financial independence

7 Simple Steps to Financial Independence

January 19, 2017 By Pauline Paquin 2 Comments

The steps to financial independence are quite simple. They are not easy, and they will require a lot of time and dedication. However, if you follow them, you will find yourself financially independent sooner than you thought possible! Here are the 7 main steps to financial independence:

1. Find your financial independence number

We all have a number. How much will you need, in retirement, to cover all of your expenses? That should be your current budget, adjusted for inflation, minus expenses you won’t have anymore, such as

Day care

College tuition

Supporting your kids

Paying off your mortgage

Dressing up for work

Commuting

Maybe a second car,

etc.

Plus all the expenses you didn’t have before but will have to pay for in retirement, like

Higher healthcare premiums

Golf membership and other leisure activities

More holidays, cruises…

Gifts for the grandkids

and so on

Let’s say you come up with $40,000 a year. Financial planners say you can safely withdraw 4% of the value of your portfolio to live in retirement, meaning you need to save $1,000,000 by the time you become financially independent.

2. Break down your goal

Saving $1,000,000,can seem daunting, but it gets much more manageable once you break your goal into much smaller monthly goals.

How much do you need to save every year to reach that number? It obviously depends on how long you plan on saving for. To save a million dollar, assuming a market return of 8%, it can take as long as 42 years if you save $250 per month, or as little as 26 years if you manage to save $1,000 a month. Yes, that’s a lot, but if you have a partner, living on your income and saving theirs can be an easy option to become financially independent sooner. In which case, if your saving rate is 50%, you would only need 14 years of savings to retire.

3. Learn to live on less

Obviously, since we have found out that the more you save, the sooner you retire, you need to start living on less. That means a thorough review of every penny you spend.

Do you really need to spend that money?

Can you do without altogether?

Can you get the same value for less?

Can you get a discount with your current provider?

These are the questions you should ask about your spending. Refinancing your mortgage, paying off your credit cards and high interest debts, negotiating your bills… are all small steps that will save you thousands over the next few years.

4. Try to earn more

While there is a limit to how little you can live on, there is none on how much you can make. If you are able to keep your expenses in check, and save most of your raises, bonuses, and income from side hustles, you will accelerate your nest egg growth exponentially.

The more you earn, the earlier financial independence will come.

5. Invest wisely

Just like your savings rate, the return your get on your investments will dramatically impact your nest egg. Find a low cost robo-advisor, and simply invest in index funds. Trying to outsmart the market and paying thousands in fees for managed funds will cripple you over the long term. Very few investors get better returns.

Don’t put your eggs in the same basket and diversify your investments. Look into real estate, CDs, alternative investments… and adjust your level of risk to your goal. If you just have a few years to go, you’ll want to become more conservative.

6. Resist temptation

Following these steps to financial independence is hard at times. The Joneses will be whispering in your ear that you should be spending more, buying stuff you don’t really need, just so you feel less like an outsider. Not being average takes a strong personality.

Just stay strong and…

7. Focus on the reward

There is a whole life after financial independence. You can volunteer, travel, take care of your kids, or even keep working in a field you really love without concerns about how much you might earn. Very few people who follow the steps to financial independence stay idle until the end. They have shown discipline and motivation, like athletes, and seldom turn off the engine completely. Picturing your perfect day in financial independence is what will keep you going through the ups and down of saving and investing. What does a perfect day look like? Who are you with? What are you doing?

That is what will make going through the steps to financial independence much easier.

This is a guest post from Pauline from InvestmentZen.com.

Photo: Alfy

Why Stock Market Trading is the Ideal Retirement Hobby

August 4, 2016 By Liam Ball 2 Comments

There are numerous ideas for retirement hobbies but few are as exciting or as potentially rewarding as trading on the stock market. In many ways this is an ideal way of finding something new and fresh to do once you stop working. If you want an enjoyable way to pass the time while looking to make some money then there are plenty of reasons for thinking that this is the ideal new hobby to take up. Even if you have already achieved financial independence, this is a type of investment that offers a lot.

Do It from Home or Elsewhere

After a full working life you will probably value the flexibility that comes with retirement. This is why you will want hobbies that you can carry out anywhere and at any time. When it comes to stock market trading, this is something that you just need a computer or a laptop to do. In fact, you can even do a lot of the work on a smartphone or tablet if that suits you best.

