Enjoying the Freedom of Financial Independence
On July 4th, we celebrated this country’s independence from Great Britain and the formation of the United States. As we geared up for barbecues and fireworks, it’s a good time to reflect on how you can achieve financial independence in your own life.
What is financial independence?
Financial independence can mean many different things to different people. For some, it is being able to do what you want when you want to do it. To others, it means having the cash flow to cover expenses throughout your and your spouse’s lifetime. Many people, regardless of age, define financial independence as not having to worry about the source of income when you are retired, or to be free from financial worry.
Today, there is a movement among millennials to achieve “financial independence, retiring early” also known as FIRE. People with this goal in mind tend to save 50% or more of their income, and are more focused on living life well for less. Amassing wealth is not the goal, but rather FIRE proponents choose to simplify and reduce overall spending, with the ultimate goal of saving money and retiring early.
Whether or not you choose the FIRE lifestyle, there are a number of takeaways that anyone can apply to daily life in order to achieve financial independence, no matter how you define it.
Step 1: Plan Now for Later
One of the most important steps you can take to achieve financial independence is to start planning for retirement as early as possible. Be sure to have a written financial plan that sets goals, and develop a strategy to achieve those financial goals. Consider working with a professional financial planner who can help you set actionable goals and provide counsel on how you can get there.
Step 2: Spend Less Now
If you are spending more than you earn and find that you have significant credit card debt, you are not mindful of your spending habits. It is important to your financial health – today and in the future – to do your best to keep expenses in check. One of the best ways to do this, is to diligently track your overall spending so you can determine where you can cut expenses. There are a number of apps available to help you track and manage expenses. The formula for success is relatively simple: keep your resources high and your needs low.
Step 3: Pay Yourself First
To achieve financial independence, your mantra should be, “save, save and save.” Don’t spend everything you earn, and don’t save whatever money you have left at the end of a month, but rather put saving above all else.
Warren Buffett once said, “Do not save what is left after spending but spend what is left after saving.” This sage advice is critical to reaching financial independence. The reality is that you need to prioritize saving ahead of everything else. Pay yourself first!
According to Investopedia, “Pay yourself first” means automatically routing your specified savings contribution from each paycheck at the time it is received. Because the savings contributions are automatically routed from each paycheck to your investment account, you are paying yourself first. In other words, paying yourself before you begin paying your monthly living expenses and making discretionary purchases. This practice encourages you to live on a smaller budget and is a powerful saving habit. Funding an employer-sponsored 401(k) plan is a great way to get started. The contribution will be deducted right out of your paycheck.
Step 4: Don’t Put All Your Eggs in One Basket
Another tactic to consider is to build a nest egg through smart investing and diversification of assets. In addition to traditional investments, such as a 401(k), stocks and bonds, you may want to consider other forms of investment. For example, you could also look for ways to earn passive income, such as investing in rental property or establishing a side business. By developing a diversified investment and long-term savings plan, you will be a step closer to a retirement that is financially worry-free.
In the end, no matter what strategies you choose, this is an ideal time of year to evaluate and improve your finance independence — and to celebrate the fact that we have the freedom to do so.