10 Biggest Pitfalls On The Way To Financial Freedom

Creating more financial freedom is both a dream and a challenge for many.

A dream because everyone would of course want to do what he/she would like to do one day without experiencing financial stress. A challenge because our society is not designed for this at all and you therefore consciously try to step outside the beaten track.

We are going to talk about that challenge today. There are enough financial pitfalls that can disrupt your dream of financial independence. These are the 10 biggest!

Do you want an extra challenge? Read this blog in which I outline the 3 ways to become financially independent within 10 years (+ a calculation for how much you need for that)!

Buy a car you can’t afford

Everyone needs transportation, that’s a fact. However, how expensive you make that transport is something you can control very well.

For many people, a car is a status symbol. A sign of materialistic success to show other people that you are doing well. But the fact that you are driving around in a thick container often does not mean that you have made a financially wise choice.

For example, cars lose 10-20% of their value per year. Especially in the first years are expensive. Not surprising because in the showroom you naturally pay the main price.

Especially if you want to achieve financial independence, buying an expensive new car is not a good plan. Basically, a car is a reverse investment.

For example, imagine that you ‘invest’ $40,000 in your brand new CO2 machine. You can assume that such a car is worth nothing after about 25 years. That is therefore a negative return of 100%.

And what happens if you put that $40,000 in an investment account for 25 years at 7% interest? Then you have $217,097, a positive return of 543%.

The Most Expensive House To Buy

Mortgage or rent is another major expense that can significantly slow down your route to financial freedom. The rule of thumb is that you should not spend more than 30% of your net income on rent/mortgage and additional charges for your home.

The problem is that this percentage is significantly higher for many people. Especially when it comes to tenants it seems to have gotten out of hand.

For example, the average tenant in the private sector pays 42% of his income in rent. People who rent from a housing corporation are slightly better off at 37% but still do not fall within the guidelines.

People with an owner-occupied home spend an average of 29% of their income on housing costs. So that is exactly within the guideline. However, this is not surprising in view of the many tax benefits that homeowners receive.

Ultimately, the fastest and easiest way to achieve financial freedom is if you can keep a lot of your money for yourself. The more money you spend on rent/mortgage, the less quickly you will ultimately take this route.

Especially if you spend 40% + of your income on housing costs alone, then there is little chance that you will have enough left over at the end of the month to become financially independent!

Do Not Invest

I’ve said it a few times on this blog and I keep repeating it: invest. If you want to achieve financial freedom, this is an absolute must.

In fact, investing has historically been a certainty for more financial freedom. To summarize some facts:

  • If you invest in a broad equity fund (for example the S&P 500), you will achieve an average return of 10%. After inflation, this is about 7% per year.
  • At that rate, your money will double every 7 years and 2 months.
  • There has never been a stock market crash that has been truly fatal for stocks. If you wait long enough, you will (historically) always recover.

It is actually very logical that investing in the long term (historically) always yields a lot. The entire global economy is designed to ensure that companies make more profit.

If one day the stock market really collapsed catastrophically (by which I mean that the shares of all companies in the world would be at $0) it would mean that the entire global economy would shut down.

I don’t see that happening so quickly! Since you will never become financially independent with savings, it is therefore always smart to invest.

If you are wondering whether you should save or invest, read this article I wrote about it earlier. In it, I also explain why there are enough people who are better off saving first.

Don’t Work On Your Bad Habits

Did you know that if you smoke a pack of cigarettes every day, it will cost you $102,200 in 40 years? In fact, if you were to invest $7 (the price of a package) every day, you would have $545,772 in your account after 40 years.

In other words, there are people who could achieve financial freedom just by quitting smoking.

But even if you don’t smoke, there are still plenty of bad habits that can cost you a fortune in the long run.

I have listed 9 of them here that could cost you tens of thousands of euros in the coming decades.

Let it be clear that I am not saying that you should let everything in your life for the purpose of financial freedom. Personally, I only believe in spending money when something really makes you happy.

By asking myself whether something “makes me happy”, I not only started to spend less, but also gained insight into what really makes me happy. Because happiness, that’s what financial freedom is all about, right?

Don’t Have a Financial Plan

Making a plan for success is important if you have set yourself the goal of becoming financially independent. Research has shown that people who write down their goals are 33% more likely to succeed than those who don’t.

