Jul 01, 2024

Financial Independence: What Is It And How to Achieve It

In this blog we talk about financial independence. What is it and how to achieve it? Somewhat of the holy grail of personal finance - financial independence. We're going to talk about what it is, different perspectives on financial independence, how to get there, and the importance of financial independence. Assess your own current situation. See how close you are, if financial independence is important to you. Learn steps you can take to move yourself along to that high place on the financial hill. How to deal with maybe budgeting and savings goals to help get you closer, how to invest in order to get to financial independence.
Couple Celebrating

Kevin Zywna, Wealthway Financial Advisors: Tonight we are going to talk about financial independence. What is it and how to achieve it? Somewhat of the holy grail of personal finance – financial independence. We’re going to talk about what it is, different perspectives on financial independence, how to get there, and the importance of financial independence. Assess your own current situation. See how close you are, if financial independence is important to you. Learn steps you can take to move yourself along to that high place on the financial hill. How to deal with maybe budgeting and savings goals to help get you closer, how to invest in order to get to financial independence. And then a little bit of a case study on the fire movement. I don’t know if you’ve heard about that, F-I-R-E. The fire movement, which stands for financial independence retire early. 

What Is Financial Security?

All right, before we jump into all that, though, I want to take a little step back to talk about financial security, which is somewhat of a subset of financial independence. It’s one of the things that we talk about on the show all the time. We work with clients who want to achieve and maintain financial security. And on the surface, who doesn’t? Everyone says they want financial security, absolutely. But in my unscientific yet professional opinion, I think only about 20% of the population really is interested in doing what it takes to become financially secure.

The Romantic Mythology Of Financial Independence

Financial security is sort of the first step to financial independence.  Financial independence, though, is a step beyond that. There’s a sort of romance and mythology around financial independence. We have this image of the highly successful, ultra wealthy person who doesn’t work for anyone, or doesn’t work period at all, and lives a lifestyle of a lavish decadence on their yacht that they float around the world in between their mansions in different countries, and drive fancy sports cars, and that’s what we think of when it comes to financial independence, that sort of romantic mythology around being financially independent. Well, I guess that’s a version of it, but that’s probably the most extreme version of it. 

What Is Financial Security?

What is financial security? That’s a state in which an individual can effectively manage their financial obligations, maintain a good standard of living, and set aside funds for the future. Financially stable. Get your bills paid, live a decent lifestyle, and you save a little bit money for the future and for rainy days – so you’re protected against life’s financial travails, and you’re building some wealth for the future. Whether that’s retirement or some other need in the future. So that’s financial security. 

How Is Financial Independence Defined?

Financial Independence Is Freedom From A Regular Job

There are other ways of looking at financial independence that aren’t quite so extreme. So for example, some people see financial independence as being free from needing a regular job because they have income from other sources. I don’t have to work for anybody else because I have enough income coming from my own efforts or other sources that I don’t have to work for somebody else. I don’t have to work for a major corporation. I don’t have a boss that I have to answer to. I don’t have coworkers that I have to deal with. I don’t have customers that I have to put up with. I am my own person. That’s basic, pretty good. Others see it as not owing money to anyone which fosters a sense of security and control. So, not having debt, not having to make payments to anybody. We actually see that a fair amount in our practice, especially when it comes to home ownership and retirement.

Financial Independence Is Paying Off Your Home

There’s still a lingering sense among people whose parents were part of the Great Depression that feel like they have to have their house paid off when they go into retirement. I can tell you, there is no law that says you have to have your house paid off when you go into retirement. The bank will not call you up after you retire and say, “Hey, we want the rest of the mortgage. It’s due now because you’re no longer working.” No, they don’t do that. But you do have to make your next mortgage payment. But some people just choose to. They just like to know that they don’t have that mortgage hanging over their head, and they don’t have to answer to the bank, and they don’t have to make that next mortgage payment. So just not owing anyone money is some people’s version of financial independence. 

Financial Independence Is Being Prepared For Retirement

For others, it means being prepared for retirement and knowing they’ll be financially stable when they stop working. I would say that’s kind of most of us, right? Financial retirement is a form of financial independence because in retirement we’ve shut down working operations, or they’ve been shut down for us because we’ve been laid off, or replaced, or reached a certain mandatory retirement age. So, in traditional retirement, we aren’t working for money. We have other resources that we can draw upon to maintain a standard of living. 

