Declare Your Own Financial Independence Day - Investopedia

Financial independence is when you can live the quality of life you desire without having to work any longer. · To achieve financial independence, it is a good ... TableofContents Expand TableofContents YourFinancialIndependence YourStrategicPlan IndependenceatLast PersonalFinance Budgeting&Savings AstheFourthofJulyremindsus,independenceisworthfightingfor.OnJuly4th wecelebrateournation’sdeclarationoffreedomfromthecontrolandinfluenceofGreatBritain.Financialindependencealsomeansfreedom.AndaswiththepoliticalindependencewecelebrateeveryJuly4th;financialindependencestartswithadeclaration. Here'showtodeclare,fightfor,andwinyourownfinancialIndependenceDay.  KeyTakeaways Financialindependenceiswhenyoucanlivethequalityoflifeyoudesirewithouthavingtoworkanylonger.Toachievefinancialindependence,itisagoodideatostartsavingandinvestingearly.Italsooftenrequiressettingupalong-termstrategyandstickingtoit. WhatDoesFinancialIndependenceMean?  Aquickdefinitionoffinancialindependencecouldbehavingenoughwealthtolivealifeofcomfortwithouttheneedtowork.Intruth,financialindependencecanmeandifferentthingstodifferentpeople.   InarecentTDAmeritradesurveyofyoungAmericansages15–29,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.19,1781.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. PacificLegalFoundation."Eternalvigilancethepriceoffreedom." PlutusFoundation."Financialindependenceisalonggame." LibraryofCongress."SurrenderatYorktown." RelatedArticles Investing 10InvestingConceptsBeginnersNeedtoLearn Budgeting&Savings HowtoReachFinancialFreedom:12HabitstoGetYouThere Budgeting BudgetingCalculator 401(k) StrategiestoMaximizeYour401(k) RetirementPlanning 6SignsThatYou'reReallyReadytoRetire FinancialAdvisor WhatDoFinancialAdvisorsDo? PartnerLinks RelatedTerms HowIsYourFinancialHealthLooking? Thestateandstabilityofanindividual'spersonalfinancesiscalledfinancialhealth.Hereareafewwaystoimproveit. more PersonalFinance Personalfinanceisallaboutmanagingyourpersonalbudgetandhowbesttoinvestyourmoneytorealizeyourgoals. more WhatIsGenerationZ(GenZ)? Bornafter1996,theoldestmembersofGenerationZarejuststartingtheircareersandpossiblytheirfamilies.Savingforretirementisapriority. more WhatIsPost-RetirementRisk? Post-retirementriskisthepotentialdamagetofinancialsecuritythataretiredindividualcouldencounter. more Millennials:Finances,Investing,andRetirement Learnthebasicsofwhatmillennialneedtoknowaboutfinances,investing,andretirement. more FinancialLiteracy Financialliteracyistheabilitytounderstandandusevariousfinancialskills,includingpersonalfinancialmanagement,budgeting,andinvesting. more