My [recent] four-part series about how to achieve the American Dream of financial independence drew plenty of comments.

Most readers agreed that the American Dream is still achievable. Others claimed it is not.

A few of these latter folks have a misperception about “the Dream” that I will address in a moment.

Let me first summarize how anyone of even modest means can achieve financial independence.

It takes only three simple steps: regular saving, intelligent investing and homeownership.

Let’s consider each of these briefly.

  1. Regular saving. Most people are not born with capital to invest. That means you have to first earn an income and, importantly, not spend every cent of it. The higher your income, the easier it is to save. (The easier it is to spend too, your first potential pitfall.)If you truly want to be financially free, you need to maximize your income through education or job training, ambition, and persistence. You then have to live on less than what you make. Many people are able but unwilling to do this. As I mentioned last week, however, when your outgo exceeds your income, your upkeep becomes your downfall.
  2. Intelligent investing. After you save, you still need a place to earn a decent return. That means money markets, CDs and Treasury bills are out of the question. Bonds pay slightly more, but today’s yields are so low that even long-term returns are likely to be modest.However, there is no better way to accumulate or preserve wealth than to own a diversified portfolio of profitable businesses.As I demonstrated last week, you need only invest $190 a month for 40 years – and earn nothing more than the stock market’s average annual return for the past 200 years (10%) – to accumulate a sum of more than $1 million.There is nothing fancy or sophisticated about owning an S&P 500 index fund and reinvesting the dividends. (And there are plenty of ways to earn more. We talk about those here each week.) But that is all it takes to compound your money at an effective rate over the long haul.Of course, readers of this column probably don’t have 40 years until retirement. Still, to maximize your nest egg you need to save as much as you can, beginning as soon as you can and compound it as long as you can. It’s never too early – or too late – to get started.
  3. Owning a home is not usually a terrific investment. Historically, appreciation has been relatively low. There are property taxes, insurance, maintenance, and mortgage interest to consider too. Yet rent is money out the window. Renters build no equity.The price of the median home in America today is $222,700.With a 10% down payment, the monthly payment on a 30-year mortgage at the national average rate of 3.6% would be $911. Property taxes and mortgage insurance would add a bit more, but this is really no more (and often less) than the cost of renting. It is also a whole lot smarter, even if future appreciation is low or nonexistent. After all, even if the home doesn’t rise in value, you will still have $222,700 when the mortgage is paid off.I realize that few people spend 30 years in one place anymore. But decades of building equity – even if you’re moving around – beats the heck out of making your landlords rich.

The bottom line is this: Regular saving, persistent compounding and long-term homeownership guarantee virtually anyone a financially secure retirement, especially when you add in Social Security and Medicare.

[ad#Google Adsense 336×280-IA]You may not have enough for expensive cars, high-powered boats and exotic trips around the world.

But these are exactly the things that diminish wealth rather than create it.

The main obstacle, as I see it, is a low level of financial literacy in this country.

Too many people realize late in life that they should have done something like this.

(That’s why it’s crucial that you share this knowledge with your kids and grandkids.)

Many of those who don’t achieve financial freedom don’t even realize they could have. Still others would not have had the discipline to work, save and invest even if they knew the eventual outcome.

I want to emphasize that we are talking about achieving the American Dream here, not being handed the American Entitlement. There’s a big difference. The first requires work, thrift, sacrifice and risk-taking.

Those virtues aren’t in favor in some quarters today. But for those willing to embrace them, the American Dream is still alive and well.

Good investing,



Source: Investment U