Financial Independence Is Freedom To Start Your Own Business

And then lastly, for a small segment of people, financial independence might signify the freedom to start a business or live wherever you choose. So just knowing that I have the option of becoming my own boss or maybe engaging in some sort of personal activity that generates enough income that supports a lifestyle that I’m looking for, or that I can pick up and leave and go somewhere else whenever I choose. I have enough money and resources to do that. That’s some people’s version of financial independence.

Financial Independence Is Defined Personally

So there is no set standard of what financial independence really is. It’s very personal and unique to each and every individual. I guess the formal definition one would say, for financial independence is the state where an individual has enough personal wealth and/or income to cover all desired living expenses without relying on active employment. Or said another way, the ability to maintain your desired lifestyle without having to work to earn income. And I’m stressing the word desired there, because everyone desires a different level of lifestyle, different desired level of living, expense. Oh, sure, everyone can want more. Everyone says they want more. But really, you don’t have to have you don’t have to max out your lifestyle in order to have a good lifestyle that you can live financially independent.

What Are The Steps To Financial Independence?

Tonight, we’re talking about financial independence. What is it? How to get it? Is it even important? It is for some people. It isn’t for as many people as you think, though. I mean, everyone says they want it, like everyone wants financial security. Everyone wants financial independence. But like we say at the top of every show, it takes some work. It takes some time, it takes some effort, and it takes some knowledge. You have to want it. You have to want the intangibles of financial independence more than you want the trappings of financial independence.

What Are The Intangibles Of Financial Independence?

So what are some of the intangibles of financial independence? Well, it has to do with, you know, the choices that you make based on your preferences rather than financial constraints. So for example, achieving financial independence provides long term security and freedom, power and control over your own life. Those are intangibles, freedom, power, control in the best sense of the word. We are not talking about power and control, using your money to have power and control over other people talking about over your own life, over your own destiny, over your own day to day activities. Those are the intangibles that money can provide you and that financial independence can provide you the trappings of financial independence that we see on TV and in the movies are the yachts and the expensive cars and the big homes and the fancy clothes and the lavish dinners and the and the excessive vacation travels and so forth. Those are the trappings, and those are nice, and you can have those at some point, typically if you do your financial planning properly.

But if you really want financial independence, you want those intangibles of freedom and power and control and independence over your own life more than you want the trappings, and in America, we don’t do that so well. You know, we live in a very consumerist consumption, look at me, sort of society where almost anyone with a job and a credit card can look wealthy without actually being wealthy. And so financial independence are for people who want to be wealthy more than they want to appear wealthy.

And so there is no magic number on that. Anyone could point to and say, you know, $1 million. I mean, at one point, that might have been a good number, not so much true today with inflation, but $5 million, ten million. You can’t really pick a number and say, once I have this amount of money then I’m guaranteed financial independence. The number is very unique and personal to you. One person’s number is not going to be saying what might be ten million for one person to claim financial independence for them might be only $1 million, for another might be five. $500,000 might be $100,000 and Social Security, depending on lifestyle, it’s totally and completely determined by your desired lifestyle, the lifestyle that you are comfortable leading.

And you know, I will say, in our practice, one of the criteria that we look for when taking on a new client to determine if we’re a good fit or not, is, like I said at the onset of the show, is people who want to at least achieve financial security, right state in which an individual can effectively manage their financial obligations, maintain a good standard of living and set aside funds for the future. That’s kind of like a debate. You have to want that and not just say you want it. You have to actually work towards wanting it.

And so once we get clients to a point of financial security and migrate them towards financial independence, what we find in most cases is that we have to actually spend a fair amount of effort trying to convince our clients that it’s now okay to spend more money. That you’ve made it, you’ve arrived. You now have enough resources, enough assets, enough wealth, enough outside income streams that you don’t have to work anymore, and you can support your desired lifestyle. And in fact, you can live a lifestyle even larger and above what you’re currently living, if you so choose.

And I tell you, people who have developed the good saving habits over a lifetime have a hard time flipping that switch to now saying it is okay for me to indulge myself, to buy the luxury car, to maybe get the vacation home, to buy myself a boat to relax upon. You know, those are the things that we unconsciously, typically throughout a lifetime, are working towards and saving towards, and having the ability to do and enjoy responsibly. But even when people get there, to that point, we have to push them a little bit more to like, it’s okay, go ahead, spend the money, enjoy it. You have done it.

