7 Steps To Your Financial Independence Day

July 04, 2017

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.

How Sitting in Traffic Can Improve Your Finances

May 23, 2017

Over the past few months, it feels like a cloud of transportation demons have settled over my poor city of Atlanta, Georgia. Over the past few months, a bridge on I-85, our major highway collapsed, a section of our second major interstate, I-20, buckled, and we had a sinkhole on Roswell Road, another major street. Atlanta has always been known to have traffic gridlock, so this series of events has taken many people’s already stressful commute to levels I questioned whether our city could survive.  My normally happy, mild-tempered friends started using words I never thought they’d say.

It got me to thinking about how many Americans spend hours each day getting to and from work and how much stress that must cause them. Of course then my mind turns to how I can help them escape this seemingly time-wasting activity, when it occurred to me that working on your money may be one of the best solutions: why not use that long commute frustration as motivation to up your financial game and find financial independence sooner? The best relief for traffic gridlock is never needing to sit in traffic again, so here are some ways to pass the time while hopefully moving yourself closer to financial freedom:

Audio books

Consider downloading financial audio books and listening to them while driving. You can check out this list of free places to download audio books. One of my personal favorites is Hoopla, who partners with many local libraries to provide free access to digital movies, music, eBooks and more, as long as you have a library card. If you’re not sure what books to read, use this great checklist from Business Insider. My personal favorite is listed as #1, written by Benjamin Graham, who was a professor at Columbia and counts Warren Buffet among his mentees.

Podcasts

If listening to an audio book is not your thing, then try listening to podcasts. US News & World Report, Entrepreneur and PlayerFM.com all offer great lists of suggestions. You can find a podcast that matches your driving distance or listen to a series while you creep along the interstate.

Putting it to work for you

As you listen, consider taking away one idea you will implement that week once your drive ends. It could be as simple as reviewing your 401k or checking your credit score. Bad memory?  Then use the voice recorder feature on your iPhone or Android to record your thoughts and takeaways from your drive to implement later.

 

Step 1 in Retirement Planning: Set a Goal

May 03, 2017

It might sound cliché but as with any planning exercise, the first step is to just set a goal. After all, how will you know when you’ve gotten there if you don’t know where you’re going? How you’ll go about defining your goal depends a lot on how close you are to actually thinking about retiring as well as how you personally define the concept of “retirement.”

One of the challenges of setting a retirement goal is that it’s less of a set number and more of a moving target. How much you’ll need to have in order to stop worrying about how much is coming in from working depends heavily on how closely you want to mirror your working standard of living. Someone who will have their mortgage and other debt paid off and no dependents to care for can retire on much less than someone who will still have housing expenses or kids in college. If you’re looking at the more traditional definition of retirement by simply stopping work one day and living off of social security and savings, setting that goal can be as simple as running a retirement calculator and seeing if the age you’re hoping to retire is feasible considering your current savings amount and rate of saving. If you’re not on track to retire by the age you are hoping, then you’ll either need to push back your date, increase your savings, or decrease the expenses you’ll have to cover in retirement.

The closer you are to actually retiring, the more specific you can be with your planning. The Financial Finesse calculator gauges your goal based on whether you’re on track to replace a percentage of your income, but often people who are planning a significant reduction in living expenses and/or folks who are plowing tons of money away into savings during their later working years can get away with savings that only replace a fraction of current income. If you’re the type who thinks of retirement as more of a “financial freedom” day where you can pursue activities without concern for earning, then there are a few more variables. For example, if you’re thinking that you want to spend your second chapter starting a business, then your goal may be more of a dollar amount that will sustain you for a year while you build your business up to provide ongoing income.

If you’re a couple decades or more away from retiring, then the best way to set your goal is to aim for being on track to replace 80% of your current income. The closer you can remain to that target, the more choices you’ll have as the years go by. And if you’re getting a late start or the thought of quitting working feels more like an imminent reality and less like some hazy future that may or may not happen, then you’re better off using the “Equivalent Pay (Today’s Dollars)” amount in the Goal Calculation tab of the calculator to measure whether you’re close to your goal or not. If the equivalent pay amount doesn’t meet or exceed your anticipated annual budget in retirement, then you need to plan to work longer, save more or cut some expenses.

Retirement factor Need less savings Need more savings
My mortgage will be paid off X
I want to start a lucrative business X
I want to pursue a lower-paying passion project X
I want to travel in style X
I want to move to a lower cost region X
I have a long life expectancy X
I have health issues X
I have family to help support me X
I plan to work part-time X
I plan to be a missionary in a third-world country X
I expect to have a lot of expenses X
I expect life to be pretty simple and cheap X

 

 

What Financial Security Really Means

July 13, 2016

When my colleague Matthew recently announced that his family had made the decision to move to Maui this summer, I was immediately intrigued. I’m a big believer in gathering wisdom from the experiences of others, so I asked Matthew to share the process that he and his family went through in making this life-altering decision. Here’s what he had to say, from an edited interview:

Q: You and your family have decided to move to Maui this summer. Was this something you always planned to do?

Matthew: This wasn’t something we always wanted to do. I was pretty content living in Southern California, due to our strong relationships here, up until recently. My wife’s family is from Maui, and she was born and raised there. Moving to Maui is something we only began to seriously consider end of December, last year.

Q: Was there a specific event that triggered you to start thinking about this?

Matthew: A number of happenings triggered us thinking about moving to Maui. For 14+ years, we had been part of a tight knit community through our church. Recently, some of the key leaders in that community passed away. Our families were really close so it was a big hit. It really hasn’t been the same since.

