Back to Basics: Financial Independence

* This article was originally published on March 11, 2020. It has been updated for 2021.

When you think of “financial independence,” does “retirement” come to mind? Or perhaps you connect more with the idea of living your life without having to worry so much about the money side. 

Many people today strive for the day when work is no longer mandatory. As they work to become financially free earlier in life, work may still be part of that life, but it’s not the focus. It’s something they do on the side or with a more leisurely mindset.

You may have heard stories about people who reduced their spending and increased their savings to the extreme so they could retire in their 30s, 40s, 50s — or even 20s. The good news? You don’t have to live on rice and beans or ramen! There are no rules to living your own version of financial independence and designing your comfortable future. 

Whether you plan to retire early, want to work a few elements of financial independence into your everyday life, or fall somewhere in between, let me break down some aspects of financial independence, starting with the basics.

Financial Independence

Most definitions of financial independence relate to work — or better yet, not having to work. While that might sound great, financial independence can mean different things to different people. For some, it’s the day when their investments can pay for their expenses and they don’t need to rely on working to earn income. For others, it’s saving and counting down the days until they’ll stop working for good and begin a more traditional retirement. And still others will continue to work for social reasons or because they love what they do after they’ve achieved their version of financial independence! 

Financial Independence Considerations

In addition to not having to work, the other benefits of financial independence may seem obvious. From freeing up your schedule and being able to spend your time as you’d like to becoming more financially self-reliant and not having to rely on others to live your best life, the perks are many. Overall, financial independence allows you to make the best use of your time — rather than dedicate that time to earning a living. This can mean less stress plus more time for yourself, with family, on vacation — whatever! 

These perks exist, but it’s important to consider the full picture because financial independence isn’t always rosy. Prior to achieving it, you may need to scrimp and save to make financial independence happen on your timeline. Because of this, you may miss out on experiences your peers enjoy. Similarly, you may find yourself at a different life stage than many of those around you. While you’re living intentionally while saving up to stop relying on your 9-to-5 job ASAP, they could be planning a luxurious vacation — and be looking at another 20 years of work before they retire!

Fear of missing out (FOMO) aside, if you plan to reduce your reliance on work or want to stop working altogether, the funds you build will likely need to last many years longer than a traditional retirement — and you’d need to accumulate them in a shorter time frame. Plus, if you step back from the working world, you may need to replace employer-provided benefits with individual policies. These benefits on your own can be pricey — especially on a more limited budget. 

If you stop working or reduce your workload significantly, you also miss out on the money you would have made during those working years. Compounding the matter is that you could miss out on your highest-earning years. When educated Americans earn the most in their 40s and 50s, earning less or no income during those years would mean missing out on increased Social Security benefits as a result. And don’t forget to watch out for inflation!

Also, keep in mind that you can’t withdraw from qualified retirement plans or traditional IRAs until after age 59½ — unless you’d like to sacrifice some of that hard-earned savings to pay taxes and penalties. On the bright side, this is where Roth IRAs can come in handy due to the ability to withdraw contributions without taxes or penalties under certain conditions.

Achieving Financial Independence

If you decide you want to become more financially independent, how do you get there? While you don’t have to work a high-income job to add elements of financial independence to your life, it does require a long-term outlook. Here are some tools you can use to get started or check in on your progress:

Put your financial independence goals in writing along with mini-milestones to track your progress along the way.

Share your goals with friends and family who can hold you accountable and cheer you on along the way.

Make a savings plan — and stick to it!

Review your budget and align your spending habits with your values and goals.

Pick up a side gig to boost your income and ability to save.

Utilize your employer-sponsored retirement plan, especially if you have access to employer matching.

Find a time to talk with us about investment options for building wealth.

Work with Jason to plan for changes to your tax situation now and strategies you can use down the road.

Reward yourself for reaching your mini-milestones and goals to inspire yourself to keep going!

Want to work toward financial independence or maybe even retire early? Whether you plan to spend your time volunteering for your favorite cause, take on a shelved passion project, or want to spend the rest of your life relaxing on a beach, the process to achieve financial independence can mean big life changes. And don’t forget that the plan should include what you’ll do after achieving financial independence — not just how you’ll get there. You probably wouldn’t want to end up bored with your free time or overspend and have to go back to work after such an achievement!

So if you’re looking forward to a more traditional retirement or just want more financial wiggle room earlier in life, let us know. We’ll help you create a plan that includes all aspects of your life and your goals.