Don’t take on a new hobby that ties you to once place and severely limits your freedom. By choosing to trade online you can do it at home, on the beach, or anywhere else where you want to make some deals.

Learn New Skills

It is a fantastic idea to learn as many new skills as possible once you retire. This is one of the best ways of keeping your brain sharp and of feeling good about yourself. If you have never before traded on the stock market then there is a lot for you to learn, which is great. You can enjoy taking on board lots of fresh knowledge by getting a period of trader training arranged to get you going.

Of course, this is the sort of hobby in which you are going to need to be constantly updating your knowledge over time. You can’t afford to rest on your laurels when the market is always constantly changing in front of your eyes.

Spend As Much Time on It As You Want

The ideal hobby is one that allows you to spend as much time as you want to on it. This is definitely the case with stock market trading, as you can either spend a lot of time looking for new investment opportunities or else take a far less intensive approach. You can expect the amount of time that you invest into this activity to be reflected in how much you earn. However, it is also the case that you can make good investments with little time if you prefer to take things easy and not spend all day on this.

Basically, it is the sort of pastime that allows you to put into it exactly the amount of time that you want to. Perhaps you will slip into a sort of routine that sees you check out the market and make decisions at the same time every day or week.

Get the Thrill of Seeing Results

Depending upon the type of person you are, you might be happy being patient and waiting for results in the long-term, or you prefer to see results right away. Either way, you can find a way of enjoying the thrill of seeing results through stock market trading. If you want to see the outcome of your investments quickly then you can look for upcoming penny stocks that are expected to take off soon. Otherwise, you could try steadier types of company that should grow little by little over time.

Whichever way you do it, you will see the results of your decision making at some point. This is something that could add a real frisson of excitement to your life and keep you feeling good about the joys of retired life.

Don’t think that retiring has to mean an end to doing exciting things such as investing money in the stock market. Indeed, when looking at it closely, it becomes clear that this is an activity that is pretty much perfect for when you retire.

20 Ways NOT to Teach Your Kids about Money

February 20, 2012 By Jeffrey Strain 13 Comments

There’s a lot of talk about how parents can prepare their kids for financial independence, but it’s just as important to point out ways that parents can unknowingly hurt their children’s financial success. If you haven’t started teaching your kids about how to be financially responsible, now is the time to begin. It’s never too early or too late to brush up on the best ways NOT to teach your kids about money (and how to avoid these unhelpful strategies). Here are 20 ways that you shouldn’t be teaching your kids about money and personal finance.

Celebrate Instant Gratification

Kids want things and they usually want them that instant. To make this perfectly clear, they will often throw a tantrum when they can’t get what they want that instant. Learning not to give into these tantrums and to explain to kids that it’s important to have the money when you buy something will go a long way to help their finances as they get older. This is especially true in an era of credit cards where it’s easy to purchase even when you don’t have the money. It’s important that kids learn and know the pleasure of delayed gratification, and having to earn some of the things that they want.

Give an Allowance without Making Kids Work

When kids are young, they often are thrilled when receiving allowance money. They can learn the importance of money by getting to handle and understand how it works at a young age. As kids get older, allowances are often given with conditions attached such as chores. The problem is that parents often times get lenient and let kids have their weekly allowance without checking to see if they’ve completed the work that they are supposed to do for the allowance. All this does is teach kids how to cheat the system and work as little as possible while still gaining the reward. This is not how it works in the real world and you do a disservice to your kids my not holding the accountable.

Negatively Lead by Example

The truth is that kids will watch you closely. The way that you handle money and your attitudes about money will be seen, studied and absorbed by your children whether you realize it or not. The way that you handle your money is the way you will lead your kids by example. That means that they are going to see the bad money habits you have and will assume these are the correct ways to handle money if you do not teach your kids otherwise. One of the most important things you can do to help your kids with learning about good money management is to possess good money management yourself. If you don’t have it, start learning now not only for yourself, but for your kids.