So a lot of financial independence, financial security, is not about raw numbers, a number getting to a particular number, or an age, or any sort of finite marker of life. It’s a state of mind more than anything. And what would be considered maybe a small, simple life for one person, would be absolutely enjoyable and comfortable for another. For example, you know, I just came back from visiting my parents. I grew up in a small town in western Massachusetts, and, you know, there aren’t too many Fortune, 500 companies based in Western Massachusetts, but there are a lot of small towns, a lot of agriculture, a lot of hard working, industrious, good people in Western Massachusetts from an outsider’s facility. You know, if you drove up from New York City, if you drove to three hours from New York City, or even the now, at 45 from Boston, and you came to a small town in western Massachusetts, you’re like, Boy, these people kind of like simple lives look kind of poor. Well, know what?

You know what a lot of those people live, the lifestyle that they choose to live and have the financial means to do so because they’re content with their particular lifestyle. Now, that’s not for everyone. Of course, some people want the big house and the boat and the fancy car, and I’m not judging that. I’m just showing that the difference in financial independence really depends on people’s desired lifestyle. So, it all depends on what makes you happy. What type of lifestyle that you lead, that you find happiest, and for some people, that can be accomplished with relatively low amount of savings and low amount of guaranteed income, where other people that would be totally unacceptable, and they will continue to work and grind until they reach higher levels of savings and assets and wealth so that they can have a nicer, I guess, trappings of wealth instead of just the intangibles. But regardless of how you look at it, you have to still want the intangibles of power and freedom and control and independence more than you want the actual trappings themselves.

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Wealthway Financial Advisors

Tonight we are talking about financial independence. What is it? How to get. I went through some of the basics of financial independence and talked a little bit about the romance and mythology of it. And really it’s very personal. You can achieve financial independence with relatively modest means, if you’re willing to live a modest lifestyle. And many people are, and so they’re content with a simpler lifestyle. And they value more the freedom, the independence, and control than they do the trappings of the wealth.

Other people, not so much. They want the trappings. They like the big house and the car and the boats and the trips and the travel. And I like some of that stuff too, you know. And so for most people, happiness usually lies in the middle somewhere. A little bit of the trappings of wealth and financial independence, but also with the financial security underpinning all of that. So that you know that if life’s financial curveballs come your way, you have the economic means to fend them off, and you can sleep well at night. And you’re also saving for the future, and that’s also giving you options down the road.

What Is The First Step To Financial Independence?

So how do you do this? How do you get to a place from financial security, to financial independence? Well, it really starts with the fundamentals and the basics, right? So financial independence means having sufficient income and savings to cover your desired living expenses, okay, income and savings. So that’s where a lot of this all starts. Evaluate your income, evaluate your expenses, evaluate how much and where you’re saving to identify areas for improvement. So those are your three main levers, income, expenses and savings.

How Should You Be Saving For Financial Independence?

And by savings, I also mean investing as well. I mean savings as opposed to spending. So are there ways that you can enhance your current income? Can you pick up a second job? Can you work more hours? Can you get a promotion? What can you do to try to increase your income? Obviously, the more one makes, the more he or she has the ability to put aside money and build up their war chest, their nest egg. To then one day use that money to live off of independent from an employer.

How Can You Cut Back Expenses For Financial Independence?

How about your expenses? Where can you cut back today? What are you spending frivolously on today that you don’t need to? What is more important? The quintessential Starbucks cup of coffee? When I was at the airport the other day it’s like a $12 cup of coffee. I was flying to see my parents, and every other person has one, right? There’s a line, yeah, right. It’s the longest line in the airport, at Starbucks. And I did get one. I have a gift card given to me by my sister in law. So I used my gift card. I didn’t even pay for it. It was like 12 bucks. The large Grande. I’m not even saying it, right. I rarely drink Starbucks coffee. But anyways, so you cut out. Say, where can you cut back on expenses today to free up cash flow?, To capture through savings, and then ultimately through investing, to build up your war chest.

Do I Need A Budget?

