The role of VTI in Financial Independence

Financial independence is a goal that many individuals strive for, as it provides the freedom to make choices based on personal preferences rather than financial constraints. There is no one way fits all to reach that goal. Where we at CryptoCollege.cc believe a very limited number of Cryptocurrencies such as Bitcoin or Ethereum could help reach financial independence. This being said, they still remain very risky and speculative bets.

Traditionally, achieving financial independence requires careful planning, discipline, and strategic investment decisions. One such investment tool that can play a vital role in this pursuit is the Vanguard Total Stock Market ETF (Short code VTI). In this article we aim to explore the concept of financial independence and highlight the benefits of VTI to demonstrate how it can be instrumental in attaining long-term financial security.

Understanding Financial Independence:

Financial independence refers to a state where an individual or household no longer relies on a traditional job or income source for sustenance. It entails having enough financial resources to cover one’s expenses, meet financial goals, and maintain a desired lifestyle without being dependent on a paycheck. Achieving financial independence often involves a combination of saving, investing, and managing expenses wisely. The ultimate goal being to live off the investment made by following the 4% spending rule. More on that later.

What is a Total Market ETF?

Exchange-traded funds (ETFs) are investment funds that are traded on stock exchanges, similar to individual stocks. ETFs offer investors an opportunity to invest in a diversified portfolio of securities, such as stocks, bonds, or commodities. They provide the benefits of diversification and liquidity, as ETF shares can be bought or sold throughout the trading day. ETFs like VTI are passively managed, meaning they aim to replicate the performance of a specific index rather than relying on active stock selection. This passive approach often leads to lower costs compared to actively managed funds.

More specifically, VTI tracks the entire US stock market encompassing stocks of all sizes from various sectors. Investing in VTI is essentially investing in the US stock market and getting in return the average performance of all the stocks listed. This diversification helps reduce individual stock risk and provides exposure to the overall growth of the U.S. stock market.

Long-Term Growth Potential:

VTI offers investors the opportunity to benefit from the long-term growth potential of the stock market. Over time, the stock market has historically provided higher returns compared to other asset classes such as bonds or cash. By investing in VTI, individuals can participate in this growth and potentially generate substantial wealth over the long term. A ballpark estimate is about an average of 10% annually. However, it is essential to note that investing in the stock market involves risk, and past performance is not indicative of future results.

Cost-Effective Investing:

One of the significant advantages of the VTI ETF is its low expense ratio. Vanguard, the fund provider, is known for its commitment to keeping costs low for investors. With a low expense ratio, VTI allows investors to keep a higher percentage of their investment returns, which can significantly impact the growth of their investment portfolio over time. This cost-effectiveness is particularly beneficial for individuals seeking financial independence as it maximizes their potential returns.

Passive Investing and Time Efficiency:

VTI falls under the category of passive investing, where investors aim to replicate the performance of a market index rather than actively selecting individual stocks (stock picking). This approach offers several advantages, including time efficiency. Passive investors do not need to spend significant time analyzing and researching individual companies, allowing them to focus on other aspects of their lives. This time efficiency is particularly valuable for individuals striving for financial independence, as they can pursue their passions and engage in activities that contribute to their overall well-being.

Dividends and Reinvesting:

Another advantage of investing in VTI is the potential for dividends. VTI comprises a wide range of stocks, many of which pay regular dividends to their shareholders. Investors can choose to reinvest these dividends automatically, allowing their investment to compound over time. The power of compounding can significantly accelerate wealth accumulation and aid in achieving financial independence faster.

The 4% Spending Rule:

When striving for financial independence, it is crucial to determine a sustainable withdrawal rate from the investment portfolio. The 4% spending rule is a widely recognized guideline in the financial planning community. It suggests that individuals can withdraw 4% of their initial investment portfolio value. VTI is expected to return on average 10% so the remaining 6% are to cover inflation (that should be on average 2 to 3%), potential capital gain taxes and to continue to grow the portfolio.

So, for example if you have calculated that you can live comfortably with $1,000 / month, you should have something like $300,000 invested in an ETF like VTI.  It would then look like this: after a year the value grows by the average of 10% to $330,000. You take out $12,000 for your yearly expenses and the remaining gains are to cover inflation and taxes. It is important to understand the 10% growth is an average where some years could see negative performances and other performances much higher than 10%. One could adjust its yearly expenditure a little bit based on that.

In conclusion:

Financial independence is an achievable goal for those who are willing to plan, save, and invest strategically. The VTI ETF plays an important role in this pursuit by offering broad diversification, long-term growth potential, cost-effective investing, and time efficiency. By investing in VTI, individuals can benefit from the growth of the U.S. stock market while keeping costs low. However, it is important to remember that investing involves risks, and individuals should conduct thorough research and seek professional advice before making investment decisions. With careful planning and the inclusion of VTI in an investment portfolio, individuals can take significant strides towards their financial independence, providing themselves with greater freedom and peace of mind. If you want to learn more about VTI a really good book is “The Simple Path to Wealth” by JL Collins.

 

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