Assume Schools Will Teach Personal Finance

I’ve never understood why schools don’t emphasize money management as a core subject in schools. I think that every school should have a semester of “How to be a millionaire by 40” as part of their curriculum (what student wouldn’t pay attention in a class named that?), but the fact is that most schools teach very little when it comes to money management and how personal finances work. The good news is that you don’t have to be a financial expert to be a personal finance teacher to your kids. Simply showing how you manage your own expenses and what you’ve learned from the financial mistakes and triumphs you’ve made throughout your life is an excellent way to teach. Don’t be shy about passing this wisdom to your kids because chances are high that doing so will teach them more than they will ever learn about this topic in school.

Hide Your Finances from Your Kids

Many parents that are not proud of their current financial situation think that the best course of action is to hide their finances from their kids. The assumption is that if the kids don’t know about it, then they can’t make the same mistakes. The problem with this assumption is that the kids will see that you are hiding the finances from them and make a whole bunch of assumptions of why you are doing this with most of them probably being inaccurate. They will come to think that personal finances is somehow a bad thing. While certainly not easy, showing your kids your financial mistakes, and how they have consequences, can be one of the best teaching lessons that kids ever receive. If you want your kids to really learn about personal finances, have them be participants in both the financial good and bad that the family is going through.

Let Kids Learn Personal Finance Themselves

Perhaps you or someone close to you was once thrust out into the world with no support system — and they are stronger and smarter for it. But please don’t assume that shoving the baby bird from the nest is the right strategy when it comes to the importance of how to handle money. If you let your kids start from scratch without any guidance, they’re doomed to learn the finances the hard way with the likelihood that they will rack up a large amount of debt. Take the time to at the very least give them a solid financial foundation of knowledge that you wish you would have had so that they can make informed financial decisions when they are on their own.

Don’t Make Your Kid Get a Job

One of the best money lessons that you can give your kids is to make them get a job before they head out to college. It will instantly show them how much they have to work to earn even a little money and instantly dissolve that fantasy that money grows on tress. When kids don’t need a summer job to earn money because their parents pay for all their meals, clothes, gadgets and transportation, it’s easy for them to assume that earning money doesn’t take a lot of hard work. Encourage teens to find part-time work by promising there will be no more hand-outs for new party dresses, going to the movies with friends, or cell phone minutes. If they want these extras, they will need to learn their worth.

Let Kids Believe They Deserve Everything

You probably didn’t know that treating your kids to their favorite things was part of teaching finances, did you? Well, it’s true that even the youngest members of your family learn how money works through their parents’ actions. If “ask and you shall receive” seems to be one of your parental commandments, they will pick up on this and start assuming that’s how buying things works. Much like instant gratification, it’s important to let kids know that they need to make choices about what they want to spend their money on and that its not going to be everything.

Fail To Teach Compound Interest

This is a memorable and influential financial concept because it appeals to kids who dream about being rich grown-ups, but it’s also a practical lesson. It not only teaches kids that there are rewards to saving money for later, and it also involves a test in the virtue of patience. It also so how interest on money borrowed can make things a lot more expensive than the price marked on it. Don’t let this extremely important lesson slip through the cracks.

Let Kids Disrespect Items without Repercussions

The easiest way to remind your kids that money is not important is to let them get away with disrespecting their stuff. It’s far better to teach them that leaving a new toy in pieces after one use is not the way to treat something that took time and money to buy. You also don’t want them to think that once something breaks or gets boring it automatically goes in the trash to make way for a replacement. Kids need to learn that if they want to justify spending money on things they like, they will need to care for those items and appreciate the fact that they are able to afford them.

Never Be Hard on Your Kids

It’s difficult to be the parent that says, “You’ll thank me later” in the face of a teen who’s begging for cash or asking for an exception to the “earn it yourself” rule. The fact is that being the bad guy teaches them that not everyone will be so considerate of their desires in adulthood. Later in life they will not be able to beg Mommy to give them a job or ask Daddy to make their debts disappear. If you give them the occasional rough reminder that they need patience and continued responsibility to keep getting what they want, they will carry this lesson for life.

Let Kids Use without Paying

Finally being able to drive, have a cell phone, and stay out late are special milestones for teens. What is important for them to learn is that with participating in adult activities comes certain obligations. Kids should learn that borrowing the car is about more than just bringing it back in one piece. They need to pay for the gas they use by topping off the tank before they return home. Perhaps parents should also require chores or money in exchange for using the family cell phone plan. It’s important that kids realize that things do not just appear freely to use without any cost.

