The answer to this question might be slightly different for everyone. It’s a deeply personal concept. For some, the idea of financial independence revolves around living on a yacht in the Mediterranean. For others, it simply means their financial needs are taken care of through retirement and that they have a healthy nest egg to pass onto their children.
In general, financial independence represents freedom from financial burden. It usually means you are able to meet your current financial obligations now while also saving enough for whatever future you have planned. If that future involves a yacht, that’s up to you!
In other words, financial independence is more than just making ends meet and “getting by.” It’s a sense of knowing that your finances are in good shape for the journey ahead.
So, now the big question is how do you achieve your vision of financial independence? Here are a few good habits to get into as you build your nest egg:
This can be easier said than done for some, but it is important to break this cycle of living from one paycheck to another. Create a monthly budget. Look for ways to save money on unnecessary expenses like dining out and buying stuff you don’t really need. With proper budgeting, you will be able to start paying down debts, putting money into savings and investing. Eventually, you will be able to live comfortably each month while also building a nice little nest egg for your future.
If your employer offers a 401(k), IRA option or pension plan, make sure you are contributing what you can each month. The money is taken straight out of your paycheck, so you barely even notice the contributions to your retirement account. Plus, the funds are tax-deferred. This means the money is taken out before taxes. This allows you to contribute a little more each month. Over time, these conservative investment accounts are designed to keep growing until you are ready to retire and start using the funds.
Now that you have a nest egg that is growing, avoid all temptations to take money from those savings accounts or retirement plans. Don’t sacrifice your future for your present unless it’s absolutely necessary. IRAs and 401(k)s should never be touched and there are usually hefty fees/penalties for early withdrawals. The only times you may consider dipping into your regular savings might be for buying a house or investing that money into higher-yield investments like real estate, stocks, bonds, CDs, mutual funds, etc. You may even have different savings accounts set up for different purposes like investing, saving for a down payment on a house or your children’s college expenses.
Your nest egg should actually be a number of different eggs in a number of different baskets. You want to diversify your financial plan to include various retirement accounts and investment strategies. Some investments will be riskier than others, so long-term success is all about diversification.
To achieve financial independence, you must have a strong financial plan. You need to stick to your plan, but also make adjustments and timely strategic moves along the way to maximize your returns. This is where a seasoned financial advisor will help you get where you need to be. Whether you are just starting to save and figure things out or you are looking to get the most out of what you have already put away, a financial planner will make a significant difference on your journey to financial freedom and maybe even an early retirement.
To schedule an introductory consultation with one of our knowledgeable financial specialists, contact Illumination Wealth today.