This article was co-authored by Ara Oghoorian, CPA. Ara Oghoorian is a Certified Financial Accountant (CFA), Certified Financial Planner (CFP), a Certified Public Accountant (CPA), and the Founder of ACap Advisors & Accountants, a boutique wealth management and full-service accounting firm based in Los Angeles, California. With over 26 years of experience in the financial industry, Ara founded ACap Asset Management in 2009. He has previously worked with the Federal Reserve Bank of San Francisco, the U.S. Department of the Treasury, and the Ministry of Finance and Economy in the Republic of Armenia. Ara has a BS in Accounting and Finance from San Francisco State University, is a Commissioned Bank Examiner through the Federal Reserve Board of Governors, holds the Chartered Financial Analyst designation, is a Certified Financial Planner™ practitioner, has a Certified Public Accountant license, is an Enrolled Agent, and holds the Series 65 license.
There are 15 references cited in this article, which can be found at the bottom of the page.
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Achieving financial and personal independence is a great feeling, and is manageable with some hard work and careful budgeting. You will have to assess everything you earn and everything you spend, and figure out areas you can make savings. Once you are regularly saving money you will find it becomes a habit and the money will accumulate quicker than you expect. With some solid savings behind you, and an informed and in control approach to your finances, you will be able to stand on your own two feet.
Set yourself on the right financial path
Achieving financial freedom is a goal for many people. It generally means having enough savings, investments, and cash on hand to afford the lifestyle you want for yourself and your family—and a growing nest egg that will allow you to retire or pursue the career you want without being driven by earning a certain amount each year.
Unfortunately, too many people fail to achieve it. They are burdened with increasing debt, financial emergencies, profligate spending, and other issues that thwart them from reaching their goals. Then there are unexpected events, such as a hurricane or earthquake—or pandemic—that overturn plans and reveal holes in their safety nets that weren’t visible before.
Trouble happens to nearly everyone, but these 12 habits can put you on the right path.
- Set life goals, both big and small, financial and lifestyle, and create a blueprint for achieving those goals.
- Make a budget to cover all your financial needs and stick to it.
- Pay off credit cards in full, so you carry as little debt as possible, and keep an eye on your credit.
- Create automatic savings via your employer’s retirement plan and by setting up an emergency fund.
- Take care of your belongings, as maintenance is cheaper than replacement, but, more important, take care of yourself and stay healthy.
1. Set Life Goals
What is financial freedom to you? A general desire for it is too vague a goal, so get specific. Write down how much you should have in your bank account, what the lifestyle entails, and at what age this should be achieved. The more specific your goals, the higher the likelihood of achieving them.
Next, count backward to your current age and establish financial mileposts at regular intervals. Write it all down neatly and put the goal sheet at the very beginning of your financial binder.
2. Make a Budget
Making a monthly household budget—and sticking to it—is the best way to guarantee that all bills are paid and savings are on track. It’s also a regular routine that reinforces your goals and bolsters resolve against the temptation to splurge.
3. Pay Off Credit Cards in Full
Credit cards and similar high-interest consumer loans are toxic to wealth-building. Make it a point to pay off the full balance each month. Student loans, mortgages, and similar loans typically have much lower interest rates; paying them off is not an emergency. Paying on time is and will build a good credit rating.
4. Create Automatic Savings
Pay yourself first. Enroll in your employer’s retirement plan and make full use of any matching contribution benefit. It’s also wise to have an automatic withdrawal for an emergency fund, which can be tapped for unexpected expenses, and an automatic contribution to a brokerage account or something similar.
Ideally, the money should be pulled the same day you receive your paycheck, so it never even touches your hands, avoiding temptation entirely. However, keep in mind that the recommended amount to save is highly debated. In some cases the feasibility of such a fund can be a question.
5. Start Investing Now
Bad stock markets can make people question this, but historically there has been no better way to grow your money than through investing. The magic of compound interest will help it increase exponentially over time, but you need a lot of time to achieve meaningful growth. Don’t try to be a stock picker or trick yourself into thinking you can be the next Warren Buffett. There can only be one.
Instead, open an online brokerage account that makes it easy for you to learn how to invest, create a manageable portfolio, and make weekly or monthly contributions to it automatically. We’ve ranked the best online brokers for beginners to help you get started.
Achieving financial freedom can be very difficult in the face of growing debt, cash emergencies, medical issues, and overspending, but it is possible with discipline and careful planning.
6. Watch Your Credit
Your credit score determines what interest rate you are offered when buying a new car or refinancing a home. It also impacts seemingly unrelated things, such as car insurance and life insurance premiums.
The reasoning is that someone with reckless financial habits is also likely to be reckless in other aspects of life, such as driving and drinking. This is why it’s important to get a credit report at regular intervals to make sure that there are no erroneous black marks ruining your good name. It may also be worth looking into one of the best credit monitoring services to further protect your information.
Many Americans are hesitant to negotiate for goods and services, worrying that it makes them seem cheap. Overcome this cultural handicap and you could save thousands each year. Small businesses, in particular, tend to be open to negotiation, where buying in bulk or repeat business can open the door to good discounts.
8. Continuous Education
Review all applicable changes in the tax laws each year to ensure that all adjustments and deductions are maximized. Keep up with financial news and developments in the stock market and do not hesitate to adjust your investment portfolio accordingly. Knowledge is also the best defense against those who prey on unsophisticated investors to turn a quick buck.
9. Proper Maintenance
Taking good care of property makes everything from cars and lawnmowers to shoes and clothes last longer. As the cost of maintenance is a fraction of the cost of replacement, it’s an investment not to be missed.
Learn to know the difference between the things you want and the things you need.
10. Live Below Your Means
Mastering a frugal lifestyle by having a mindset of living life to the fullest with less is not so hard. Indeed, many wealthy individuals developed a habit of living below their means before rising to affluence.
This isn’t a challenge to adopt a minimalist lifestyle or a call to action to head to the dumpster with things you’ve hoarded over the years. Making small adjustments by distinguishing between the things you need and the things you want is a financially helpful habit to put into practice.
11. Get a Financial Advisor
Once you’ve gotten to a point where you’ve amassed a decent amount of wealth—be it liquid investments or tangible assets that aren’t as readily available to convert to cash—get a financial advisor to educate you and help make decisions.
12. Take Care of Your Health
The principle of proper maintenance also applies to the body. Invest in good health with regular visits to doctors and dentists, and follow health advice about any problems you encounter. Many problems can be helped—or even prevented—with lifestyle changes such as more exercise and a healthier diet. Some companies have limited sick days, making it a notable loss of income once those days are used up. Obesity and ailments make insurance premiums skyrocket, and poor health may force earlier retirement with lower monthly income.
The Bottom Line
These 12 steps won’t solve all of your money problems, but they will help you develop healthy habits that can get you on the path to financial freedom—whatever that means for you.
It sounds like an obvious thing, but the first step to garner enough savings is to save, and the second step is to save enough.
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By Dhirendra Kumar
Many people ask for different kinds of financial advice. Sometimes, it is about inputs: ‘I have a certain amount of money. What should I do with it?’ Sometimes it is about outputs: ‘I need a certain amount in five years. So what do I need to do to ensure that this happens?’ Sometimes it combines both.
All these entail well-established and sensible ways of finding solutions. However, there’s one request that is really hard to respond to, and this has to do with financial independence. It may appear to be a vague term, but signifies roughly similar things to different people. This is not having to worry about money, ever.
It is a common enough dream. Since the daily grind of earning dominates our lives, a permanent relief from this is the freedom that most of us desire. Of course, there are many degrees of financial freedom, and the highest is not having to work to earn for the rest of your life.
Then again, there are many who do not have to work. There are those with large inheritances, and those whose burden we taxpayers are committed to carrying all our lives. However, it takes most of us our entire working lives to reach that stage, if at all we reach it.
The fact is that if we save and invest with a modicum of planning, lesser degrees of financial freedom can be achieved earlier in life, and can be just as rewarding. For salaried people, achieving even a mild degree of financial freedom early in life is more important now than it was a decade or two ago. India is clearly passing through a job crisis. There are a number of people among the urban middle-class, who have suddenly lost their jobs. Youngsters are finding it difficult to find jobs, or are forced to accept low-quality employment. Middle-level executives are being shunted out of employment because employers think they can be replaced at a lower cost.
This widespread crisis in personal financial confidence is different from the way things were a few years ago. Most salaried people were confident in their jobs and sure of frequent increments, either in their current jobs, or better ones. They may not have had actual financial freedom, but effectively felt like they did. One can’t really say when the employment situation will change for the better.
However, those of us who change their attitude towards money, savings and personal finance will be much happier, and will be able to deal with this new, uncertain world much more easily. While these job-related problems continue, the only people who are relaxed and not stressed are the ones who have enough savings. Unfortunately, the proportion of younger earners in their 20s and 30 who save, is quite low. In fact, the young generation is almost uniformly dedicated to negative savings. As soon as people start earning, they take on loan EMIs, essentially spending future savings today.
