You’ve probably heard the term “financial independence” once or twice. But have you ever stopped and wondered what that really means? As you save more and work harder to increase your net worth, what do you need to do to achieve your own kind of financial independence? It may be worth considering whether there is
Let’s take a look at how the industry has traditionally defined this popular phrase and how it can be used to set short- and long-term goals.
The Best-Known Meaning of “Financial Independence”
Across the industry, most financial professionals consider you financially independent when you can live comfortably for the rest of your life without needing a job to pay your bills.
This independence comes largely from making smart money decisions consistently and maximizing what you get out of your finances.
Often this involves owning a business, participating in the real estate market, having unearned income, having multiple sources of income, and other strategies that can be earned throughout life to help you work less. will allow you to earn more income.
Consider the movement of FIRE. The Financial Independent, short for Early Retire, has gained popularity in recent decades as a way to encourage financial independence. Thrifty and extreme savings and investments Because they retire much earlier than the average age.
Those who choose this lifestyle have to make a lot of sacrifices in the beginning, but eventually get more money, free time, and the ability (perhaps still to some extent) to do what they love. ) and generally earn more. from life.
This is just one example of financial independence. It’s worth noting that there’s a distinct difference between being financially independent and being extravagant. You should have enough money to save, invest and plan for the future while meeting your basic needs as well as covering your expenses.
What does financial independence mean to you?
While the above is the definition of financial independence commonly thought of in the industry, it’s more important to consider what the term means to you personally.
Most young professionals have a goal of achieving financial independence and that is often the reason why they choose to work with a financial advisor in the first place. But if you don’t take a hard look at what financial independence means to you, it can be hard to feel like you’ve really achieved or achieved your goals. You have reached the “finish line”.
What stage of life we consider financially independent, and how we get there, varies from person to person. Perhaps for you, it’s a work-free lifestyle that frees up your schedule and allows you to pursue your passion projects.
It can also mean paying off all mortgages and debts. If you’re adventurous, that might mean selling your home and having the ability to travel around the country in an RV or car. immigrate to another country. Even reaching a certain amount of savings is seen as a personal way of achieving financial independence.
For example, consider a Generation Y planning client who worked 60-70 hour weeks and had many health issues. She had to take her leave, live with her family and focus on her health. She was making $250,000 a year, but it didn’t matter because she wasn’t feeling well most days. She eventually changed careers and ended up working for a non-profit organization.
She earns half what she used to but works 40 hours a week and is much happier in her new role. She very wisely paid off her debts and amassed her emergency savings while she was with her former employer so she could more easily switch to low-paying jobs.
This was what financial independence meant for this particular client. Whatever your definition is, it should be unique to you, your long-term goals, and your personal values. Try to find what has meaning and purpose for you, not how others define it.
Fundamental Elements of Financial Independence
First of all, you need to know how much income you need to live on. This is where budgeting comes in very handy.A lot of the time people may speculate in their heads or wave around general numbers, but specifically Budget written down based on values More help in reaching your goals.
moreover, annual expenditure. That way, you can see exactly where your money is going and from there determine what you need to support your lifestyle.
Remember that apart from living expenses such as rent/mortgage, groceries, utilities, etc., you need to be able to cover other necessities such as medical bills and insurance policies such as life insurance, disability insurance, pet insurance, etc. please
Expenses aside, create a workable spending plan that incorporates discretionary spending (also known as play money!), brokerage accounts, retirement savings, and other long-term goals like buying a home or traveling. Of course, increasing your emergency fund isn’t a bad idea either. If you haven’t started yet, do so.
With rising costs of living and rising inflation, one job alone may not be enough to meet your living expenses and strive toward your goals. It’s actually a good companion if you need to work extra work to supplement your current income. About 61% of millennials have a side job, earning an average of about $12,689 annually.1
On the other hand, if you are in a good position and feel ready to quit your job, your unearned income (Airbnb, rental income, business income, investment income, etc.) will fully support you when you retire. Please make sure. I no longer receive my salary.
If so, ask yourself if you’re going to live off your investments during this time period, or if you’ll be making additional investments. And if you don’t want to get a 10% penalty for stealing your retirement account, can you use a brokerage account or other investments? please.
Trying to deal with every aspect of your financial life can feel a little overwhelming, but that’s okay. You can always take one step at a time and break down your to-do list into action items that are easier to manage and tackle.
How can I achieve financial independence?
Financial independence is possible, but you have to work smarter. What are SMART goals?
SMART = Specific, Measurable, Achievable, Relevant, Timebound.
Start by setting SMART short- and long-term goals detailed enough to keep you invested enough to reach them.
Suppose you want to spend $5,000 on a trip to Europe next year. To make this a prudent goal, the Consumer Financial Protection Bureau (CFPB) recommends addressing the following questions:
- Clear: What are you saving for? Vacation to Europe.
- Measurable: How much do you want to save? $5,000
- Achievable: Is it realistic or doable? Yes, if less disposable income is spent on non-essential items such as shopping and eating out.
- Related: Is this important to you and worth saving? Yes, traveling is a fulfilling and meaningful activity for me.
- Expired: When will you reach your goal? About 12 months by next summer.
By starting with these details, you can decide for yourself if your goals are worth it or if they should be revisited.
Not sure where to start? It’s always a good idea to prioritize paying off debt, especially if you have high-interest debt such as credit cards or personal loans. And, of course, retirement savings should be one of your financial non-negotiables.
You can also work with a financial planner to set goals and be specific about what you want out of life. In striving for such goals, some find it too cheesy and miss out on some of the fun things in life.
As with most things in life, balance is important. A financial planner can help you get realistic and put real numbers on the page. Then, instead of spending money out of a scarcity mindset, you will feel more comfortable spending it on things that bring joy to your life.
And if you find yourself so tired of your job that you’re rushing to reach your goal and want to retire in your 40s, it may be worth considering a move to a more sustainable job, even if it pays less. not.
Make sure you’re not just trying to hit a magic number and hoping life gets better afterwards, like the example above of a client who worked fewer hours but was more satisfied with her life. is needed. Collaboration with planners It is also beneficial during this kind of career change.
If you need help getting there, that’s okay!
It is no exaggeration to say that the world of finance is complex. That’s why financial advisors like us here, Generation Y planis a great resource and provides a wealth of knowledge that you can take advantage of. You’re busy building your career and growing your family, so there’s no need to add becoming a financial professional to what’s already fulfilling.
Your advisor will help you review your budget, set SMART goals, and help you achieve financial independence. Once you have decided on your destination, you can create a roadmap with achievable steps to get there.
source:
1Zapier report: 40% of Americans will have a side job by 2022
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