Declare Your Own Financial Independence Day - Investopedia

A quick definition of financial independence could be having enough wealth to live a life of comfort without the need to work. In truth, financial independence ... PersonalFinance Budgeting&Savings AstheFourthofJulyremindsus,independenceisworthfightingfor.OnJuly4th wecelebrateournation’sdeclarationoffreedomfromthecontrolandinfluenceofGreatBritain.Financialindependencealsomeansfreedom.AndaswiththepoliticalindependencewecelebrateeveryJuly4th;financialindependencestartswithadeclaration. Here'showtodeclare,fightfor,andwinyourownfinancialIndependenceDay.  WhatDoesFinancialIndependenceMean?  Aquickdefinitionoffinancialindependencecouldbehavingenoughwealthtolivealifeofcomfortwithouttheneedtowork.Intruth,financialindependencecanmeandifferentthingstodifferentpeople.   Ina2020TDAmeritradesurveyofyoungAmericansages15–29,forexample,57%of respondentsjudged themselvestobe financiallyindependentbyvirtueof beingabletomeettheirfinancialobligationswithoutfinancialhelpfromparents,grandparents,orothers.  Betweenthosetwobenchmarksliemyriaddefinitionsoffinancialindependence.Somepeoplehavenodesiretoeverquitworking.Theyjustwantenoughmoneytobecomfortableandtohavetheabilitytocoveranemergencywithoutgoingintodebt.Forothers,financialindependencemeansfreedomfromworrywhentheyretireincludingthefreedomtotravel;spendtimewithfamilymembers;relaxandenjoythe“fruitsoftheirlabor.” Othersseeitasbeingabletosupportthemselvesandbethereforfamilywhoneedthemwithoutworryingaboutbeingabletoaffordtohelp—orhavingenoughtosupporttheinstitutionsandcausestheyvalue.Yourdefinitioncouldincorporatemanyofthesegoals. Whateverfinancialindependencemeanstoyou,unlessyouwinthelotteryorinheritafortune,itwilllikelyonlyhappenifyouarewillingtogoafterit.TheFoundingFathersknewthatAmerica’sindependencewouldnotbeachievedwithoutafight.Andtheyknewthefightwouldnotbesuccessfulwithoutastrategicplan. So itiswithfinancialindependence.  Theplanswe'rediscussingcanhelpyoubuildyourwaytofinancialindependence.Butit'simportanttorecognizethatstrategyandprudencecanonlygosofar.Familyresponsibilities,health,personalcircumstances,andsocialprivilege—orthelackofit—playalargeroleinhowfreeanindividualistobuildwealthandachievefinancialindependence.Thisadviceisgiveninthatspirit,knowingthattheplayingfieldinAmericahasneverbeencompletelyeven.TheindependenceandfreedomdeclaredonJulyFourthandwonintheRevolutionaryWarisimportanttocelebrate.ButAmericansmustalsorecognizethatitleftoutthemajorityofthenewnation'sinhabitants;ournationisstillfightingtofeelandbefullyequalandfree. YourFinancialIndependenceStrategicPlan  Justasthereisnoabsolutedefinitionoffinancialindependence,thereisalsonoonestrategythatwillhelpyougainfinancialindependence.Thatsaid,allstrategicplanshavesomefeaturesincommon.Youwillneedtosetfinancialobjectives,choosetheassets—financialandotherwise—youwillneedtoachieveyourgoals,decideontheinvestmentstrategiesandothertacticsyouwillemploy,andcommittoperseverancetokeepfightingforyourfinancialindependenceuntil(givenhardworkandsomeluck)itisinhand.  FinancialObjectives  Yourfinancialobjectivesareuniquetoyou.Thinkaboutyourlong-termgoals.Doyouwanttotalfinancialindependence—freedomfromworkingforaliving,andtheabilitytodoasyouplease?Orareyourobjectivesmoremodest?AreyouOKwithamostlyindependentlifestylewithsomeneedtosupplementyourpassiveincome?  Yourageandfinancialsituationwillinfluenceyourchoiceofobjectives. Ifyouareinyour20s or30s,youhavedecadestoachieveyourgoalsalongwiththeabilitytotakemorerisks.Atthatage,youmayevenwanttopursuewhat’sknownasthe FIRE(FinancialIndependence,RetireEarly) strategy,whichinvolvesanextremesavingsandinvestmentstrategydesignedtoallowyoutoretirefarearlierthannormal.Or,astherespondentsintheTDAmeritradesurveyindicated,yourgoalmaybetobeabletopayyourbillsandavoiddebt.  Ifyouareolder, saybetween50and65,youlikelyalreadyhaveretirement-savingsobjectivesbutevenifnot,thereisstilltimetoplanforfinancialindependence.Dependingonyourgoalsandaccumulatedassets,thismayinvolveariskierinvestmentstrategytomakeupforlosttime.Oryoumayneedtoresetwhatdefinesretirementcomfort. Whateveryourobjectives,writethemdown.Keeptheminfrontofyouasconstantremindersofwhereyouwanttoendup—livingalife,asyoudefineit,offinancialindependence.  Assets  Whichtools(weapons)willyouneedtoachieveyourobjectives?Thesecanincludeincome-producing assets ofmanykinds—rangingfroma savingsaccount or CDs toaportfolioof dividend-payingstocks,bonds(or bondfunds),and realestate.  