So those are your three main levers that you can pull today to try to set yourself up for financial independence down the road. And of course, you know, a lot of it has to do with creating a budget, or a savings plan, as we more euphemistically call it. Because I know you’re not going to create a budget, and if you do create a budget, you’re not going to stick to it. So we don’t even try that anymore. The one thing we do try to get people to do is set a savings goal, a savings plan and commit to X amount of savings per month or per pay period. So let’s just call it $1,000 a month, right? That I’m going to do that. No, no matter what, for as long as I can, and look to increase that a little bit each year with each pay increase I get from my employer. And then I’m going to spend everything else. And we’ll do the math, and we’ll determine if that’s enough, you know, in this hypothetical type of thing, but I mean, that’s what we actually do.

Why Commit To A Savings Plan?

So is that enough? Will that get you to a place of financial security first, and then financial independence. At what age would that happen? We do all the math around that. So just commit to a savings plan. And so whether that’s into your company retirement plan or some of it goes to the company retirement plan, some of it goes to IRAs at your control. Some of it goes to a regular brokerage account or a mutual fund – in your control. Whatever you’ve got to capture that money and stick to the plan if you want to have hope of financial independence one day. And then you’ve got to sort of define those financial objectives.

What Does Financial Security And Financial Independence Mean To You?

Because what it means to you, or what it means to anyone else doesn’t matter to you. All that matters is your lifestyle. What lifestyle do you want to lead that would make you happy and content? So what are those financial objectives? What type of lifestyle do you want to have, simple, complex, lavish, whatever? I’m not passing any judgment on anyone’s lifestyle, that’s personal and unique to you. But you’ve got to find out what works best for you and makes you happy. Then the financial infrastructure gets built around that.

Where Should You Put Your Savings?

Then you’re going to make sure that when you capture that savings, it’s not just savings in the bank. Ultimately, you’re going to have to get it into investments that will grow over time. And that’s how you supercharge your nest egg. And then living below your means is part and parcel of all of this. Like I said earlier, at the onset of the show, you know you have to want the intangibles of financial independence more than you want the trappings. Some self-sacrifice today – you’ve got to want to prioritize savings over excessive spending today.

Balance Your Post Retirement Spending

And then once you get to a place of financial competency, then you can start to have those trappings, and you can enjoy them guilt free because you did the hard work and the heavy lifting early on in your life. It helps to cultivate a frugal mindset that will help foster that independence. So I’m not saying you’ve got to be cheap. I’m not saying you’ve got to deny yourself all the worldly pleasures. No, there’s a balance here. But you have to be willing to sacrifice today in order to have the freedom, control, and independence tomorrow.

Like a lot of people, I try to watch what I eat and try to balance my diet. But I tell you, if my wife and I are going out to a nice restaurant, I am getting that dessert. And when I go out to a nice dinner, I am almost always going to get the dessert. I don’t care if I’m dieting. I don’t care what I ate that day. I’m getting a nice dessert when I go out to a good dinner because that makes me feel good and it makes me happy. Completely irrational and self-indulgent. Okay, don’t go out to eat fancy dinners every night. We do it one or two times a month at most, you know. So in that setting, I like that self-indulgence that’s manageable, controllable and somewhat moderate compared to the rest of my eating style.

Same holds true for spending, right, for some people. It’s okay to treat yourself to maybe some nice clothes or some nice shoes, or a handbag. Or upgrade yourself to a suite instead of a basic hotel room when you take a vacation. If you’re being reasonable and responsible in other areas of your spending. So it’s not complete denial of all the worldly trappings that we have at our disposal. It’s responsible use of them and keeping your eye on the higher price of that financial independence.

The Importance of Investing

And so just to drive that home even further, you cannot save your way to financial independence. You must invest. Caveat – most of us can’t save our way to financial independence. We have to invest savings. Is the money you put in the bank, in your savings account, your checking account, money markets, CDs, a bank, and almost uniformly, the interest rates you’re getting on bank savings products are pretty much comparable or less than the rate the going rate of inflation. If you want to outpace the rate of inflation, then you have to invest for the long term. And for most of us, that means common stocks, mutual funds, exchange traded funds, investing for the long term in vehicles that can grow over time faster than the rate of inflation. And that means we are growing our net worth.

That means we are getting wealthier. That means we are becoming closer to financial independence. So it’s not just enough to save in a bank. You have to invest in growth oriented securities, whether that’s through your company retirement plan or with the help of an advisor or on your own.

What Are Some Of The More Common Investment Vehicles?