Fail To Teach How Credit Cards Work

Just because you don’t think your child is ready for a credit card doesn’t mean he or she isn’t ready to learn good habits and the facts behind credit card use. You’d be surprised how many teens and college students don’t understand how paying for something on credit works. Worse, they might actually believe it’s better to owe merely a minimum monthly payment instead of the whole amount of their purchase. If you teach them early that credit cards are powerful tools that have both advantages and disadvantages depending on how they are used, they will understand the needed restraint that comes with being a credit cardholder.

Let Kids Spend Everything They Earn

When kids first start working or earning an allowance, they might only make enough money to see a few movies, buy a couple of video games, or purchase a pizza dinners with their friends. While it’s fine to let them enjoy the few hard-earned dollars they do make, they also shouldn’t think that everything they earn should immediately be spent. Even kids making minimum wage should be taught the importance of putting money away for a rainy day, even if it’s just a few dollars at a time.

Never Explain the Difference Between Wants and Needs

One of the most important lessons that anybody can learn, whether that be adult or child, is the difference between wants and needs. If you act like every single thing in the world is something that is essential, your kids are going to get the same impression. By distinguishing between what our real needs and what are just merely wants, you set the foundation for your kids to make good financial decisions by being able to distinguish between the two when spending their money.

Make Talking about Money a Taboo Subject

It amazes me that so many families view conversations about money as taboo as conversations about sex. The reality is that both subjects should be able to be discussed freely among family members so that the kids aren’t misinformed about these important topics. You do no service to your kids by making money and finances a subject that should not be talked about at the house. The more open you are about money, the way it works, and the daily decisions that have to be made about it, the more comfortable your kids will be when it comes time for them to create their own budgets.

Never Give Any Financial Responsibility

There seems to be some parents that want to shield their kids from all their money problems. Since they have money responsibilities that they don’t enjoy, they feel that they are doing their kids a favor by not having them have any money responsibilities. This is a terrible assumption. It’s vitally important for kids to begin to develop money responsibilities and learn from their mistakes. If they are not given any financial responsibility, when they go out into the real world on their own, they are going to be completely clueless. The result will be that they will make huge financial mistakes rather than minor ones they learned from when they were kids.

Teach That What Others Have Matters

If you want your kids to constantly be chasing after the Joneses throughout their life, instill in them that what others have matters. One of the most important lessons anyone of us can learn is what makes each of us happy, and it isn’t money or stuff. When you help children learn what they love to do, they then don’t have to fall into the trap of believing that buying and having certain things will create happiness.

Teach That Brands Matter

When it comes to getting the most from the money you earn, understanding value is important. That usually means not buying the cheapest or the most expensive of anything, but rather the item that gives the most bang for the money. When kids are taught that brand is more important than value of functionality, they get a warped sense of what is important when purchasing anything. They believe that they are the Joneses and need to have the best of everything even when it may not be in their budget. Brands are not necessarily bad things, but to teach kids that is all that matters does them a great financial disservice.

Teach Being Rich Is Important

The impression that being rich is important is sometimes the unintended consequence that kids get from parents who are struggling with their own finances. This is especially true if these struggles cause continuous strife within the family. Kids begin to think that having a lot of money is important. While there is certainly nothing wrong with having a lot of money, it’s important that having the money is not the end goal. Money is simply a tool to help each person achieve their goals and should never be the goal itself. With all the commercialization that permeates the US culture, this is often easy to lose track of, but it’s one of the most important lessons about money that you can teach your kids.

Probably the most important realization to take away from this list is that actively taking steps to help your children learn about how money works and how to use it to benefit them the greatest is a set of skills that you as a parent need to teach your kids. If you default those lessons to someone else or try to hide them, the kids are likely going to end up being in far worse financial shape than if you were simply honest even about the money mistakes that have been made. Empower your kids to understand the basics of money and you will give them a gift that will serve them well their entire life.

(Photo courtesy of Brad_Chaffee)

Prepare for Financial Independence

November 10, 2011 By Jennifer Derrick 3 Comments

The daughter of a friend of mine is getting married in a few weeks. While the guy seems very nice, I’m worried about the match. The daughter isn’t, in any way, prepared for financial independence. She just finished college and hasn’t had a “real” job yet. She only makes a few hundred dollars per month by stringing together a couple of part-time jobs. Fortunately, the boyfriend makes a nice living. The daughter has made no secret of the fact that she intends to just ride along on his money once they’re married. He will be the one handling the bills. She wants to have kids and stay home. Work and money management aren’t on her list of priorities.