This sounds like the same crusty advice that older people always give to the young, but it happens to be true. Whether the job environment improves or not, saving as much as possible at the beginning of one’s career immeasurably improves one’s happiness levels later. Today, those who have savings that are equivalent to even a year or two’s expenses (including any loan EMIs) feel much more relaxed about their careers.
Not just that, I’ve seen that those who have achieved even this financial security are able to negotiate in their employment better than those who cannot take any risks.
This is actually as close to financial independence as most of us can get. It sounds like an obvious thing, but the first step to garner enough savings is to save, and the second step is to save enough. Unfortunately, many of us don’t get started for years after we start earning. Given the hyper-persuasive consumerist culture that surrounds us, it’s not easy to start—and there’s no other way to achieve financial independence.
The author is CEO, Value Research
With financial freedom on your side, you can live your life to the fullest, afford anything and everything you desire, and travel the world.
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Independence Day 2020 Special: You might have always dreamt of living your life just the way you want — like going on a world tour in your 30s or retiring early. However, many of you probably won’t be able to do that unless you were born rich or achieve financial freedom.
Financial freedom, in fact, is the luxury of having sufficient income to take care of the expenses of self and family members despite not doing a regular full-time job or running a business. With financial freedom on your side, you can live your life to the fullest, afford anything and everything you desire, and travel the world.
Here are five ways to become financially independent at a young age.
1. Live within your means
While credit cards and loans allow people to live a certain quality of life instantly, they can impact their financial stability in the near and long term. Hence, the first step towards financial independence is to learn to live within your means. Follow the 50-30-20 rules of budgeting so that you are comfortably able to allocate your post-tax income to all three buckets — 50% of the income goes to needs, 30% for wants and 20% to savings and investing.
2. Prioritize saving and investing
Usually, youngsters tend to spend first and invest whatever amount is left at the end of the month. Try to reverse this process. Based on the average expenses, determine a fixed amount that you would want to save and/or invest every month. Invest first and spend whatever is left. This can also be achieved by instilling the habit of budgeting in your life. Also, start small but start early and invest in investment options that can offer your inflation beating returns.
“Starting early in accelerated wealth generating avenues like mutual funds and stocks will help you benefit from the power of compounding as well as spread out your risks. Keep an investment horizon of 10-15 years. You can start investing through SIPs to inculcate discipline. Keep increasing your contribution towards your goal in proportion to the increase in savings/increments received so that you reach the desired corpus faster,” says Harsh Jain, Co-founder and COO, Groww.
3. Make investing a habit
You don’t have to be born rich to become financially independent. You can achieve financial freedom by staying financially disciplined over a long period. “Investing regularly will help you amass a considerable sum in the long run. Set aside an amount from your monthly salary towards investments. The power of compounding will make you financially independent over time,” says Archit Gupta, Founder and CEO, ClearTax.
4. Increase your savings and investment rate, and invest in the right options
If you are to become financially independent at a young age, you should necessarily increase your savings and investment rate. Analyse your expenses and cut off the unnecessary ones. This will leave you with more money in hand which can be diverted towards your investments. The more you invest, the faster you become financially independent.
You also need to invest in the right options. In fact, there is no example of someone becoming wealthy by parking their savings in a regular savings bank account. “If you are to get rich and financially independent, then you have to invest in suitable investment schemes. You have to analyse and compare the various available options and pick the one which best suits your profile,” says Gupta.
5. Stay away from borrowing
If you have a loan to repay, then it makes it difficult or slower to achieve financial freedom. Hence, you have to stay away from all kinds of loans, and if you already have any, then you have to close it soon. You have to be as self-sufficient as possible so that you are not required to avail any kind of loan.
6. Create an emergency fund
Life is unpredictable. Hence, financially preparing yourself for an emergency can help avoid any sudden jolts to your finances. Based on your average monthly expenses (living costs), ensure that you have an emergency fund that can allow you to survive without income for at least six months. This will protect your investments and keep you away from unwanted debt. “You can invest in liquid funds for this purpose so that your emergency corpus is easily accessible. Additionally, ensure that you have sufficient insurance cover so that you don’t have to dip into your investments,” says Jain.
7. Plan your taxes and have sufficient insurance cover
Plan your taxes in advance and make sure your tax planning is aligned with your long-term financial goals. Look for avenues that serve the dual purpose of wealth creation and tax saving. Also, make sure that you buy insurance with sufficient cover if you haven’t already as premiums get more expensive with age.
8. Review your financial situation regularly
Cultivate a habit of reviewing your finances once every six months. This includes tracking the performance of your mutual funds and your portfolio as a whole. This will keep you in control and allow you to make changes like increasing the investment amount, redeeming certain investments, portfolio rebalancing etc with ease. Reviewing your financial situation will also help you keep your debt levels in check.
9. Invest in yourself
Most importantly, invest in yourself and in activities or vocations that enrich you as a person. “Read books on investing or get inspired from industry leaders who started small, yet achieved financial independence with discipline. As you learn more about the nuances of investing and expand your circle of competence, you will be able to explore more wealth creation avenues and take smarter decisions regarding your portfolio,” advises Jain.
10. Don’t get into peer-pressure
There are two categories of young professionals. The first one likes to be financially disciplined and would want to attain financial freedom at the earliest. The second one is rather reckless in terms of handling their finances and would blow up their money on buying expensive items and taking extravagant vacations. “To attain financial freedom at a young age, you should not get influenced by the young professionals falling in the second category,” says Gupta.
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When you’re just starting out, taking these easy first steps to take control of your finances can set you up for great success.
According to a survey conducted by the Pew Research Center, the national unemployment rate for adults ages 18 to 34 has declined to 7.7%. However, despite a 6% increase in weekly earnings over the last four years, 26% of Millennials are still living at home with their parents.
As young professionals work toward financial security and independence, below are my recommendations on what you can do to put yourselves in the best financial position:
1. Write Down Your Goals
It’s been said that a goal without a plan is just a dream. So, what better way to start realizing your goals than identifying them, writing them down and creating a plan for achieving them?
Ask yourself where you’d like to be in five or even ten years from today. Then, create a plan that helps give you a baseline for measuring your goals. Remember, financial success doesn’t happen overnight. Along with proper planning, it takes patience, dedication and consistency. Writing down your goals will help bring the vision of your future to life and give you something tangible to review.
2. Cut Expenses
Whether you’re currently employed or not, you’re likely to have expenses. Consider creating a budget as a way to benchmark incoming revenues and outgoing expenses. By continuously reviewing spending, you can easily identify opportunities to reduce fees or cut expenses altogether. Maybe you don’t need the premium cable channels or the highest speed of internet. Cutting those costs are a quick and easy way to find dollars to pay down debt or reinvest into a savings plan.
3. Automate Savings
Automating a savings plan is one of the best ways to succeed at saving. If you have to manually log in to your bank account and transfer funds into a savings account weekly or monthly, you are less likely to do it. I recommend working with a bank or financial planner to automate the process so you don’t have to think about it. Start out with a small amount—even if it is just $20 per month—and increase it as you get more comfortable with the process.
4. Plan for Retirement
Yes, retirement. Even though it may be decades away, it’s never too early to starting thinking about it. In fact, the sooner you start, the better the outcome. Retirement accounts provide tax-deferred growth, a powerful feature to help boost your long-term returns and income years from now when you stop working.
by Lyle Daly | Updated July 21, 2021 – First published on Nov. 19, 2019
This is one question you don’t want to get wrong.
The concept of financial independence, meaning to have enough savings that you don’t need to work anymore, has become increasingly popular in recent years. This is in large part due to the FIRE movement, an acronym for “financial independence, retire early.” A growing group of Americans are calculating their “FI numbers” and figuring out exactly how long it will be until they can call it quits at work.
Whether you’re interested in early retirement or you just want to be able to retire comfortably at 65 or 70, it’s important to know how much money you’ll need. By calculating the amount you need to save for financial independence, you can ensure that you’re on track to retire when you want.
So exactly how much will you need? It’s a complicated question, and first, we need to establish a definition of financial independence.
What is financial independence?
Financial independence is when you have enough in your savings and investment accounts that the average annual return is equal to or greater than your living expenses.
Once you’ve reached that point, you can conceivably live on that money indefinitely, because you’re not depleting your savings to cover your bills. For example, if you have $1 million saved and it’s earning a 5% return each year, you could withdraw $50,000 a year and break even.
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The challenge is determining what’s truly a safe withdrawal rate. Fortunately, there have been multiple studies done to shed some light on this subject.
The Trinity study and the 4% rule
If you’ve read much about financial independence, you’ve probably come across the 4% rule. It claims that 4% is a safe withdrawal rate from accounts with a mix of stocks and bonds. That means once you’ve saved 25 times your annual expenses, you’ve presumably reached financial independence.
The evidence behind this rule is the Trinity study. Three finance professors at Trinity University tested potential withdrawal rates for various ratios of stocks and bonds using market data from 1925 to 1995. Ultimately, they found that withdrawal rates between 3% and 4% were unlikely to deplete a person’s retirement portfolio over a 30-year period.