But how do you plan a financial success? First, you need to know what financial freedom looks like to you. In other words, how much do you need per year (and what will be your target amount?). Knowing this, you can take the following steps to work towards your goals:

  • Start tracking your income and expenses (No idea how to do this? Read it here: The 6-Step Guide To Budgeting Like An Expert)
  • Save on the points where you notice that there is room for improvement.
  • Invest all that was left in investments with a return of +/- 7% per year (such as index funds)

You can then calculate how quickly you will achieve this goal and whether the pace at which you are saving now is fast enough for you.

Do you want to know how you can calculate all this exactly for your situation and how quickly you can achieve financial freedom? I previously wrote a blog about it: The Ultimate Guide: Becoming Financially Independent.

Build up debt

There is a reason people hate debt and that is because they are.

The main problem is that debts are so easy to build up these days and are sometimes almost inevitable. If you want to borrow money, there is always a company that is in line to provide you with credit. From credit cards to consumer loans for a new car or the renovation of your bathroom.

Often you also pay substantial interest on consumer loans (sometimes even 14% per year). If you are on your way to financial freedom, your hard-earned money is of course not meant to spill the cash of a commercial company!

If you have debts with high interest, it is necessary to pay them off first. The sooner you do this, the less interest you will pay over the long term.

No idea where to start? Then start paying off the debt with the highest interest and taper off in this way. The sooner you have paid off the debts with large interest, the less interest you will eventually pay.

Do you have larger problematic debts? Then read this blog in which I explain in 6 steps how to make a plan to get rid of this.

Don’t Pay Attention To Your Savings Percentage

Your savings rate is an important metric if you want to know how quickly you are moving towards financial freedom. Below you can see the table that indicates how much of your income you should save to be financially independent within a certain number of years.

Now you can guess how much Dutch people save on average from annual income. The answer? Between 6-7%. If you save that much, it means that after 62 years of work you are financially independent. Assuming you invest the money.

These are of course terrible figures, but for many people, this is of course the reality. After all, many of us never achieve financial freedom and always depend on our work to provide us financially.

Yet there are also countries where the savings percentage is much higher. How about China, for example, where people save an average of 30% of their income!

If financial freedom is your goal then you will really have to take a critical look at how much percent of your income you put aside each year and how you can increase this as much as possible (without drastically compromising your happiness in life).

Are you curious about where you stand on the ladder of financial independence? I previously wrote a blog about the 10 Levels of Financial Independence. There you can read how many savings you need to become financially independent part-time (+ 9 other examples).

Having an Expensive Friend

The route to financial freedom is difficult enough, but if you have a (tax) partner who does not share the same ideas as you, it becomes even more difficult.

The fact is that financial freedom, like everything else in a relationship, is a team effort. It is of course very nice if you manage to save $300 per month extra, but if your partner spends that again the following weekend, you will of course get nowhere.

I don’t want to mention one is better than the opposite. Ultimately there is something to be said for financial freedom, but of course also for the happiness, you experience today. After all, life starts today and not tomorrow.

You must of course know for yourself how you want to tackle this challenge. However, good communication often helps you on your way. Try to start a good conversation to get both sides of the story on the table. The golden mean will eventually be found somewhere.

Never Switch

Switching is and remains one of the easiest ways to save money. Yet as a country we do not do it en masse. For example, 6% of Dutch people switch from health insurance every year and 94% do not. That while this can save an average of $660 per year!

Actually, this is a real shame, especially if you are working towards financial freedom. For example, imagine that you would save $1500 per year by switching. And not just your health insurance, but also your energy supplier and everything else you can save on.

If you do this for 15 years and invest the money at 7% interest, you will have an extra $39,851 in the bank. Let’s face it, who wouldn’t want that?

This just goes to show that small simple adjustments can sometimes generate a lot of extra money. Apart from entering a few details, switching is usually done automatically nowadays.

Also, take 3 hours this year to go through everything and invest the amount that you save. Then there is a good chance that you will be financially independent one or 2 years faster.

Not Knowing What You’re Doing It For

Creating more financial freedom is undoubtedly a challenge. In addition, it is undoubtedly also a challenge. After all, what you are trying to achieve is not something generally considered “normal”.

I mean, how many people consciously save 30% + of their income to invest that?

I checked that out in this blog and there I found out that the Dutch only reached this percentage in 2009. In the following year we had a negative savings percentage of -15%.

Because you are swimming against the current, it is important to know what you are actually doing all of this for. Why are you saving so much of your income instead of spending it? What do you want to achieve and what gives your life meaning if you are financially independent?

More financial freedom is not the ultimate goal, it is the starting point where you can organize your life exactly the way you want it. If you know what you save and invest so much for, it will definitely be a lot easier!

Felix Tammi

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top