This concerns me, though, because I wonder what happens if the marriage doesn’t work out? What happens if he dies and has inadequate insurance? What happens if he turns out to be a poor manager of the money and runs the family into bankruptcy? This girl will be left with no marketable skills and no real understanding of how to budget or plan for a successful financial life. She’ll have to start from scratch. I’ve seen too many people get into this sort of situation and it always pains me.

Let me be clear: I have no objection if a woman or man wants to stay home and raise the kids. I have no objection if he or she doesn’t want to work. That’s a choice to be made between the partners. Where it becomes dangerous, though, is when one partner is completely dependent on the other because that partner has no skills or abilities that will allow them to live independently (or to contribute to the family’s income) if the need arises.

We all go into marriage believing it will work and that things will be fine. But things happen that we don’t expect. The marriage doesn’t even have to end in divorce or death for things to go very wrong. What if the breadwinner loses a job? What if one partner becomes disabled or sick? Can the other one pick up the slack? What if you have kids who are born with disabilities that require expensive care? What if a kid gets hurt and becomes disabled? Can you both earn the money necessary to pay for the treatments? Sometimes plans go awry and the partner who was previously dependent has to either step up and contribute to the income or stand on their own. Without any skills or knowledge about money, it’s likely to be a very painful process. Too many people never make the adjustment and end up relying on government assistance or are forced to move in with family.

People – both men and women – really need to learn how to be financially independent before they add on to their lives. Spend some time working and living on your own before you get married and have kids. Learn how to budget and how to save. Learn how to shop wisely. Gain valuable career skills and contacts that you can draw upon later if the need arises. Learn how to handle your money and legal affairs. Learn basic skills including cleaning and cooking. In short, learn how to take care of yourself before you have to take care of others, too.

Then, once you’ve mastered fending for yourself, consider adding others to your life. Even if you ultimately decide to stay at home, you’ll be able to draw upon those life skills if you need them. Getting into relationships and commitments where you are totally dependent on the other person for money or care is a dangerous proposition.

There’s nothing wrong with getting married, having kids, and deciding to stay home. Just make sure you can fend for yourself if you have to. If the worst happens you’ll be able to deal with it. If you have kids, you’ll be able to take care of them, too. It’s not unromantic to plan for your own care before leaping into marriage and family. It’s prudent and smart.

Reached Financial Independence. Now What?

August 11, 2008 By Jennifer Derrick 14 Comments

I have a friend who has reached financial independence at the relatively young age of thirty-eight. He is completely debt free, having paid off his modest mortgage several years ago and owing nothing else. He has enough money invested to live quite comfortably, if modestly, from the earnings those investments produce. In other words, he no longer has to work to make a living. (If you want to learn more about financial independence and how it can be accomplished, I highly recommend the book, “Your Money Or Your Life” by Joe Dominguez and Vicki Robin.)

I’ve never considered him wealthy; he’s not a trust fund baby or a dot-com millionaire. He didn’t inherit millions. He does make a good income, but it’s not exorbitant for the area in which we live. He reached financial independence the old fashioned way. He works hard. He never buys things he can’t afford. He lives very low to the ground and stashes all the extra money in high-yield investments and savings accounts. Having been friends with this man since college, I can attest that he did nothing more than live significantly below his means for the last twenty years. At times he worked multiple jobs to pay the bills and still have some left over to save.

I can hear some people saying, “Well, that’s fine but he’s deprived himself all these years when he could have been living a better life.” Maybe, maybe not. He could have spent more money, certainly, but would it have bought him the happiness he has being debt free and free from work? I doubt it. He’s always had fun doing things that are cheap or free and I’ve never once heard him complain that he can’t have or do something. He made a decision years ago that he would achieve financial independence and he’s worked toward that goal. Even if most of us wouldn’t choose that path, it’s certainly admirable that he made a financial plan and stuck to it. That in itself is rare these days. And most of us would love to have his freedom, we’re just not willing to sacrifice in the short term to achieve a long term goal. Harsh, but true.

