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Financial independence should be a goal for everyone, though achieving it is difficult in terms of discipline and effort required. Here are some commandments to help you to improve your personal finances and, hopefully, reach your financial freedom.

  1. Savings are equal to income minus expenses. Make sure the difference is always positive. While increasing income is difficult, expenses can always be reduced. “There is fat in every middle-class budget”. Yet, try to improve your income too.
  2. Avoid advertisements: they are trying to sell you something you don’t need. Avoid showing-off expenses too, they don’t make you better than your neighbour.
  3. Learn the minimalist lifestyle. It won’t only save you money, it will make you happier.
  4. Know how much money you make per hour worked. Compare it with everything you buy and ask you the following question: ‘Is this thing I am about to buy worth all the hours I need to work to have it?’
  5. Invest what you save. Investing means withdrawing money from your bank account and putting it on investment vehicles such as mutual funds, insurances, or any kind of assets.
  6. You need to have a little bit of financial education. Here are some concepts/topics to start with: compound interest, asset classes (real estate, equities and fixed income, at least), risk-return trade-off, active vs passive investment and behavioural finance.
  7. Pay for a financial advisor. They can add a 3% return to your portfolio.
  8. Beware of inflation. Learn how it erodes your wealth. Think in real terms, not in nominal terms.
  9. Try to minimize your tax bill. Delay the payment as much as you can. Tax savings, as interests, compound in the long term.
  10. There are more (and better) assets than real estate. Invest in financial markets.
  11. Diversify your portfolio and rebalance it periodically. Invest globally, not locally. Don’t focus your investments on your country.
  12. Put the money you will probably need in the next 2-3 years in monetary and fixed income assets. With the rest of your wealth, create a long-term portfolio with which you feel comfortable.
  13. You feel comfortable with an only-equities portfolio if you are willing to tolerate more than 50% drawdown. It wouldn’t be the first time in History, nor the last. If you are not able to suffer that kind of losses, include some fixed-income or cash in your long-term portfolio.
  14. Focus on the long run. Short term is not an investor’s friend. Be patient. Let compound interest do the rest. Do not panic when the stock market crash. In the long term it always recovers (except for Japan). Take advantage of it: buy.
  15. Buy and hold. Trading will make your broker richer, not you. Besides, market-timing is not a winning strategy.
  16. Do not complicate things: derivatives, structured financial products, short-selling and illiquid investments are (almost) always for professionals.
  17. Don’t listen to financial and economic forecasts. They are usually noise, and when they are not, the market has already discounted them.
  18. If you are going to buy a house, value the opportunity cost of not investing that money. If you are going to get a mortgage, analyze the risks.