Now, there are some issues with how that study has been interpreted in the 4% rule:
- The study covered withdrawal periods of up to 30 years. If you want to retire at 50, 40, or even younger than that, you may be withdrawing from your retirement portfolio for well past three decades.
- It didn’t find 4% was always a safe withdrawal rate. With the right mix of stocks and bonds, a 4% withdrawal rate over a 30-year period was successful between 95% and 98% of the time, when adjusting for inflation.
The 4% rule is a good starting point and it’s simple to understand, but it’s not necessarily safe.
The Early Retirement Now study
The Early Retirement Now site has done a much more recent and detailed study on safe withdrawal rates. Like the Trinity study, it analyzed withdrawal rates with several different ratios of stocks and bonds.
It looked at longer withdrawal periods, though, starting at 30 years and going up to 60 years to account for those who retire early. It also analyzed more withdrawal rates, starting at 3% and going up to 5% in 0.25% increments. The Trinity Study, on the other hand, only used increments of 1%.
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In this case, there were some clear winning numbers — a 3.25% withdrawal rate and a 75:25 stock-to-bond ratio. These were 100% successful for each withdrawal period up to 60 years.
A 3.50% withdrawal rate also worked in most cases. With a 100:0 stock-to-bond ratio, its lowest success rate was 98% over a 60-year period. With a 75:25 ratio of stocks to bonds, its lowest success rate was 97% over 60 years.
And what about a 4% withdrawal rate? Even with the ideal stock-to-bond ratios, this withdrawal rate’s success dropped to 93% over 40 years, and it decreased more for longer periods. That may seem good overall, but remember that it won’t be good enough if you’re the one running out of money during retirement.
How much money do you need for financial independence?
To be financially independent, a smart savings target is between 28.5 to 31 times your projected annual spending. That range allows you a withdrawal rate of about 3.25% to 3.50%, both of which are proven to be successful even over periods of longer than 50 years.
Let’s say you want to be able to spend $60,000 per year in your retirement. You’d aim to save anywhere from $1,710,000 (and take a withdrawal rate of 3.51%) to $1,860,000 (and take a withdrawal rate of 3.23%).
You can never be completely sure how long your savings will last. There’s always the possibility of a worst-case scenario that takes out a huge chunk of your portfolio. But once you’ve reached the savings target above, you’re in excellent shape if you decide to live off your nest egg.
By Cynthia Bowman
- Financial Independence
- 3 Ways To Manage a Budget
- Setting Goals
If you want to retire early to do some traveling or to spend quality time with your family, you’ll need to create a plan that will result in you becoming financially independent.
Staying out of debt and building your net worth are two actions that can help you gain financial independence and increase your chances of successfully retiring early. Gaining financial stability requires patience — you need to learn how to effectively manage your money and create passive income streams. Here are the retirement strategies you need to achieve financial independence.
How To Become Financially Independent To Retire Early
It may seem difficult, but with lots of preparation and making some lifestyle and mindset changes, you can retire early and comfortably. Start with envisioning what you would like your future to look like.
Long-Term Thinking: Calculate Your Retirement Needs
To answer the question “When can I retire?” you’ll need to first calculate your retirement needs, as this number is different for everyone. You might need to consult a financial planner to discuss retirement goals or use a financial planning app or another resource with a basic formula that takes into account your current annual spending, income and year you want to retire.
Financial independence blogger Mr. Money Mustache recommends multiplying your annual spending figure by between 20 and 30 to figure out your retirement needs. You could also use an online retirement planning calculator to create a forecast. Having a defined number in mind can help you visualize your goal and progress.
3 Ways To Manage a Budget
The key to achieving retirement on your terms is managing your money. Reducing spending and maximizing your income is necessary to have the funds you’ll need by the target retirement date. A budget is essential to control your finances. Make sure that your budget includes two important factors:
1. Reducing Living Expenses
Spending less than you make is the first start toward reaching your financial goals. You’ll need to give up bad habits that result in overspending on nonessentials.
Unnecessary shopping habits based on convenience, comfort or just fun are widespread in U.S. society, and spending money in this way is what stands between the average person and true wealth. Do what you must to break habits that are costing you, and optimize your budget and spending to reduce living expenses.
2. Increasing Your Income
If you’re still living paycheck to paycheck — even after cutting expenses — you’ll need to find ways to increase your income so you have money to invest. Whether your goal is to play the stock market or invest in a business venture, there are several ways to generate more income.
You could take on a part-time job or do freelance or contract work. There are always opportunities to tutor, mow lawns, sell crafts, and even rent out your car or home. You could also focus on building a side business that can provide income in retirement.
3. Creating Passive Income
If you don’t see yourself working for a company until you retire, you should explore some other ways to generate income. Building passive income streams — that is, recurring revenue from a business or other endeavor like owning rental properties — keeps money coming in so that you don’t have to rely solely on your savings or Social Security benefits.
Easy Things You Can Do to Start Preparing for Retirement Now
Worried About Social Security Not Being Enough?
“You need to start living a lifestyle in which you’re no longer trading time for money — you can create something valuable one time that people will continue to purchase,” said Pat Flynn, creator of the Smart Passive Income blog. But generating passive income requires patience as well as work.
If you start making money from an online business, generating passive income won’t happen overnight, but it will put you on the path to earning revenue from something you created, said Flynn.
Good To Know
In addition to starting your own business, other passive income ideas to consider include investing in a lending club, earning cash back rewards on credit cards and getting paid for promoting digital products on sites like ClickBank.
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Once you know how much you’ll need and you have a budget, it’s time to set goals that will get you to the financial independence you’re in search of. Don’t forget to include the following ideas in your goal-setting and action plan:
Start Investing Early
You’ll have a better chance of reaching your goals if you begin focusing on your retirement investment when you’re young. Even if you think you’ll have more money to invest when you’re older, don’t miss out on the benefits of compound interest on those initial savings contributions now.
Make room in your budget for retirement savings contributions so you can start earning compound interest sooner rather than later. For example, CNN Money reports that if you save $3,000 per year from the age of 25 to 35 at a 7 percent annual return, your initial $30,000 investment will grow to $338,000 by the retirement age of 65.
Getting out of debt by paying off your mortgage, clearing credit card account balances and paying off loans can help increase your net worth. If your goal is financial freedom, you don’t want to be making monthly payments or paying interest on old debts.
You should do whatever you can to reduce your debt load and avoid acquiring new debt to keep yourself on track. You might want to consider using a tool like the Debt Payoff Planner app to organize your debt repayment plan.
Retiring early as a result of financial independence is possible, even if you don’t earn millions of dollars. All you need is a long-term plan and the commitment to make it possible. It may take some sacrifice, but the best piece of advice is to get started today, even if it’s with small steps.
Figure out how much you need for retirement, create a budget you can stick to, cut back on spending and save aggressively towards your future. You may need to adjust your lifestyle to support less spending and more savings, but you may look back one day and be thankful you did.
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Jamie Young contributed to the reporting for this article.
Our in-house research team and on-site financial experts work together to create content that’s accurate, impartial, and up to date. We fact-check every single statistic, quote and fact using trusted primary resources to make sure the information we provide is correct. You can learn more about GOBankingRates’ processes and standards in our editorial policy.
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- How to Start Saving Money as an Independent Contractor
Saving money can be a real challenge for anyone navigating life amidst consumer quirks and capital perks. A 2019 Bankrate survey found that less than 40% of Americans have enough savings to dampen a $1,000 blow to their wallets. This becomes even more difficult for independent contractors.
Gig workers must be their own accountants–managing all debits, credits, taxes, and deductions throughout the year. On top of that, there is the risk of income instability and financial volatility due to the inevitable off-season, sudden events, or potentially overcrowded market.
If you want to be financially successful and secure, especially as an independent contractor, it’s imperative to consider the weather of the journey carefully. For tradesmen of the gig economy, flexibility and freedom come with requirements that are totally within reach.
In this article, we will address what strategies are most effective for saving money and how to start saving money as an independent contractor!
Set Money Saving Goals
Before asking how to start saving money, it helps an unspeakable amount to set some concrete goals. Such goals encourage you to develop long-term money habits and increase your odds of hitting your benchmarks. Consider whether your goal is to buy a new flatscreen TV or sponsor a week’s vacation in Portugal.
Regardless of which, don’t forget to factor in your basic needs versus your desires. These needs should also include an emergency fund in case things go sour when you’d least expect them to.
The next step is to create a timeline of your savings. Depending on the price value of your target, determine how much money you’ll need to set aside each month, and commit it to habit. To make tracking easier, you can keep a money-saving calendar to keep tabs on when and how much money is flowing in and out of your bank account.
One great tool to use for knowing how much money to allocate to what is by using a money-saving calculator. There are plenty of options when it comes to calculators, so foresight goes a long way. A good rule of thumb is to use the 50/30/20 rule – 50% on needs, 30% on wants, and 20% on savings.
