Desperately Seeking Independence
Today is Wednesday, July 3. And tomorrow, July 4, we'll celebrate our nation's anniversary of independence. We will let freedom ring. We'll proudly wave our American flags. We'll drown our kids (and ourselves) in red white and blue. And then at the end of the day, we'll shoot off some fireworks.
It will be awesome.
Independence for our great nation did not come easy. In fact, the Revolutionary War lasted from 1775 - 1783. It took our country eight long years to achieve independence. And since this blog is (mostly) about money, the irony of The Revolutionary War happening over taxation is not lost on me.
For most us reading this, we’re after our own form of independence.
Simply put, financial independence = having enough income to pay one's living expenses for the rest of one's life without having to be employed or dependent on others.
I reckon for most of us our own independence will take a little longer than 8 years. Doesn't mean it can't. You could be on FIRE (aka financial independence, retire early; more on this in another post). That would certainly speed up your ability to become financially independent since rates of saving are typically more than 35% of gross annual income and expenses are trimmed to bare minimums.
The traditional model to financial independence follows the common financial planning formula. Here's what it looks like:
Wealth = money x time/years x assumed rate of return
Typically this formula projects out over many, many years. And to some, it might really feel like a very long battle. Maybe your very own “revolution”, especially when rates of saving are <10% of gross annual income.
As humans, we have a difficult time projecting and seeing ourselves, our lives in 15, 25, 30 years from now. We just can't do it. Plus our brains love instant gratification. Our formula above? Definitely NOT instant gratification.
And so today I'm offering up some mini-versions of financial independence. Because financial independence is personal. You've heard that before!
So let's get started…
Money in the bank
You've commonly heard this referred to as an "emergency fund". I have a different term for it - Pillow Money. More on this in a minute.
An emergency fund is exactly that. It's money set aside for when life happens. Because life is not a straight line. Google will tell you anything from 3 months of living expense to 12 months. Which is correct? IMO, none of it.
I've long believed the right amount of cash in the bank is the amount of money that, when you lay your head on the pillow at night, allows you to sleep peacefully knowing it's there and you could literally get your hands on it tomorrow if needed. That's pillow money.
How much is the right amount? I can't answer that for you. Remember: it's personal. But what I can tell you is having enough money in the bank can help you when life doesn’t go according to plan. And it can help increase feelings of security, flexibility, and freedom.
Living under a mountain of high interest debt can be crippling. And it's also a sure fire way to delay your true financial independence. The amount of interest and fees collected by credit card companies topped more than $100…BILLION in 2018.
Carrying credit card debt = an immediate transfer of wealth off of your balance sheet and onto another balance sheet (read: not yours).
If you have credit card debt, develop a plan to pay it off. I personally like the “Snowball” or “Pacman” method: make minimum payments on your larger balances and put as much money as you can toward the smallest balance. Once that's paid off, take that monthly payment and apply it + the minimum payment of your 2nd smallest balance. And keep going.
The math, and perhaps conventional logic, says pay off the highest interest rate first. Remember, math ≠ money. I believe psychology plays a much bigger role when it comes to debt. In my experience, financial change tends to stick when we can see/feel victories. Given the same cash flows, paying down a $1000 balance at 12% will always happen quicker (read: see/feel a victory) than paying down a $2000 balance at 19%.
While we're on the topic of debt paydown, here are some other ways to help achieve financial independence:
Paying off student loans
No car loans
Paying off your mortgage
Eliminating one, any, or all of these can take a tremendous financial burden off your shoulders. It can help free you up emotionally and financially.
Imagine the following scenario:
Credit card payments: $800/month
Car loan: $500/month
Student loans: $700/month
Mortgage: $2500/month (principal & interest only)
That's $4500/month. At a 25% effective tax rate, we need to earn $6000/month or $72,000 per year to cover those four expenses.
Maybe you want to make a career change. Open a business. Work part time. Travel more. Whatever. Or maybe you love your job and simply want to save more money. Invested over 10 years at 5%, our $4500/month grows to just over $675,000*.
Remember: this stuff is personal. There's no right or wrong. Understand where your money goes and why. Align it with your values. And speaking of where your money goes and why…
Create a Spending Plan
As you know by now, the word b*dget is a dirty, dirty word. We despise them. We deplore them. Too often they show us where we're failing financially: eating out too much, spending too much on amazon, not saving enough, etc. By utilizing and following a Simple Spending Plan, we can free ourselves from the burden of the traditional b*dget. And this in and of itself can create a form of financial independence. No more nitpicking over the daily buying decisions. Freedom in knowing our money is going where we want, how we want - and why.
Time value of…time?
Our last form of mini-financial independence comes in the form of time. Time to do the things you love, be with and around your family more. It could come in the form of a job that eliminates a long commute or gives you flexibility to work anywhere. It also shows up when we're free to take extended periods of time away from work, hire someone to cut the grass, or maybe we work with a financial advisor so we don't have to spend as much time doing our own financial planning. Creating time in our lives can help increase our levels of happiness, reduce stress, and add to our feelings of financial independence.
HAPPY 4TH OF JULY!!