Of course, stocks, ETFs, mutual funds, bonds. For some people, at least in our practice, it is largely going away – we’ve largely eliminated or drastically reduced the bond holdings in our client portfolio. Because all bonds do long term is drag down your long run rate of return. They help a little bit in the short term, in times of market turmoil, but at the expense of long term growth rates. So we don’t use them very much in our investment portfolios.

We also integrate the investment portfolio with ongoing analytical financial planning that gives our clients the peace of mind of knowing that they’re still on track despite short term market movement. There aren’t too many advisors at this stage of the game that integrate financial planning with investment management the way we do.

Making Informed Decisions To Accelerate Your Path Towards Financial Freedom

Then, of course, you’re going to want to make informed decisions and make conscious choices to accelerate your path towards financial freedom. So every time you’re faced with a choice of, I need a new… What am I going to do? Am I going to buy the Mercedes, the Lexus, the BMW, or am I going to buy a Ford, Toyota, a Honda, right? All of those are vehicles. All of them will move you around from place to place. They’ll get you where you want to go, but the variety of cost of the vehicle is dramatically different. So if you’re working towards financial independence, you have not achieved it, and it’s something you want, then guess what? You’re going to get the Ford or the Toyota or the Honda, because those cost less. And then maybe one day, as you get closer, you can enjoy the Lexus or the BMW or the Cadillac guilt free. That’s because you already have the power and control over your life to make those decisions, because you’re financially independent.

Tonight we’re talking about financial independence, what it is and how to get it. We went over some of the different perspectives of financial independence. There’s no one state of financial independence. It’s very unique to each and every individual. But there are certain common steps that we all can take in order to move ourselves along that continuum from financial security to financial independence, if that’s something that we value in life, and not everyone does. Not everyone wants financial independence. Back to a very small minority of people are willing to do what it takes. Everyone says they want it, but it does take some time. It takes some effort and it takes some knowledge. That’s why we put on the show, in part, to help people help themselves get to a better financial place.

Financial Independence Wrap-Up

So we’ll wrap things up by talking a little bit about the fire movement. If you’ve heard about that, FI-R-E, which stands for financial independence, retire early. Among some people, this is somewhat of a niche sort of subculture, where people at a very young age, relatively young age, try to work very hard, try to live very minimalistly, and save and invest as much money as they possibly can. And then have that financial independence at a much younger age than traditionally we would have in this country. So, you know, maybe in their late 30s or even or early 40s, get to a state where they have enough money and enough income from a variety of sources, not work, not employment, not working for somebody else to maintain their desired standard of living. And so one of the things that I did find interesting in researching this particular movement is one of the things that you can do, or anyone can do. That happens almost subconsciously a lot of times when people retire – you relocate from an expensive area of the country to a more cost effective area of the country.

Take an extreme example. Move from, say, Palo Alto, California, which I think has the highest cost of living right now, even more than New York City. Move from there to Mobile, Alabama, say, so your dollars can go a lot further. The dollars you made in Palo Alto go a lot further in Mobile, Alabama. If you want to live in Mobile, Alabama or pick your place, you know, wherever. But people who live in like, say, Northern Virginia, which has a high cost of living, where salaries are higher to support that cost of living, then they can relocate to Florida or South Carolina, where the cost of living is much more affordable. And so it’s a way of leveraging the money that you did make and are making and have saved, making it go further. That pushes you closer to financial independence, if that’s something you’re willing to do, if you value the intangibles of financial independence.

A note of caution here of what we’ve learned through the years, just to retire early, you’ve got to have something to retire to. You still need to have meaning and purpose in your life if you want to have a full life. You know, I’m reminded of a story of a friend of a friend who sold just by luck, some businesses and property on the Outer Banks just before the housing crisis in like 2005/2006 and made enough money that they were financially independent at a relatively young age, in their late 30s. Well, guess what? They were the only ones that they knew in their late 30s who was financially independent and didn’t need to work anymore for money. So that person had a t shirt made up that says, waiting for my friends to retire, right? So if you’re the only one living this lifestyle, it can be somewhat of a lonely existence. And then the bigger question is, what do you want out of life? You know, just retirement for its own sake is not necessarily a goal. I mean achievement versus self-indulgence. Achievement, you can get good work. You can get good validation and good purpose out of good meaningful work and self-actualization. Whereas self-indulgence can be a little bit self-destructive, so just be careful about that.

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