Since independent contractors have the added burden of managing their own taxes, we recommend a slightly augmented ratio. Gig workers should put aside at least 20% for taxes to compensate for untaxed profits. That leaves a little less for saving, but those who managed their records responsibly are likely to earn money back at the end of the year.
Lastly, consider if you plan to save money in a savings account. If so, be sure to calculate the increase in monthly interest with every deposit. The benefit here is that the more you save, the more your money works for you – a simple yet effective tip on how to start saving money!
Manage Your Finances
Once your money-saving goals are all lined up, the next tip for how to save money is to organize your finances. As a freelancer, the likely first step is to separate your business expenses from your personal expenses.
Keeping separate accounts makes money management cleaner and swifter. It also fills the stress gap when it comes to the time to file taxes and write off tax deductions . Remember to keep a logbook of your expenses and save receipts to make things easier.
Next, you want to start creating a budget that works for you. Budgeting can be really tough for freelancers due to the financial volatility. Still and yet, do your best to generate a general average monthly income based on your average yearly income. This will guide you to follow a solid budget all year round, but be realistic about your expectations for peak-season and low-season.
Remind yourself to avoid impulsive spending by budgeting ahead and spending on only the things which truly matter. Use a money-saving tracker app specialized for budgeting to set you off on the right foot and check out our budgeting tips for freelancers if you still need help sticking to your parameters!
Pay Off Debt
This may seem a little counter-intuitive, but it “pays off” in the long run (pun intended). If you’ve got any high-interest debt building up under your name, do your best to resolve it as soon as you can! Paying off the money you owed means that more of what you have belongs to you.
Large or small debts with high rates can quickly double or triple their value. Not to mention that unpaid debt can ruin your credit, which could otherwise be advantageous for anyone in need of a start-up investment for their business. Luckily, we’ve got a management plan for self-employment debt too.
Change Daily Habits
Even excluding avenues of less familiarity, there are always life patterns that can be augmented or adjusted to better serve our financial interests. Here are a few that apply to nearly everyone, and take little effort to employ:
Round up the prices when grocery shopping
This little trick is one of the better tips for saving money on groceries. The process is simple – just declare a budget the next time you go shopping and round all the prices of your items up to the nearest dollar amount. Make sure to stay within your spending range. When the time comes to checkout, you’re guaranteed to have spent less than your budget.
Wait for the sales
Certain items are cheaper during certain times of the year. Conduct some hearty investigation about the best when and where to purchase whatever you’ve got your eyes on, and strike when the iron is hot. The same goes for produces and knowing what is in-season thus will be cheaper for you to purchase!
Get a Piggy Bank
It’s a classic for a reason. Grab a piggy bank from the nearest convenience store, or keep the now-empty olive jar as a money-saving jar to contribute. Sometimes all it takes is to follow old-school methods to tuck money to the side for when you need it.
Now you’re ready to kickstart your savings and start building better financial habits! For more financial and gig economy resources delivered right to your inbox, be sure to subscribe to our newsletter to stay up to date!
JGI / Tom Grill / Getty Images
Melanie Lockert is the author of “Dear Debt: A Story About Breaking Up With Debt,” a money memoir and how-to. She paid off student loan debt of $81,000 and draws on that experience to inform her writing.
You’ve graduated from college and are ready to start your life as an independent adult. But let’s face it: Living on your own is expensive, and the costs can add up fast. And even if you score a job right away, your entry-level salary and lack of significant savings might make it hard to keep up.
One solution is moving back in with your parents. It might not seem appealing to a newly minted adult eager for independence, but living with your parents can be one of the most suitable money decisions you make at this point in your life.
Personal finance and business expert Amanda Abella graduated in 2010 and lived with her parents for seven years before moving out on her own.
“From a financial perspective, I wouldn’t have been able to do most of what I’ve done if I hadn’t lived with them for a while,” she said. “I graduated in 2010, which was an economic nightmare. Fortunately, I could stay home.”
Abella has been able to save and invest, start a business, and take risks—things that she admits she would not be able to do if she was on her own and paying all her bills from day one. You may not plan to live with your parents for seven years, but you can still reap the financial benefits of spending at least some time living with your parents.
You Can Jumpstart Your Savings
Saving is a big problem in the U.S., with most people being unable to afford a $400 emergency. Living at home can help you start saving money so you can build up an emergency fund and lay down a strong foundation with which to sustainably support yourself in the future. This is especially true if you’re in a city with a high cost of living.
You can save money by not paying:
- Utilities (gas, electricity, internet)
- Renters or mortgage insurance
Abella says that living with her parents helped her save in the first place. “I wasn’t making nearly enough money at my last job to survive in a city like Miami,” she said.
You Can Conquer Your Debt
If you racked up a lot of student loan debt while in college, you’re not alone. In fact, there are nearly 45 million student loan borrowers in America, paying back more than $1.71 trillion. Average student loan payments are around $300, which can take a big bite out of your budget.
Living rent-free with your folks may not make those minimum payments affordable, but it may allow you to put more toward your debt. Paying more than the minimum can help you cut down on interest and put more toward the principal balance.
You Can Start Investing Early
When it comes to investing, time is your best friend. The problem is many recent grads simply can’t afford to get started with investing, especially if they’re shackled with debt. Living at home with your parents frees up rent money—typically your biggest expense—so you can get started on investing for your future. The average household spend on all things related to housing is 27% of total expenses. Thus, this saved portion of the budget can be set on automatic monthly savings plan to achieve a certain goal by the end of the stay-at parents period”
You can start investing in an IRA or 401(k), as well as the stock market. If you start investing at age 25 instead of 35, it will result in a significantly bigger nest egg—possibly even allowing you to retire early.
You Can Spend Less on Food
It’s not hard to blow your budget on food, especially if you don’t have experience grocery shopping and cooking affordable meals. It’s likely you’ll be sharing some meals with your folks—and maybe even getting a home-cooked meal instead of greasy takeout. Plus, it’s a good opportunity to get a crash course on cooking for yourself so you can eat on a budget when you move out.
You Can Afford to Take Chances and Be Picky
Living with your parents has clear monetary advantages. But one perk you might not realize is that living with your parents can be a safety net to try new things.
Keeping your costs under control means you don’t have to take just any job or move into a less-than-ideal place because that’s all you can afford. You can also be more aggressive with investing and take chances on starting a business.
Abella was grateful to move out at the right time for the right place. “Living with my parents allowed me to be more picky because there was no rush,” she explained.
Rebecka Zavaleta grew up in Los Angeles. After graduating from the University of Pennsylvania, Rebecka worked building…
The days of storing your savings under a mattress are over. Cash under your mattress can’t even keep up with inflation, let alone grow enough for retirement.
Today, financial experts agree the best way to build wealth and plan for retirement is through investing.
But, according to the Pew Research Center, only 52% of U.S. families participate in the stock market by way of an investment retirement account.
If you’re in the other 48% or are an inexperienced beginner, here’s how you can get started.
- Set Yourself Up For Success: Prep Work
- Robo-Advisor Route
- Do It Yourself (DIY) Route
- Interest Compounded
- Comfortable? Double Down
- Remember the Money Mantras
Set Yourself Up For Success: Prep Work
To set yourself up for success, build a process that lets you contribute a portion of your paycheck regularly each month. To free up the funds, I recommend you have a minimum of three months’ worth of emergency funds saved up (three times your monthly expenses), your debt is stabilized (no interest-based charges), and you are following a budget plan.
A robo-advisor is an algorithm-driven investment platform that uses client financial data to offer digital investment advice. Essentially, the robo-advisor will automate your portfolio management. You will answer upfront questions on your finances and investing goals, and the robo-advisor will make real-time decisions with your investments.
Some examples of robo-advisors are: Fidelity, WealthSimple, WealthFront, Betterment, and Ellevest and can sometimes be less expensive than hiring a financial advisor.
In my experience, the robo-advisor route is a great way to start investing as a beginner. It’s cheaper than hiring a professional financial advisor. To manage a robo-advisor account is low-maintenance because it runs on auto-pilot.
Do It Yourself (DIY) Route
If you’re interested in managing your portfolio and investments yourself, you can go with the DIY route.
Here are the DIY steps:
1. How do you want to invest?
Index funds are a type of mutual fund or exchange-traded fund (ETF). Index funds mimic the top companies in the financial market, such as the Standard & Poor’s 500 Index (S&P 500), and are considered a safe investment.
Sector funds are mutual funds and ETFs focused on sectors of industries such as technology, healthcare, agriculture, and manufacturing.
2. Choose a brokerage service:
A brokerage account is where you deposit and store funds for investing. Vanguard, Fidelity, Charles Schwab, Public, and WeBull are a few examples of brokerage service accounts. You can link your bank account to fund your brokerage account on a regular cadence.
3. Choose an account type:
Taxable account: A taxable account is a brokerage account. It’s used to store and save funds for investing but has fewer deposit and withdrawal restrictions compared to an IRA or 401(k). But it lacks tax benefits- meaning the income you earn through investing using a brokerage account is taxable when you choose to withdraw it.
