In our CEO’s book, “What Your Financial Advisor Isn’t Telling You,” Liz Davidson explores declaring your very own “Financial Independence Day.” At Financial Finesse, we understand that financial independence means something different to everyone. To shed some light on this, I’ve broken down this concept into three different levels.
Level 1: Earning Enough to Rely on Yourself
At the first level, financial independence is about earning enough income to no longer depend on family or government assistance. Many individuals achieve this goal with their first job after college. However, it’s important to note that not everyone may aspire to this level of independence. For example, many may find themselves thriving while living a different purpose, like stay-at-home spouses, and that’s okay!
Level 2: Building a Safety Net
This second level involves having enough savings to cover your essential expenses for a significant period, typically ranging from 3 to 12 months. This financial cushion gives you a sense of security. This peace of mind is valuable during transitional periods, such as job changes or unforeseen circumstances. Our CEO refers to this as having “FU money,” which gives you an escape plan, like the freedom to leave a job if necessary.
I personally reached this level a few years into my career by reducing my expenses. I shared housing with roommates and diligently saved any extra income I earned (especially since I was on a commission-based income). I distributed most of the savings into a rewards checking account with a local credit union. It earned an impressive 5.09% interest rate (subject to meeting certain criteria). The remaining portion I kept in a savings account at a bank, earning 1% interest and serving as an overdraft account for my other checking accounts. Additionally, I’ve developed a money management system that uses separate checking accounts for different types of expenses.
Level 3: Embracing Financial Freedom
The pinnacle of financial independence lies at the third level, where you have enough investments to sustain your lifestyle without relying on a job for income. Most people refer to this stage as “retirement,” which signifies the ultimate achievement of financial independence. Personally, I’ve divided this goal into two parts:
- The first part entails accumulating enough funds in my HSA, Roth IRA, and 401(k) to retire at the age of 62. Given the long time horizon of over 25 years, I invest these funds aggressively.
- The second part involves having enough rental properties to generate income, enabling me to reach my financial independence day much earlier. To achieve this, I save around one-third of my gross income. I allocate another third to taxes, and the remaining third covers my current living expenses.
Where are you on your journey?
Where do you currently stand on the path to financial independence? Where would you like to be? If you’re eager to progress to the next level, we invite you to explore our CEO’s book, “What Your Financial Advisor Isn’t Telling You,” along with the other resources from Financial Finesse that provide valuable insights and strategies to support you on your journey to financial freedom.