We started re-thinking why we were in Los Angeles. It’s a busy place, and in many ways, not our ideal place to live, although we have really enjoyed the work and relationship opportunities we’ve had. We began to consider other places to live, Hawaii being the chief place, due to my wife being from there.

Q: What was your timeline for making this decision and what things did you consider?

Matthew: It took about 6 months to determine if the move was viable, and after we determined it was viable, we went with it. We considered a number of different factors:

  • Cost of living: Hawaii is a pretty expensive place to live, but so is where we currently live (the South Bay of Los Angeles). We performed a cost of living analysis and determined that besides food and gas, it’s pretty much a wash.
  • Housing costs: Rental rates are about the same between Maui and LA. We were pleasantly surprised to learn that housing prices are a bit more affordable than the South Bay, especially if you stay away from the beach.
  • Potential job salary (if we were unable to keep our jobs): We weren’t sure if we’d be able to keep our jobs or have to find new ones, so this was a bit of a gamble. After doing research on IT jobs for me and biology jobs for my wife, we found that we could possibly take a 50% pay cut if we moved. So we did some soul searching and felt ok with this decision – a more restful, peaceful way of life was more important to us than making more money and having a more expanded lifestyle.
  • Our current savings: We have been aggressively lowering debt and saving money for the last few years, which was a huge factor in our decision to move. Having a financial cushion to fall back on helped ease concerns over the cost of moving, initial rent payments, and possibly being without a job for a few months.
  • Relationships: Friends we’d be leaving behind as well as the benefit of being closer to my in-laws were important considerations. My son has a lot of close friendships with kids his age through school, so that was a big one to work through.

Q: Anything that would have caused you NOT to make the move?

Matthew: A number of things had to line up for this to work, and if any one of them had not, we probably wouldn’t have considered moving. First, and most important, we needed the existing relationships in Maui (my wife’s family and friends), which leads to potential connections between us and the community. Second, we had to have a viable financial plan to move. Third, the hope of a better lifestyle is what pushed us over the edge.

Q: If you had one piece of advice for people thinking about making a life change like this, what would it be?

Matthew: There’s a lot that goes into a decision like this, and obviously it’s not something to take lightly. I think understanding yourself, as well as understanding your immediate family is super important. What type of environment will make you and your family most effective and happy should be your starting place.

Some of us are lucky, and we understand ourselves from the get-go pretty well. Others may need to spend some time soul searching and looking for answers as to who we are and where we should go in life before decisions like this. This process takes time, but if you want to be effective and happy as a person, you’ll want to undergo this process and continue to re-evaluate and develop over time.

After you do some soul searching within yourself and with your family, then you can start evaluating where you might want to move. Is the place you’re thinking of a place to visit or is it a place to live? Could you really be happy there long term?

Do I, as a person, make sense within that community or region? Will I fit in well there? Do I have something to offer that community? Do I have the potential to care about the people that live there or will all of my relationships likely be superficial?

Lastly, have an exit plan in case you miscalculated. If it doesn’t work out or if the place doesn’t line up, what’s the worst that can happen? Can you and your family leave relatively unscathed?

The CFP® viewpoint: I was very happy to see that the long and short-term effects on family finances played a central role in the decision but that this wasn’t the primary factor. I’ve seen so many instances where families are dragged around the country as one parent climbs the ladder in a corporate job only to find that the financial success wasn’t worth the strain on their marriage, kids and overall life. I also love the fact that before they had this idea, they had already begun laying the financial foundation, and to me, that’s actually the key takeaway for all of us.

Even if you’re not sure what your “Moving to Maui” event will be, being financially prepared will make the decision much simpler. It’s a real shame to say no to the things you really want to do because you’re too burdened by debt or don’t have any savings in the bank to allow for leaps of faith. To me, that’s the true definition of financial security – making choices for every reason besides money because you’ve already got that one taken care of.

 

Happy Memorial Day!

May 25, 2015

We are taking a break from blogging today at Financial Finesse to spend time with family and friends. Next Monday, I will pick up with Week 2 in our Financial Check Up Challenge series. In the meantime, you can enter the challenge to win access to an unbiased financial coaching session with yours truly. Here is a link to last week’s blog that began the series.  Continue reading “Happy Memorial Day!”

Want to Live a Happier Financial Life?

February 19, 2015

Very rarely do I find a personal finance article that resonates me as much as one I recently read called “How to Live a Happier Financial Life.” First, I love the title. When it comes to finances, sometimes we get so caught up in the numbers that we forgot the whole point is is about maximizing happiness not money. Sometimes that means spending more money on certain things but often it actually means spending less. The article’s following points do a good job of differentiating which is which: Continue reading “Want to Live a Happier Financial Life?”

7 Gifts That Can Keep on Giving

December 08, 2011

Rather than give away more fish this holiday season, why not teach them how to fish with a gift of financial education? After all, New Year’s is coming up and better money management is one of the most common resolutions. (A gift about losing weight may not go over so well.) While unfortunately you can’t exactly buy our services as a gift for someone, here are 7 personal finance books that I’ve found to be particularly insightful: Continue reading “7 Gifts That Can Keep on Giving”

What the Navy Seals can Teach Us about Executing a Plan

May 06, 2011

The biggest news story all over the world right now is the U.S. Navy Seals Team Six’s mission into Osama bin Laden’s home.  This event has created an incredible amount of emotion across the globe and as of this writing, a controversy over publishing photos.  While I won’t go into a political discussion here or a religious one either, there are things that we can all take from this event and apply to our own lives. Continue reading “What the Navy Seals can Teach Us about Executing a Plan”