Tax-efficient account: Most experts recommend utilizing a tax-efficient investment vehicle especially as a beginner. That means using a Roth IRA or Roth 401(k) account.
A Roth IRA is tax-efficient because your investments will be exempt from income tax when it’s time to withdraw for retirement. That is because you pay taxes before you invest, not when you withdraw. A Roth IRA account is the most commonly available to everyone with income below $140,000 (per 2021 IRS rules).
Check with your employer to see if they offer a tax-efficient retirement account. Then see if you can max out your yearly Roth IRA contributions. You can contribute up to $6,000 per account per year. If you plan to invest more than $6k per year, you’ll need to open another investment account.
4. Make a deposit and set up automatic contributions.
A solid starting point is a $500 investment followed by $100 contributions per paycheck. However, if you cannot afford $100 per paycheck, start with what you can contribute. The important lesson is doing it regularly and committing to it. You can set up automatic contributions through a bank account. From there, you can adjust as your income level, lifestyle, and money goals change.
5. Diversify your portfolio.
To limit the risk of a volatile stock performance, the safest route is to spread out your investment choices. As an example, 25% could go into a sector healthcare ETF, 70% into various S&P 500 index funds, and 5% into bonds. If you spread out your investments, you have less exposure to its potential failure and your mitigating overall risk.
6. Patience is a virtue.
The best advice I can give an investing newcomer is not to obsess over short-term trends. When you invest, some grow anxious watching your money go up and down. The secret is, don’t look every week or every day. Keep investing each paycheck and focus on the long-term trend.
When you invest in the stock market, you will benefit from compounded interest. This is earning interest on your balance and earning interest on your interest. The earlier you start investing, the more your balance and interest compounds. The power of compound interest can be demonstrated using this compound interest calculator provided by the U.S. Securities and Exchange Commission.
Comfortable? Double Down
Over time you’ll get the hang of it.
After you start feeling more comfortable with the process of investing, start increasing your automatic deposit amount every year. A good rule of thumb: increase your contribution percentage even further as you earn more income.
The purpose of most investing is to help you save for your retirement. The more you save, the earlier you can retire. To better understand what goals to strive for, you can set your savings goals based on your age. As a guide, you can use savings benchmarks and match that to age milestones.
Once you get the hang of it or your account balance significantly grows, you may want to consider hiring a professional financial advisor to keep a closer eye on your nest egg.
Personally, investing helped fuel my wealth-building. With sound investing strategies and low-risk diversification, I was able to purchase a home.
Remember the Money Mantras
Investing requires a strong and patient stomach. It’s essential to be okay with your money going up and down over time as you continue to invest your committed monthly amount. So as a beginner, and even for the experienced, here are some money mantras that can help get you through the highs and lows.
- The best time to start investing is now.
- Time in the market is better than timing the market.
- There’s no gain or loss until you sell.
- Just like inflation, taxes will go up, and so will the stock market.
- Stay committed and focused. Keep it slow and steady.
Flexibility and freedom are two words that typically come to mind when you think of contract or part-time work. However, with flexibility and freedom, there can be financial uncertainty. But don’t worry. With a little planning ahead, you could be well on your way toward financial wellbeing.
If you don’t have the safety net of employer benefits or have a retirement plan and are looking for financial strategies, here are some ways that can help put you on more solid financial ground.
Have 3-6 months of savings
As a contractor or part-time worker, your income likely tends to ebb and flow. Having an emergency fund with enough savings to cover three to six months’ worth of your critical expenses can help ensure you can pay your bills even during times of low employment.
Know what you owe
If you’re doing contract work and don’t want taxes withheld from your pay, you’ll need to make estimated quarterly state and federal tax payments. A tax professional can help you determine how much to budget for taxes and how to file.
Take advantage of savings tools
Contract workers and part-time employees can take advantage of the savings tools below to help plan for and meet important financial goals.
- 529 college savings plans 2 : Money invested in these state-sponsored plans can be withdrawn federal income tax-free if you use them to pay for qualified educational expenses, such as tuition, books and supplies. You can open one for anyone, including your children or yourself. Keep in mind that non-qualified withdrawals may be subject to federal and state taxes and the additional 10% federal tax.
- Traditional IRA: If you’re not eligible to contribute to a workplace retirement plan, this account 1 can be a good alternative. Money you contribute to a Traditional IRA grows tax-deferred until you withdraw it during retirement. If you’re in a lower tax bracket when you retire, you’ll pay less in taxes on your IRA earnings later than you would today.
- Roth IRA: Unlike the Traditional IRA, a Roth IRA offers no upfront tax advantage 1 . However, it can be an excellent companion to a Traditional IRA or an employer-sponsored retirement plan. To be eligible to contribute to a Roth, you must meet certain income guidelines.
- SEP, Simple Keogh and Solo Roth 401k plans: These accounts are all tax-deferred retirement plans for self-employed workers. Your tax advisor can help you determine which one is most appropriate for you. If you’re unsure of how much to save toward retirement, our tools and calculators can provide you with helpful guidance.
If you’re unsure of how much to save toward retirement, our tools and calculators can provide you with helpful guidance.
Employer benefits are not the only path to pursue financial security. Planning ahead, knowing what you owe, and taking advantage of saving tools can help contract or part-time workers on their journey toward their long-term savings goals—and it’s never too late to start.
The news was alarming; at year-end 2017, U.S. household debt rose to $13.15 trillion—an all-time high. The recent study showed that rising debt comes with a price—less money in your wallet, as well as a burden on your emotional and physical well-being . What’s even more alarming, perhaps, is that nearly four in five full-time American workers report living paycheck-to-paycheck .
With rising health care and secondary education costs, it can be tough to find extra money in the budget to allocate towards saving for retirement. But most Americans don’t want to work forever, so saving for a financially-secure retirement should become a top priority. Let’s break it down.
Why everyone should put retirement first
What’s the biggest purchase you’ll ever make? If you answered “house,” try again. The correct answer is most likely going to be your retirement. That’s right—retirement is something you buy, like a car or a vacation. So then the question becomes, “How important is my ticket to quit working?” At all stages of your life, it’s important that you continuously plan and save for that “ticket to quit.”
Every day that you don’t buy enough retirement, you add retirement debt.
With that in mind, you may be wondering what you can do to prepare yourself to satisfy your retirement needs. Luckily, there are a variety of practical tactics you can utilize to reach your goal of achieving a comfortable, stress-free retirement.
Practical tactics to help you save for retirement
· Set a vision
According to a recent report, 81 percent of Americans say they don’t know how much money they’ll need in retirement . But if you’re thinking about your retirement goal as a certain number in a bank account, you’re doing it wrong. Instead, think about what you want your retirement to look like. Do you want to retire early? Retire late? Travel often? Work part-time just to stay busy? Set a clear vision of what you’d like your retirement to look like before crunching any numbers.
· Have an idea of how long you’d like to be retired
After answering the questions above, you’ll have to answer one final question – how long do you want to be retired? The answer to this question will be determined by what age you want to retire and how long you plan to live. Not sure how to determine your life expectancy? Look at how long your parents and grandparents lived, and remember that you don’t have to be precise. Do people in your family tend to live into their 70s or 80s? 90s or beyond? Most people have a pretty good idea of their family history—and that’s all you need.
· Determine how many years of retirement you need
If you’ve decided that you want to retire at 65 and you know your family tends to live to their mid-80s, then you need about 20 years of retirement. And keep in mind, life expectancies are generally increasing—so if you can, try to pad the number and give yourself some wiggle room.
· Put a number to it
This is where your retirement service comes in. It’s possible to calculate the amount of money you need to buy the retirement you want, and you can work with your retirement service to work out a payment plan. Choose to pay a lot up front to get a discount, or pay a little now and more later. It’s easy!
· Make the savings process as automatic as possible
Think 401(k). Many plans automatically enroll employees in the company-sponsored retirement plan with an option to “opt out” for those who aren’t interested. Saving for retirement becomes that much easier when contributions are made as part of the payroll process—and before taxes. You won’t miss what you didn’t have, right?
· Compare retirement services
Great—now you’re “retirement rich” and “life poor.” Quite the contrary, actually. This is the Golden Age of Buying. Never before in the history of “buying stuff” has it been easier to get a lot of stuff for a little money. Want to go to a sunny beach? Trivago, Orbitz, and Kayak are all there to give you options at the touch of a button. Want a new flat screen TV? Amazon, Target, and Best Buy are lining up your options by features and price.
The key is to use those services when YOU want, not when THEY want. You can be impulsive, adventuresome, or simple—the solutions for living life today on your terms are all around you. Better yet, think about what you’ll be able to do in retirement using those same services!
How many years of retirement will you be able to afford?
We’ve created PAi’s CoPilot retirement service as tool to help move you from just visualizing your retirement to actually getting you there. We’ve ditched the complex charts and calculations, and translated your dollars into the only thing that matters—how many Years of Retirement you can afford. We won’t tell you how to buy, others will. You’ll just know if you’re on track or not; no judgments.
