Category Archives: Financial Independence

Financial Independence: A Universal Goal

While reaching early retirement is my goal, it might not be suitable for everyone.  On the other hand, the goal of reaching financial independence should be the focus of everyone during their working years.  Even though most careers seem to drag on forever, the amount of time that we have available to work and save money is truly finite.  Everyone should have the goal of saving enough money to cover at least 25 years of living expenses.  It does not matter if you enjoy your career or not.  This rule applies to everyone.  The sooner you start working towards reaching financial independence, the better off you will be.

Reasons to Achieve Financial Independence

Job Loss

Today, the unemployment rate in the U.S. is around 4.5%.  Most employers are now hiring.  Many jobs are even going unfilled.  Unfortunately, this can change in a flash.  Recessions occur as part of the business-cycle.  When business slows down, companies need to reduce expenses to remain profitable.  One of the easiest ways to reduce expenses is to reduce labor costs.  When this transition occurs, hard-to-fill jobs become hard-to-find jobs.

Losing a job is one of the most stressful situations that a person or a family might face.  By being financially independent, the stress can be removed or drastically reduced.  If you have many years of living expenses stashed away in savings, a job loss can be viewed as an opportunity to take an extended vacation from work, start a business, or explore working in a different line of work.  Financial independence affords options.

Defined Benefits

Since the start of the new century, employers who offer defined benefit plans have been on the decline.  Gone are the days when people work for a company for 35 years and receive $40,000 per year for the rest of their life after they retire.  Employers do not want to have to pay the costs or take on the risk of being liable for underfunded pension promises.  Defined benefit plans are even on the decline in government jobs.

This now puts the responsibility of paying for retirement on the employees in the form of a defined contribution benefit (401K).  The individual is now burdened with the responsibility of saving enough money for retirement.  Many people lack the sophistication to correctly determine how much they need to save and do not have the ability to manage this type of investment account.

If managed correctly, defined contribution accounts are great tools for saving money that can contribute to a person’s financial independence.  The money that is invested grows in a tax deferred account.  Most defined contribution accounts now offer low-cost index funds and target-date retirement funds.  In some cases, employers also match a percentage of their employee’s contributions.

Everyone should start by contributing 15% of their salary to their 401K.  After that, work on increasing contributions by 1% per year.  Increases the contributions every year until you are contributing the maximum amount allowed by the IRS.

Social Security

Social Security is going to run out of money by 2034 unless the government makes some major changes.  That does not mean that Social Security is going to go away.  At that point, Social Security will be funded by payroll taxes.  Based on the current projections, Social Security will be able to pay $0.75 for every $1.

By reaching financial independence, a person does not have to rely solely on Social Security to fund their retirement.  Even if Social Security was fully funded, it does not provide enough in benefits for most people to enjoy a high quality of life.  To ensure a high quality of life in the future, switch your focus from relying on Social Security to cover your future expenses to working towards becoming financially independent.  By doing this, you will be able to view Social Security as a nice supplemental income stream.

Health

Too many people think that, they can work forever.  You might be healthy today, but that can and will most likely change with age.  Yes, we can eat right, exercise, and keep up with doctor visits.  In some cases, we can take measures to improve our health.  The gross reality of the situation is that most people cannot keep up the physical and mental pace of a demanding career once they reach a certain age.

By being financially independent, a person has the option of being able to retire on their terms and to enjoy life while they are still young and healthy.  Life is not too much fun without money.  Life is less fun when you are in poor health.  Once your reach financial independence, you will not have to stress about being forced to work because you do not have the resources to sustain your lifestyle without the income from a job.

Family

Not only do we owe it to our self to reach financial independence, but we also owe it to our family.  We only have one shot at life.  By reaching financial independence, we can do so much for our loved ones.

By being financially independent, a parent or grandparent can better provide what their children or grandchildren need to be successful in life.  Financial independence provides security for a spouse and can reduce the  financial stress in the relationship.  Also, by being financially independent, you can be present in the lives of those you live with, extended family, and friends.

Conclusion

When you think of financial independence, do not only think of it in terms of being able to retire early or live a luxurious lifestyle.  Look at it as necessity.  Life happens and we do not know what is around the corner.  By being financially independent, you take more control over your life.  People who are financially independent have options that others who lack resources do not have.

Some say that control is an illusion.  On some levels, it is.  For example, we do not have control from one breath to the next.  However, losing a job and not having money is not an illusion.  By becoming Financial independent, you can take control where it is possible.  You are also able to enjoy a freedom that is available to almost everyone, yet experienced by so few.