Financial Independence
Financial independence is having enough money saved, often combined with thoughtful spending, so that you are not completely dependent on a job for a paycheck.
Wait, isn’t this retirement? Yes, most retirees have achieved financial independence, but what if you don’t need to wait until retirement to attain a level of financial freedom? Sounds great! It’s entirely possible to feel financial freedom while working and I encourage you to strive for it as soon as possible because independence can provide unbelievable peace of mind, reduce stress, and give you freedom with your time! You may also find that it gives you less pressure at work, making you not as worried at review time or during a round of layoffs. In addition, having extra money in the bank might make you feel freer to try that dream job, change careers, or start a business.
Financial independence in retirement is different than during your working years. For retirement, we need to plan for zero future earned income. In your working years, you will have earned income, but the goal is to save plenty of money and trim expenses in order to have options and flexibility. The more you save and pay off debt, the more you will start to feel financially independent. It’s the complete opposite of living paycheck to paycheck: being financially independent places you ahead of your finances instead of behind.
To get ahead and on a path towards of financial freedom, I recommend taking these steps:
Always maintain a positive personal balance sheet; this is the pillar of financial independence
Assets > Liabilities
Abbreviated example: $150,000 401(k) + $75,000 savings + $300,000 home > $150,000 mortgage. As you can see, this person does not need their next paycheck to stay positive.
Most people feel stuck at their job because this is reversed. Abbreviated example: $5,000 savings + $25,000 car value < $10,000 credit card debt + $30,000 auto loan. This person needs their next paycheck just to keep from sliding further into the negative.
Trim your monthly expenses. This accomplishes two things:
It allows you to save more money each month.
Less recurring expenses means less to cover with a paycheck.
Example: $20 not spent is $20 more in the bank, and $20 less that you need to cover the following month.
Explore your values and gear your spending towards items, hobbies, and activities that you truly enjoy. Cut back on the rest.
Build an emergency savings fund
This blog is for general educational purposes and does not constitute financial, tax, or legal advice. Please contact our firm for specific advice applicable to your personal financial situation.