Let’s start with a conversation, then let us do the rest of the work for you. Contact us online or give us a call to get your 401(k) plan started: 800.236.7400.
Michael Kiley, Founder of PAi
Saving money takes discipline. And a certain amount of sacrifice.
According to Bankrate, more than half of Americans are behind in saving for retirement, and 21 percent of Americans aren’t saving at all.
The importance of saving money is rarely disputed. Saving is one of the most basic (and most repeated) bits of financial advice out there. Despite the importance of saving money, many of us aren’t following through on that tip. When it comes to doing the right thing financially, just knowing you should save isn’t enough.
And that makes sense. It’s tough to do something consistently without understanding why you should save money and put in all that effort in the first place. After all, saving money takes discipline and a certain amount of sacrifice.
Knowing the reasons to save money can be critical if you want to stick with a savings plan for the long term. If you need help understanding the importance of saving money, consider these key reasons why you should save money now:
1. Saving can give you freedom
It can be tough to allocate some of your cash to a savings account if you don’t have a set goal for that money. Why save for later when you can spend on what you want today, right? But among the many reasons to save money is that even if you don’t know exactly what you’re saving for right now, you’ll likely find something you want to save for in the future. A new car, a new home, a child’s education… the possibilities are endless. Plus, it’s critical to have some cash set aside for emergencies and unexpected expenses as they come up.
“It has nothing to do with the money and everything to do with giving yourself flexibility and choice in your life,” says Eric Roberge, CFP ® and founder of a financial planning firm that specializes in giving financial advice to people in their 30s.
“When you have money available in the bank you can do what you want without stress,” he says. If you’re wondering why you should save money, imagine giving yourself freedom to choose what you want to do, rather than feeling stuck in a particular situation or position because you rely on the paycheck.
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How much you should save depends on your financial goals. You may have a tangible goal you want to pursue, like taking a year off work to travel. In that case, you want to estimate how much you’ll need not only to cover the cost of travel, but also to cover regular living expenses if you don’t plan to make an income during this period.
If one of your reasons to save money is to gain flexibility, you can set a specific amount aside each month (hint: automate your savings) based on what you can afford to save after things like retirement savings and emergency fund contributions.
“Saving gives you the freedom to live life on your own terms.”
Roberge says that you could label that savings account your “build wealth fund.” The importance of saving money here is to give you cash reserves that you can use when and how you want.
2. Saving provides financial security
Sunny skies are the right time to save for a rainy day.
Start an emergency fund with no minimum balance.
Discover Bank, Member FDIC
“I love saving money because it means financial security,” says Kara Perez, who founded a financial education company that aims to empower women by providing them with the tools and education to reach their financial goals.
“Plain and simple, having money makes your life easier,” Perez says. “I save because I want my future self to have the same great lifestyle I have now, and I don’t want to get caught in a financial emergency.”
Perez recommends putting money in both a liquid savings account where you can keep cash for unexpected expenses and emergencies, as well as putting money into something like a brokerage account where you can invest for the future.
3. Saving means you can take calculated risks
Part of the importance of saving money is to build cash reserves so you can take calculated risks with less worry. If you don’t have any savings, it may be harder to pursue certain passions. Take starting a business, for example. To be a small business owner, you’ll need financial backing to get it off the ground.
But if you set a savings goal and contribute to your savings each month, you can explore new opportunities, even if they may temporarily impact your earnings (if you set off as a small business owner, paychecks could be slow to come at the start).
“Saving gives you the freedom to live life on your own terms,” says Matt Becker, CFP ® and founder of a financial planning practice focused on new parents.
“When I lost my job three years ago, my wife and I used that as an opportunity to start the businesses we’d been dreaming about, rather than scrambling to find another paycheck as quickly as possible,” Becker says. “We could only make that decision because of the years we’d spent building our savings.”
Why you should save money
The importance of saving money is simple: It allows you to enjoy greater security in your life. If you have cash set aside for emergencies, you have a fallback should something unexpected happen. And, if you have savings set aside for discretionary expenses, you may be able to take risks or try new things. Pretty good reasons to save money, right?
If you’re convinced as to why you should save money, you can get in a savings groove by opening an online savings account. And good news: It doesn’t take a lifestyle overhaul to become a saver. There are simple ways to save money, which you can start practicing today. Once you’re in the habit of saving, you’ll forget there was ever a time when you didn’t save.
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The “Financial Independence, Retire Early” concept, also known as FIRE, is a method of extreme savings designed to help you gain financial independence—and hopefully, retire—as early as possible.
It’s certainly not a financial strategy that appeals to everyone, but for people motivated by the idea of accelerating their savings and enjoying a longer-than-average retirement, it could be the right fit.
Financial Independence, Retire Early: What to know
The FIRE movement took root following the publication of a book in the early 1990s called Your Money or Your Life. Authors Vicki Robin and Joe Dominguez advocated that every expense in a person’s life should be evaluated according to how long you had to work to pay for it.
Born out of this philosophy, the FIRE movement created a system in which extreme savings can lead to freedom from the conventional 9 to 5 grind. Ultimately, FIRE principles aim to give you the ability to make financial decisions based on a desire rather than a need for money.
Once you’ve reached financial independence, you can then live off your savings and income from investments, withdrawing around 3% to 4% per year for expenses. You may retire earlier than the typical age of 65 or choose to continue to work.
How does FIRE work?
Although there are several different approaches to the FIRE strategy, the one thing that remains constant is an extreme commitment to savings. People following this approach save up to 70% of their income and seek to reduce spending and debt until they’ve reached their savings goal. A common FIRE savings goal is 30 times the total of your annual expenses. For example, if your expenses total $4,500 per month ($54,000 per year), you’d want to have $1.62 million in savings to be financially independent.
Here are a few strategies FIRE advocates use to accelerate their savings:
- Decrease spending: By minimizing spending, there’s more money to save. Some people avoid any non-essential spending while others budget in some basic lifestyle comforts.
- Eliminate debt: Every penny you pay toward debt is a penny you can’t save.
- Increase earnings: As earnings increase, so should your savings. Raises in FIRE typically go directly into savings.
- Max-out retirement savings: While many people using FIRE retire early, you’ll still want money available when you reach the age of 59 1/2.
- Build investments: If you retire early, you’ll have to wait until age 59 1/2 to draw on your retirement funds or you’ll face a stiff 10% penalty, plus taxes, on your withdrawals. Investing in non-retirement accounts that aren’t tax deferred can help you grow your savings and provide income until you reach the 59 1/2 benchmark age.
How do you know if FIRE is right for you?
These questions can help you determine if FIRE might be a fit for your financial goals.
- Are you willing to change your lifestyle? FIRE involves an extreme approach to savings. If you’re not comfortable giving up some creature comforts, FIRE might not be the right approach for you.
- Have you already built an emergency fund? Without the cushion of an emergency fund, you could have to run up credit card debt or tap retirement savings—both of which have a negative impact on FIRE’s accelerated savings strategy.
- Are you already maxing out your retirement plans? If you have money left over each month and you’ve already maxed out your employer and individual retirement plans, you can start investing in a taxable savings account.
- Do you have a complete picture of your finances? For FIRE to be effective, you have to have a complete view of your debt, income and expenses, as well as clearly defined financial goals. A financial advisor can help you assess your net worth and build a long-term financial plan.
If you meet some, but not all, of these criteria, you can still follow FIRE principles to cut spending and increase your savings. Put simply, the FIRE concept offers guiding principles that can help you reassess your spending and savings habits. From there, you can build a short- and long-term financial plan that aligns with your life and goals.
Even if you don’t plan to retire early, FIRE can help you eliminate debt, prevent you from taking more debt on and provide you with a solid cushion of savings to absorb life’s financial shocks along the way.
Financial Independence, Early Retirement According to CA Rachana Ranade, financial independence means that instead of us working for money, money should work for us
Savings or pocket money should be redirected to a bank account to earn interest
Financial analysts have stressed the importance of attaining financial independence at a young age, especially for those youngsters in their 20s who are professionals working in industries. Financial independence is key to early retirement and the concepts are inter-related to each other. If one does not achieve financial independence on time, then it is difficult to retire early. To provide a comprehensive guide on understanding financial independence for early retirement, Chartered Accountant (CA) Rachana Ranade, recently addressed a session in Thrive 2021- an event organised by stocks and mutual funds investments platform Groww.
According to CA Rachana, financial independence means that instead of us working for money, money should work for us. She explained that a movement known as ‘FIRE’ predominantly started in the US, which comprises of two basic concepts – financial independence and early retirement. FIRE is an abbreviation, in which ‘F’ stands for financial, ‘I’ stands for independence, ‘R’ stands for retire, and ‘E’ stands for early. (Also Read: Balancing Income And Expenses: How To Create A Monthly Budget And Stick To It )
There are two types of income, explains CA Rachana. One is active income and the other is passive income. Active income is what one earns through a job, by putting in actual efforts in work. Whereas, passive income is what one can earn by not putting in any physical effort. Passive income is mostly earned through investing in equity etc.
