated on your assets can change your life.

Earning a 10% return on $10,000 is only going to net you $1,000 before taxeshardly earth-shattering. But the same return on a $1,000,000 portfolio is $100,000, which has far more utility despite requiring the same effort and research.

Amassing wealth and becoming financially independent is a slow process that takes time. You do small things every daycut your expenses, generate extra income, and put the money into brokerage and tax-deferred retirement accounts. With time, it begins to amount to something.

As each new opportunity appears, you can react on a larger scale than your previous investments. That's calledcompounding. It's when the interest, dividends, and capital gains your money has earned begin to generate their own interest, dividends, and capital gains, and on and on in a virtuous cycle. It's how $10,000 can grow to $2,890,000 over 50 years at a 12% return.

Not all income is equal. Where and how you hold your assets can mean the difference between being somewhat well off and obscenely rich. Those with little or no wealth generate a lot of taxable income, while those who end up financially independent generate large unrealized gains in the form of real estate appreciation, unrealized capital gains, and profits made through tax-advantaged or tax-free accounts, such as an IRAor401(k).

A physician earning $250,000 per year is going to get taxed heavily, probably paying $95,000 in taxes for a net income of $155,000. Yet, if he had earned the same amount from within a pension plan or IRA, he wouldn't pay a single penny in taxes. That's an extra $95,000 per year compounding for him. At 12% over 30 years, that's an extra $23 million in wealth. That's right$23,000,000 simply because the money is earned within a tax-advantaged account instead of regular labor.

This is why you should do everything you can, within reason, to fully fund your retirement plans, as well as to focus on how your seemingly small decisions help or hurt tax planning. No decision is too small.

Gaining complete control over your time is often one factor in achieving financial independence. You may not have totally reached the investing goal that allows you to maintain your lifestyle without an additional paycheck, but if you have the freedom to spend your time how you want to, that might be the most powerful definition of wealth for you.

If each morning, when you show up to the office, or the job site, or the practice field, or studio, it feels like you are unwrapping a Christmas giftthen you are on track for achieving financial independence.

If you find the profession that gives you that feeling, and you are disciplined in managing the business side of it by controlling costs, you have a huge advantage over your competition. You may continue to work 8, 10, 12 hours a day or two, four, or 10 years longer, not because you need to, but because you love the process and product itself.

According to decades of extensive research by Thomas J. Stanley, Ph.D., author ofThe Millionaire Next Door, the grades one earns in school have no correlation with the economic wealth and success outside the medical and legal professions. That's not to say education isn't important88% of American millionaires did, in fact, graduate with an undergraduate degreebut academic performance is not all it's cracked up to be.

Why then, do parents, teachers, and counselors continue to tell children that they won't be successful if they have a C- GPA? Statistically speaking, according to Stanley, it's because often these people are themselves not financially successful. Therefore, they have no idea what it takes to achieve financial independence and thus buy into the great myth that good students go further in life. They measure analytical intelligence only and not the creative intelligence that is responsible for sparking innovations, societal advancements, and crafting solutions in niche markets that so many others miss.

They also fail to realize that most millionaires wear blue jeans, overalls, or work shirts, not a suit and tie. They eat McDonald's and Burger King. They live in ordinary, well-established neighborhoods. Most own their own business.

Statistically, if you want to guess who is going to be wealthy and financially independent, you'd be more likely to guess right choosing a self-sufficient student in shop class who paid for their own car, gets decent (but not spectacular) grades, has a job, and enjoys what they do than selecting someone from the honor roll. It's counterintuitive, but it's often true.

No matter how successful you are, unless your spouse is equally disciplined, frugal, and investment-oriented, your efforts toward a better, financially independent life are going to feel like struggling in quicksand.

The emotional, financial, and social toll that marrying the wrong person can take on your life will overwhelm almost any progress you can make in your career or pocketbook. As you try to build a life, they will be out spending your money, making it nearly impossible for you to achieve financial independence.

It may sound surprising, but a tremendous amount of success is based on proper temperament and psychology. How can you focus on your work and creating the life you always dreamed of if you are worried about the situation at home? To truly build a life, you need to have the kind of support that allows you to take risks because you know, no matter what happens, there will always be someone waiting for you at home who loves you unconditionally and shares your overarching financial goals.

Billionaire investorCharlie Mungerhas remarked that entrepreneurs can thrive if they specialize in an overlooked economic niche, much like animals in nature. Often, these niches are extremely lucrative but not likely to win you friends at cocktail parties.

Conjure up images of a multi-millionaire. What do you see? High-tech 20-somethings on a yacht? Molecular biologists? Although there are a few, most of the big money is in industries such as waste management, pizza, clothing stores, trailer parks, candles, and shipping.

Consider the case ofSam Walton. He built a tiny dime store from the corner of Arkansas into the biggest retailer in the world, amassing a family fortune of more than $191 billion.

There's nothing particularly exciting about selling 50-cent flip-flops and bottles of cheap cologne in small towns, but Walton was on a mission to bring affordable goods to everyday Americans. He was a man possessed with vision. He built his company one store at a timeone might even say one checkout at a timewith no fanfare or red carpet walks.

Business owners represent a disproportionately large segment of the millionaire population. It's hard to believe, but there's a good chance that the biggest hardware store owner or plumber in your town has a net worth many times that of the highest-paid doctor. Part of the reason is a concept we've discussed called capitalized earnings. Another reason is one Dr. Stanley mentioned in his book. Doctors are pressured to buy status symbols to convince their patients they are successful. Not the plumber. They can put more money into retirement accounts. Over decades, the result is millions in additional wealth for the guy who unclogged toilets instead of arteries. That's not something you learn about in school.

It is almost always a mistake to provide gifts of cash and support to those relatives who are unable to generate high incomes on their own or who are constantly in financial trouble.

Consider the incentive system you set up. One son becomes a physician and one daughter an attorney and you say they don't "need" your money, while at the same time you provide free rent, board, and bailouts for their sibling, who sits at home in credit card debt but refuses to look for work.

You have managed to effectively turn that child into a financial and credit junkie; its unlikely they'll ever get over their addiction. The child may tell you that they only need one more loan, but the fundamental, underlying problem is theinability to manage money. The support you give to your relatives should help them become financially independent themselves, not create a dependence on you. That's one way to ensure you'll never have financial freedom.

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How to Become Financially Independent - The Balance