Anyway, the other day I was sitting on the porch with my friend having a beer and he told me he’d just quit his job that day. I wasn’t too surprised because I knew he wasn’t thrilled with the situation and, now that he had reached financial independence, he didn’t need to work there anymore. But I wondered what he would do now. He’s not the sort of person who will be content with a life of leisure for long. He has to be doing something or he goes nuts. So I asked him, “What are you going to do now?”

His answer surprised me. I thought he would say travel the world or work on the house. Maybe work part time. Something easy. Nope, not this guy.

“I’m going to volunteer full time.”

“Volunteer for what?” I asked.

“Whatever groups need me and I feel like I can help at the time.”

Now, this is a man who is in a position to simply donate money to organizations that he wants to help and leave it at that. But instead of the easy way, he’s choosing to actually give his time. And not easy desk job stuff.

I asked him what groups he was considering working for and he named off a few. Habitat for Humanity, some local conservation and environmental groups, some local literacy groups, and, my favorite, teaching some classes on finance at the local community college that serves the underprivileged areas of the city. He’s going to be building houses, cleaning rivers and roadsides, and teaching. This is not a life of leisure.

He said that he’d start off working for several organizations and then see if he wanted to specialize or keep working for whoever needed him. He’s exploring opportunities in other states and countries as well, so he can combine some travel with his volunteer work. He said he’d probably take some part time paid work in his field, as well, to keep him from having to touch his saving too much and to stay involved in his industry. “Just in case,” he added with a shrug.

I sat there drinking my beer and thinking how astounding this man is. I was exhausted just listening to his plans. How many of us (be honest), if we found ourselves in his situation, would choose this harder path? Wouldn’t most of us choose to indulge our travel habit, or work part time and spend the rest of the time in leisure pursuits, chasing golf balls around the green? There’s nothing wrong with that: When you’ve earned the money, you’ve earned the right to do with it what you will. But to choose to work for those less fortunate and, even better, to teach others the skills that earned you your money and your freedom, well, that’s something special.

I asked him why he made that choice. He said that he simply felt it was fair. He had so much energy, time and talent that it wasn’t fair to waste it on the golf course or let it atrophy by doing nothing. He felt like volunteering would give him what he needed to be happy: Contact with other people, a chance to make a difference, a chance to use his talents in the pursuit of something greater than money, exercise, time outside, and a chance to teach others some of what he knew. He said that he recognized that most organizations are short on people who can give a lot of time, are young enough to give physical labor instead of just money, and who are motivated to see something through, rather than just racking up hours to satisfy a community service requirement. He met those criteria and decided to give what he had: time, energy, and ability.

“Besides,” he said, “I’m never sure what these organizations do with my money when I give it to them. At least I know for sure what my labor is doing to help.”

“Wow,” was all I could say.

In the end, my friend gave me a lot to think about. Should I ever find myself in his position (and I’m actively working to get there by my mid/late-40’s), what will I do? Will I also do something that matters or will I waste my time and talents doing trivial things? I hadn’t really thought about it until I spoke to my friend. To be honest, my wishes to this point have been pretty selfish and not very well thought out. I always figured I’d work part time, but I have no idea doing what. I want to travel extensively, I want to pursue a lot of hobbies that get neglected, I want to be more social. I want, I want, I want. There’s nothing wrong with satisfying some of my wants, but now my friend has me thinking: Is that going to be enough? I doubt it.

What my friend opened my eyes to is this: We spend so much of our lives trying to get money, to achieve financial comfort or independence, and for what, exactly? So we can buy more stuff? So we can sit around all day and do nothing? That’s fine if it satisfies you, but I doubt it will be fulfilling for long. Assuming you remain in good health, you’ll probably want more. It’s a question worth considering. If you’re ever fortunate enough to reach the point where work is optional, what will you do? Will you keep working in your field, or will you try something new? Will you work part time or full time? Will you give something back?

I know I will spend the next few years looking for volunteer and part time opportunities that combine my interests and hobbies with the chance to do something meaningful. Volunteering can be a great way to remain active and involved in life, to combine your interests and hobbies with the chance to give something back, and to acknowledge your gratitude for your position in life. Or, as my friend says, it’s simply fair.

Image courtesy of Brandon Cirillo