Financial independence is achieved when two major conditions are fulfilled. Firstly, if the passive income of an individual exceeds active income, then there is a possibility of achieving financial independence. Secondly, if an individual is not completely dependent on a full-time job, but has other sources of income that can earn revenue, then financial independence can be achieved. The FIRE movement of the US, which zeroes in on early retirement with financial independence, is based upon three major parameters.
- Extreme savings: This means that one needs to save 50 per cent to 70 per cent of income towards savings.
- Concept of frugality: This means that one must think before buying anything. People should purchase things that are needed and money should not be spent on unnecessary items.
- Generating a passive income: The income that one earns through investing and other sources, apart from a job.
How long will it take for you to achieve financial independence?
One can know at what age he/she will retire by following a three-step process, according to the FIRE method:
Step 1: Determine your savings percentage
This means that one must fix a certain amount of percentage of the income for savings. According to FIRE method, it should be around 50 per cent to 70 per cent of total income.
Step 2: Calculate your target retirement amount
For knowing your retirement fund or retirement corpus, multiple your annual expenses with 25. If one needs to know the annual withdrawal amount after retirement, then multiple your retirement corpus amount with four per cent.
Step 3: How long will it take for you to achieve FIRE?
For knowing at what age one will retire, visit http://fireagecalc.com/. Input your data such as the amount of saving, amount of investment etc, and you will be able to find your retirement age.
According to CA Rachana, some of the major points to keep in mind in order to save more and attain financial independence are as follows:
- Redirect your cash gifts or pocket money: Redirect your savings in a bank account which can get you earnings
- Career planning: Plan your career early. If the plans are well executed, one will have high chances of success
- Avoid or minimize debt: Use credit cards wisely and try to avoid debt as much as possible.
- Reduce your spending: The magical formula is Income – Savings = Expenditure. This means that out of your income, you need save first and then make expenses.
- Get yourself insured: Insurance is necessary as one never knows the amount of money required for any unforeseen circumstances
- Build an emergency fund: An emergency fund is crucial for staying financially assured in life.
- Have a back-up plan: No matter how focussed one is to make one plan work, always have a plan ‘B’, just in case.
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Four Ways to Help You Establish Healthy Financial Habits
Financial planning can be challenging and is often a hurdle for many people because we are creatures of habit and finances are personal. Compare your personal finances to making that commitment to live healthier by making smart food choices and working out regularly. If you want to be successful, you must establish a personalized plan and be willing to change your current habits. One of the main reasons we prevent ourselves from working out 3-4 times per week or saving more and spending less is because we are not willing to change our habits. Many of us genuinely try, but we give up when things get too complicated.
Complexity is the enemy of progress, especially when you need to address both short and long-term financial goals, like paying off debt while saving for retirement. Here are some tips to help you establish healthy financial habits:
Set your money goals. do you want to begin paying off credit card debt, start saving for your child’s college education or book a trip this year by only using cash? Whatever your financial goals may be, write them down and include what you need to do to achieve them. Planning for your short- and long-term financial goals is a process, and most cases, you must change a current habit to reach your goals.
Create a (simple) budget. Stick to it. Avoid makign it more complex than it needs to be by creating a basic budget. The goal is to see where your money is coming from (your income), where it’s going (your spending) and to identify areas in which you can improve (i.e., cancel those subscription services you no longer use – or need). Commit yourself to changing your current spending/savings habits to achieve your financial goals.
Creating a budget is a simple step to getting control of your money and financial situation, but sometimes it’s the most difficult to implement. If you have concerns over certain areas of your budget and feel you need to trim back, consider talking with a financial counselor from our partners at GreenPath to help you make better informed decisions.
Pay yourself first. Every month, your first expense should be to pay yourself. If you’re like most people, paying yourself is the last on your list. And it makes sense with the seemingly endless stream of expenses we are responsible for (mortgage, rent, groceries, car insurance, etc.). If you want to see your net worth steadily increase, you must pay yourself first. Make it easy by setting up an automatic deposit from your paycheck. Finding new ways to save will become more of a long-term commitment rather than a short-term challenge.
Put your money to work (for you). To address your short-term money needs while committing to your long-term goals, you will need to put the money you save to work. This can include setting up an emergency fund, so you have access to cash in times of need; contributing to a 401(k) to help plan for your retirement years; protecting yourself and your family by finding the best insurance policy for your situation; or opening a 529 college savings plan.
Remember to set goals, keep it simple and know there will likely be some hiccups along the way. The simple finanical habits you establish today will help you stay on the course to lifelong financial success.
Not sure where to start? Our Rock Valley Investment Services team is here to help. For more information or to schedule a free virtual or in-person consultation, visit us online or call (815) 282-7436.
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There are risks involved with investing which may include market fluctuation and possible loss of principal value. Particular investments may not be suitable for certain situations. Carefully consider the risks and possible consequences involved prior to making an investment decision. There can be no assurance that any specific investment strategy will be profitable. Our firm does not provide legal or tax advice. Be sure to consult with your own legal and tax advisors before taking any action that may have tax implications. Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment losses. This material does not constitute an offer to buy or a solicitation of an offer to sell any security and is presented for informational purposes only.
“There was a long, hard time when I kept far from me the remembrance of what I had thrown away when I was quite ignorant of its worth.”
So said the wealthy and beautiful Estella in Great Expectations, who proceeds to squander the privilege with which she has been raised.
And, while Dickens’ hero, Pip, is fortunate to come into a great inheritance in his adulthood he, too, fritters it away, not understanding the value of money or the value of a kind deed.
While there is redemption for both characters in the novel, it is clear they are typical of some young people both 160 years ago and today.
There are both Pips and Estellas aplenty in 2021. While many face financial pressures, other youngsters are financially profligate rather than storing money wisely for a rainy day.
Some of this cohort are relying on the help of others. According to savings and wellbeing app Get Dreams, 38 per cent of British millennials today admit their spending patterns are heavily influenced by anticipation of a future inheritance.
Earlier this year, the company interviewed 1,500 British millennials to explore how expectations of a future inheritance influences the generation’s financial planning.
This was in the light of predictions from the Institute of Fiscal Studies, which predicted the median inheritance for those born in the 1980s to be approximately £136,000.
Key findings from the research were as follows:
- 65 per cent of millennials expect to inherit money
- 49 per cent of these say they have never seen a will, while 16 per cent are unsure if there is a will in place
- 85 per cent believe they would be the automatic beneficiary in the eyes of the law.
- 38 per cent admitted they were spending today in anticipation of this great expectation.
But, as Henrik Rosvall, chief executive of Dreams, says, current estimates put 30m Britons into the bracket of those who have not made a will.
With a rising trend of high-profile court cases involving siblings challenging inheritance decisions, this could “surprise those who believe themselves to be heirs”, he says.
Potential for disappointment
Add the potential for inflation to erode the spending power of cash savings, and Rosvall says it paramount for intergenerational wealth planning and advice to be provided alongside the prospect of intergenerational wealth.
As a result, Rosvall has urged young people to seek financial independence, make sensible savings and provide a “responsible safety net” for themselves.
Rosvall says: “It is important that younger generations understand the value of saving money themselves and spending within their means, and the positive impact this can have on their all-round wellbeing.”
According to Jonathan Sandell, investment proposition director for Scottish Widows, having a mindset that is focused on a potential inheritance, rather than focusing on what young people can do now to start generating wealth, is a dangerous one.
“What is wrong with this mindset? Asking “What could go right with it?” is a more useful question. Disputed inheritance is more common than most realise.
“Added to which, how can anyone possibly plan for when they might receive an inheritance? There’s just no certainty. They are best off ignoring it, getting a decent education and putting that to good use in the workplace now.”
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- When Daniella Flores achieves financial independence, their healthcare costs will skyrocket.
- To prepare, they’re funding an HSA to use soon and bulking up cash savings to pay high premiums.
- They’re also making sure to take advantage of more affordable insurance while they have it.
Daniella Flores, 32, had resolved to achieve FIRE (Financial Independence, Retire Early) and leave their corporate job by 2024. However, there was one big obstacle to their plan: healthcare.
“Right now, I have great healthcare,” said Flores. “The majority of the premiums are covered through my employer and we pay $300 a month.”
Flores’ wife also gets her healthcare through Flores’ employer. When Flores leaves their job to focus on freelance work, they’ll have to switch to their spouse’s employer insurance. When they switch to that insurance, their shared premium will skyrocket from about $300 a month to over $1,500 a month.
Flores told Insider that this premium will be higher than their monthly mortgage payment for their home in Washington state. That said, they’re still moving forward with their plan to be financially independent, and are doing three things to prepare for the high cost of healthcare ahead.
1. Get all your annual checkups done before quitting
Because Flores knows they’re quitting ahead of time, they’re getting all their annual appointments in now, so they’re taken care of before the cost of their healthcare goes up.
So far, this includes getting a physical done with a primary care physician, getting their teeth cleaned at the dentist, going to the eye doctor, and scheduling an appointment with a gynecologist. Their wife is also taking advantage of this period of time to do all her checkups, too. “We need to get all this stuff out of the way,” said Flores.
