Financial independence is a goal that most people prioritize but often fail to reach. Why do so many people fall short of achieving true financial independence? The first part of the answer to this question may be that most people do not have a proper understanding of what it means to be financially independent, and therefore lack a proper plan to achieve that independence. Today, we will outline what constitutes financial independence as well as a few things that can help you to work toward your financial goals.
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What Is Financial Independence?
Put simply, financial independence is the ability to cover your own living expenses (and those of your dependents) without having to be dependent on others. This could mean that you are free from employment or do not have to rely on income from another party to live your life comfortably. Your income could come from your own business or passive income from various sources.
Why Do People Aim for Financial Independence?
While it might seem obvious to some, others may view financial independence as a goal with skepticism. One question that comes up is whether aiming for financial independence is actually worth it given that you might end up losing out on opportunities and experiences in the meantime. Financial independence, and retirement, are a long way off for many people, and it might not be worth it to gain independence in a few decades if you lose the ability to enjoy your life in the present.
Luckily, many people do not necessarily have to choose between enjoying their lives in the present and positioning themselves to be financially independent in the future. Some simple modifications to your current lifestyle can go a long way to help prepare you for a more financially secure future.
Financial Independence is More than Retirement Planning
While retirement planning is a key element of proper financial planning, it is not by itself sufficient to become financially independent. Unlike retirement planning, which tends to focus on building a strong nest egg from which you can draw funds during your retirement years, preparing for and working towards financial independence requires a holistic view of your financial and life situation. While retirement planning is a part of that preparation, it involves much more than that, including:
- Having an understanding of your current spending patterns and creating a spending plan that you can realistically carry out
- Reducing and eventually eliminating any debts you have, including your mortgage
- Creating a sizeable emergency fund that you can fall back on in times of need
- Establishing your own business or improving your job security
- Understanding and establishing sinking funds for non-periodic expenses
- Creating and implementing an investment plan
- Making smart choices regarding your taxes
This is not an exhaustive list. Financial independence involves looking at your entire life and making a plan to reduce and eventually eliminate your dependence on your benefactors or your paycheck. Below are a few things people typically do to work toward financial independence.
Use a Tax-Advantaged or Tax-Free Retirement Account
One way many people go about establishing a solid foundation for financial independence is to save a set amount of their income in a tax-free or tax-advantaged account like a 401(k) or IRA. Many choose to invest somewhere between 10 and 15 percent of their income yearly into such accounts. If you start saving at 30 and work for another 25 years, these accounts can accrue considerable funds.
Make Life Choices that Enable Greater Independence
Many techniques are focused on financial matters like saving, investing, and budgeting. But for many people, non-financial matters often end up becoming the more important choices with respect to financial independence. Establishing communication with one’s spouse and relatives regarding spending habits and budgeting can be just as important. Furthermore, making smart health choices that can hopefully delay or even prevent major medical expenses can be huge in terms of saving money.
Have an Emergency Fund and Sinking Funds
Having both an emergency fund and sinking funds for expenses you reasonably expect to have to pay can be a wise decision.
- Emergency funds are for large, unexpected expenses that could otherwise cause serious financial distress. If you suffer an unanticipated medical problem, a car accident, or lose your job, you will be in a better position to weather the storm if you have an emergency fund.
- Sinking funds are for expenses that you can anticipate but that are not regular or periodic. For example, if you know that you will need to replace a part on your car in the next few months, you can create a sinking fund into which you can deposit small amounts and eventually have enough to cover the replacement.
Reduce & Eventually Eliminate Outstanding Debt
Finally, getting rid of your outstanding debt is an important strategy that many people pursue in the quest for financial independence. While building your wealth is often central to the goal, and establishing solid budgeting practices is also critical, eliminating debt is probably the most common step people take towards true independence.
Work with a Financial Advisor
If you’re hoping to work toward financial independence, financial planning is critical. The experienced financial planners at The Templeton Group can help you to build a strategy to work toward your goals. To learn more about our services and how we may be able to help you, request a free initial consultation with us today.
Disclosure
The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual.
