Happy 4th of July! To honor the theme of independence, I’d like to share an oldie but goodie, written by my colleague, Greg Ward, updated for 2017. Enjoy and have a safe celebration.
To honor our nation’s birthday, why not declare your own personal “Financial” Independence Day? To me, financial independence equates to not having to worry about money, so if you are worried about your finances, take these seven steps to economic freedom:
Step 1 – Establish an emergency fund
Failing to set aside money for an economic emergency or a rainy day is a sure way to get you in trouble if and when the rain comes. Arm yourself against such things by putting aside six to twelve months of expenses in a safe, liquid account such as a savings account or a money market fund. You won’t make a lot, but you’ll have something to help you weather the storm. A well-funded emergency fund is the first step to a worry-free financial life.
Step 2 – Pay off high-interest debt
Borrowing money at a high interest rate is a form of voluntary slavery. Emancipate yourself by committing extra payments to the debt with the highest interest rate. Once that’s paid off, use the newly freed money to make an even bigger payment on the debt with the next highest rate, and continue this process until all high-interest debt has been wiped away. If you are truly averse to debt, you can continue the process until your low-interest debt, such as your mortgage, is paid off too. Not owing ANYONE money may be the ultimate form of economic freedom. See how a little extra payment can go a long way toward paying off debt with our DebtBlaster calculator.
Step 3 – Save more for retirement
According to our research, over 90% of employees are saving for retirement, but less than 30% are confident in their ability to achieve their retirement goals. Take the worry out of retirement by running a retirement projection, and applying any recommended changes. For many, it’s simply a matter of socking away more. For others, it may mean working a few more years, or investing a little more aggressively. Whatever you do, don’t rely solely on your employer or the government. Financial independence comes from self reliance.
Step 4 – Manage your income taxes
Don’t let fear of the tax man cause you undue worry. In the spirit of the Boston Tea Party, say no to higher taxes by contributing to tax-deferred accounts like a traditional 401(k), IRA or even your HSA. You can avoid income taxes in the future by contributing to a Roth retirement account today, or save for specific expenses completely tax free by contributing to a flexible spending account or health savings account. There’s nothing wrong with paying your fair share, but that doesn’t mean you have to give Uncle Sam an interest-free loan every year, which is exactly what you are doing if you receive a large tax refund every year. Take back what’s yours by adjusting your tax withholding so that you pay what you owe while keeping what you deserve. Knowing you WON’T owe the IRS money is another step toward financial freedom. The IRS has a nifty withholding calculator you can use to estimate the appropriate number of allowances to claim on your W-4 tax withholding form.
Step 5 – Invest in and out of the U.S.
America may be the land of the free and the home of the brave, but it only represents about half of the world’s economy, so make sure to diversify your investment portfolio so that it includes both foreign and domestic holdings. Complement your U.S. stocks and bonds with international stocks and bonds, and don’t overlook investing in emerging markets (as long as you have the tolerance for the volatility, that is). Round out your portfolio with a decent level of exposure to real assets such as commodities and real estate. That way, when you read about the economic problems in Europe and the U.S., or about the possibility of higher interest rates or rising inflation, you can take comfort in knowing you have exposure to assets that may actually perform well in these types of environments.
Step 6 – Have adequate insurance
No one ever expects to get into a car accident, become disabled, end up in a long-term care facility, or die young, but the reality is that such things will happen, and being without adequate insurance is a sure way of putting you and your loved ones in a financial mess. Maintain your financial independence by insuring against such risks. A well developed insurance plan offers peace of mind, so review your coverage periodically to ensure you are prepared for whatever life throws your way. A good insurance agent can help you understand the risks, and make sure you are adequately protected.
Step 7 – Have an estate plan
You’re working hard to achieve the American Dream, don’t lose it for lack of planning. Learn how to maximize wealth transfers by utilizing tax credits and exemptions. You can also minimize estate taxes and probate fees through proper asset titling and the use of trusts. Your estate plan should include a will, a financial and healthcare power of attorney, and a healthcare directive (also called a living will). Without an estate plan, you may have to rely on the government to decide who gets your stuff when you pass on. A good estate plan allows you to control your assets “beyond the grave,” thus preserving your financial independence. There are a number of websites that provide access to inexpensive estate planning documents, including www.nolo.com and www.legalzoom.com.
Our country was founded on the principles of life, liberty, and the pursuit of happiness. I don’t know about you, but for me, happiness comes from knowing I’ve done all I can to protect me and my family from financial hardship. If you wish to live financially independent as I do now, take these steps, and choose to live financially free! There’s nothing more patriotic than that.