2. Fund a Health Savings Account (HSA)
Flores also has a Health Savings Account, which they said will come in handy after they quit their job and have high healthcare costs for a while.
An HSA is an investment account available to people with high-deductible plans to contribute pre-tax dollars and use to pay for qualified healthcare costs, tax-free.
In addition to putting their own money into the HSA, Flores said they are also taking advantage of the fact that their employer offers up to $850 every year for “doing little challenges online, or sending them proof of your physical visit.”
Flores said that while some people invest in HSAs to use when they’re older and retired, they plan to use the fund as early as next year to meet their new needs.
3. Funnel extra money into savings
Flores said their wife’s insurance isn’t necessarily bad, but that it comes with exorbitantly high premiums. To plan for this, they’re slowing down their investing and focusing more on their savings account to have cash available..
They have an emergency fund, which they are “beefing up.” They are also putting more away into a savings account bucket they call “F U money,” which they created last year to give them the ability to say “F U” to professional burdens they don’t want to tolerate any longer.
“I’m just going to use it for stuff we might need,” said Flores. “Knowing that after I quit, my income won’t be so steady anymore.”
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Are you living paycheck to paycheck? These 9 tips can help you stop living on the paycheck cycle and help you establish financial independence by saving money.
- By Kate Ashford with Forbes
- – 02/22/2018
Nearly 8 out of 10 workers (78%) live paycheck to paycheck, according to a new survey from CareerBuilder.com. 1 That’s up from 75% last year, and it applies even to those making 6 figures: 1 in 10 workers making $100,000 or more say they live paycheck to paycheck.
“In working with many clients over the years, I have found that most people tend to spend their entire paycheck if it is available in their bank account, regardless of whether they are at a low/middle level or are highly compensated,” says Marc Kodomatsu, a financial planner in Lake Oswego, OR.
If you’re putting away adequate savings for your goals and you have a healthy emergency fund, living paycheck to paycheck isn’t necessarily a disaster. But a quarter of Americans have no money saved for an emergency, according to Bankrate, and 20% have less than 3 months of living expenses in the bank. 2
“The events in Houston are a stark reminder of the perils of living paycheck to paycheck,” says Thomas Balcom, a financial planner in Lauderdale-by-the-Sea, FL. “For those folks who have flood insurance, they may not have the funds available to cover their deductible or tie them over until they return to work.”
Breaking the paycheck-to-paycheck cycle takes discipline and a plan. Here’s what top financial experts recommend as the best steps toward more financial independence:
Track your spending
Much of paycheck-to-paycheck spending is because you aren’t paying attention to your outflow of money. Take 2 to 4 weeks and document every purchase, whether it’s by credit card or cash. At the end of the period, you’ll be able to see where your dollars are going—and you’ll be more conscious of your overages. “Optimistically, performing the above process will change a person’s cash spending habits and make each paycheck go further, so there are actually funds still left when the next paycheck arrives,” says Sallie Mullins Thompson, a financial planner in New York City. “If this doesn’t help, a more drastic approach may be needed.”
Make savings automatic
If you plan to save “whatever’s left over” after you spend the rest of your paycheck, you’ll never put anything away. Whether you’re building up emergency savings or putting money away for retirement, that money should come out first, ahead of the rest of your spending. Set up an automatic transfer on paydays from your checking account to the savings account of your choice, or sign up for your company’s 401(k) plan to have retirement savings happen automatically. The more you can put on autopilot, the better.
Put savings elsewhere
If you’re managing to save, make sure you’re putting your dollars somewhere you can’t easily get to them. “If you can easily transfer funds same day from a savings account to a checking account at the same bank, those funds will often get spent,” Kodomatsu says. “Using an account that is not very accessible helps.” That means an interest-earning savings account or money market at another institution if you can.
Take a hard look at your fixed expenses
Sometimes a paycheck-to-paycheck existence means you’ve locked yourself into a lifestyle you can’t really afford. “The general guideline is that your monthly housing expenses should be 28% or less of your monthly gross income,” says Natalie Barber, a financial planner in Atlanta. “If you are outside of that range, you may want to consider moving to a less expensive neighborhood or downsizing or getting a roommate.” The same goes for that luxury car: how would it impact your budget if you sold it and purchased a more economical vehicle?
Then turn to your want-to-haves
Many of your expenses are necessary—mortgage, insurance, food—but what’s left over is more flexible. Try ranking your discretionary spending items from most important to least important. “If someone has a gym membership that costs $150 a month, could they sacrifice or compromise to a cheaper solution?” says Stephen Jordan, a financial planner in Peoria, IL. “If someone has a cable package that is $200 a month, could they get by with one that costs $50 a month?”
Save your raises
If you’re truly locked into a lifestyle with no wiggle room, make it your goal to use raises and bonuses to sock money away, suggests David Mendels, a financial planner in New York City. Whenever you receive a salary bump, tax return, or bonus cash of any kind, use it to build up your emergency savings or bolster your retirement fund.
Choose someone to help you stay on track
“Working with someone to hold yourself accountable is probably the most important thing,” Jordan says. He recommends working with an advisor, relative, spouse, or a trusted friend to increase your chances of success. “I compare this to working with a nutritionist or trainer to lose weight,” he says. “It isn’t really something that can be done over the course of 1 meeting.”
Find your “why”
You must have a strong reason to change your habits. Are you saving toward a down payment on a second car that will make your family life easier? Or a down payment on a house so you can stop renting? “You must have a dream and a belief that you can make it come true,” says Dana Anspach, a financial planner in Scottsdale, AZ and author of Control Your Retirement Destiny. “Otherwise, why cut the cable TV? You have to believe that making a small change now will lead to a better life.”
Be patient with yourself
“Moving to a savings mind frame for someone who hasn’t saved is similar to moving to a healthy eating lifestyle for someone who eats mostly fast food and sweets,” Barber says. “It’s hard to break habitual spending habits and even harder to have clients reflect on their emotions and feelings toward money. This usually isn’t an easy fix.”
This story is adapted from Life Kit’s weekly newsletter, which arrives in inboxes each Friday. Subscribe here.
From signing up for the right credit card to paying off debt to navigating a financial crisis — managing money is a lot easier with a little know-how. Here are seven of our favorite Life Kit episodes on common and confusing money topics, featuring personal finance experts who are eager to help you out.
Cut Down Miscellaneous Expenses
Trying on pajama pants at Target just for fun, swinging by an ice cream store, because it’s not the same as the pint I have in my fridge — I’ve been there. Personal finance expert Tiffany Aliche, “The Budgetnista,” recommends asking yourself whether you “Need it, love it, like it or want it” before springing for impulse purchases. If the gratification from a purchase will last less than one year, it’s just a “like,” and you might be better off skipping it to save up for something you’ll “love.”
How To Spend Less Money, Starting With A Budget
When I moved into my first apartment out of college, I quickly realized that no one ever taught me how to budget. Author Kristen Wong points out that young adults shouldn’t feel obligated to budget just because it is what grown-ups do. Instead, she suggests holding onto a personal goal that you’re saving up for, like a weeklong trip, a new computer or dinner from your favorite restaurant. Here’s more on how you can budget to feel “liberated.”
Make Money From Your Side Hustle
Remember when you dreamed of making earrings for a living? Or walking dogs? Or insert childhood dreams here. Your job may look very different today, but there are ways to turn your passion into income.
Freelance gigs have become a significant part of many careers — and as long as you know why you’re willing to hustle, the extra work may be worth it. If you’re looking to make money doing what you love, here’s a way you can strategize to still maintain a healthy work-life balance.
Crush Your Debt
Want to dig out of debt as fast as possible? It’ll be challenging — think cutting your expenses and working extra hours — so you’ll need to stay motivated. We recommend checking in with loved ones for support, dividing bigger goals into action items and rewarding yourself with small joys. And remember to plan ahead to resist temptations until you reach the finish line.
Improve Your Credit Score
Ah, the credit score. A mysterious number that tells lenders how financially reliable you are and how good you are at paying off debt. There are rules to this number, but they aren’t easy to understand. If you’re trying to rent an apartment, buy a car or apply for a loan, someone will likely check out your credit score. We’ve got tips on how to bump it up in this Life Kit episode.
The First Step To Passing On Wealth: Deciding What’s Important To You
Survive A Financial Crisis
Many of us faced new economic challenges due to the coronavirus-forced lockdown and resulting layoffs. In this episode, personal finance expert Michelle Singletary walks us through immediate steps we can take in response to financial crises, from understanding our essential needs to asking loved ones for support to applying for federal funds.
Save Up For Retirement
Between everyday purchases and larger investments, saving up for retirement can be difficult. This episode breaks it down into four smaller steps you can take to prepare — like looking into your company’s retirement contribution. It may seem tricky, but the earlier you start saving, even just a little bit, the more time your money has to grow. (Shoutout to compound interest!) We believe in you.
Find more Life Kit stories on money, here.
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