Ahomeismanypeople'slargestasset—andcanturnintoasourceofequityorbeusedinareversemortgagetohelpfundretirement.Andthat'snottheonlywaytoinvestinrealestate.Rentalproperties cangeneratesignificantamountsofcashflowbutcanrequiresubstantialinvestmentandrisk.REITS(realestateinvestmenttrusts)areanotherwaytoinvest.TheCOVID-19pandemicshowedhowrealestatecanbothdropandgrowinvalueoverashortperiod.Overthelonghaul,however,realestatehasshownitselftobeaconsistentproviderofwealth. Anotherwealth-buildingassetwouldbetostartandrunasuccessfulbusinesswiththeultimategoalofeithernotbeingdirectlyinvolvedinday-to-daymanagementorofsellingthebusinessforasubstantialprofit. Assetsalsoincludeintangibles,suchasknowledgeandskill.Youwerenotbornknowingaboutthestockmarket, rentalproperties,orhowtorunasmallbusiness.Youwerebornwiththeabilitytolearn,research,read,andexperiment withdifferentstrategiestoseewhatworks. Tactics  Yoursuccessfuljourneytofinancialindependencedependsalotonyouractions.Thesearethethingsyouneedtolearnaboutanddotoachievefinancialindependenceasyoudefineit. Startwithabudgetthattakesintoaccountincomeandotheravailableassets,allowsyoutopayyourlivingexpenses,andifatallpossible,letsyousaveandinvest.Thinkofyourbudgetasaroadmaptofinancialindependence.Payattentiontowherethemoneygoesandavoiddeadends.Cutcostswherepossible,creatingmoreopportunitiesforsavingandinvestment. Takefulladvantageofanyemployer-providedretirementsavingsplans,ifyouhaveaccesstothem,orstartbuildingyourownthroughanIRAorRothIRA.Ontheotherhand,it'simportanttoallowforfun(unlessyouarefollowingtheFIREstrategyabove).Justdon'tgooverboardand,aboveall,donotborrowforrecreation. Alongthesamevein,expecttheunexpectedbycreatinganemergencyfundtoprovideliquiditywhenyouneeditmostforanunexpected(butnecessary)expense.Planningforunexpectedeventsthatcouldderailyourplansiscrucial.Itdoesn'thavetobeapandemic;itcouldbeillness,anunexpectedjobloss,oraneconomiccrisisliketheGreatRecessionof2007to2009. Finally,developaninvestmentstrategythattakesadvantageofthepowerofcompoundinterest.Compoundinterestisfreemoneyandaddsupovertime.Learnasmuchasyoucanaboutinvestingbutalsotakeadvantageoftheknowledgeothersalreadyhave.Ifinvestingisamajorpartofyourwealthplan,findandutilizeaninvestmentadvisorasearlyintheprocessaspossible. Perseverance  Thenotionoftheneedfor"eternalvigilance"inthepursuitofliberty,oftenattributedtoThomasJefferson,couldalsobeappliedtofinancialindependence.Theroadtofinancialindependencerequiresalifetimecommitmenttocontinuousbudgetingandinvestment. Youalsoneedtobewatchfulaboutsituationsthatcouldleadtohavingmoneytrickleoutthatcouldbeputtobetteruse.Orthatcouldleadtoaccumulationofmoredebtthatyoucanhandle.Ifyoufeelitcomingon,makeyourselfstopandpayattention,andworktofindasolution,whetherit'sdebtcounseling,debtconsolidation,oreventhatoldstandby—puttingthecreditcardsinadrawerandnotusingthem. Keeplookingfornewopportunitiesandnewwaystomakethemostofyourhard-earnedcapital.Perseverancealsodemandsthatyoulearnthestepsforbuildingaprofitableinvestmentportfolioandmakesurethatyourebalanceitregularlytokeepitmovingtowardyourfinancialobjectives.Then,adjustasyougetclosertoretirement. IndependenceatLast  Sometimessuccesssneaksuponus.Ifyourfightforfinancial independenceisintenseandpersistent,youmayendupastheContinentalArmydidaftertheBritishsurrenderatYorktown,Oct.19,1782.Atthatpoint,historianssay,the Americanshadeffectivelygainedtheirindependence.Thefightcontinued,however,foralmostmoretwoyearsuntilSept.3,1783,whenthesigningoftheTreatyofParisbroughtthewartoanend.  Inotherwords,keepupthegoodfightuntilyouaresureyou’veachievedtheobjectivesyousetouttoachieve.JustasitdidonJuly4,1776,independencebeginswithadeclaration,followedbyaplan,includingobjectives,assets,tactics,andmostofall, perseverance.Alittleluckcan'thurt,too.Andsomegenerositytoyourcompanionsonthatroad.Bothpeopleandnationsneedthecompanyandhelpofothers. ArticleSources Investopediarequireswriterstouseprimarysourcestosupporttheirwork.Theseincludewhitepapers,governmentdata,originalreporting,andinterviewswithindustryexperts.Wealsoreferenceoriginalresearchfromotherreputablepublisherswhereappropriate.Youcanlearnmoreaboutthestandardswefollowinproducingaccurate,unbiasedcontentinour editorialpolicy. TDAmeritrade."FinancialIndependenceSurvey,"Page2.AccessedJune30,2021. PacificLegalFoundation."Eternalvigilancethepriceoffreedom."AccessedJune30,2021. PlutusFoundation."Financialindependenceisalonggame."AccessedJune30,2021. LibraryofCongress."SurrenderatYorktown."AccessedJune30,2021. 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