The Fourth of July has passed, a time to celebrate freedom and the sacrifices made to secure it for our nation. But what about financial freedom? Achieving it, much like national independence, requires a clear vision, thoughtful planning, and the ability to prioritize long-term goals in a world that often emphasizes the immediate.
Financial Independence
- “I want my money to work for me, I don’t want to have to work for money.”
- “I want to choose whether to work or not. I don’t want to be forced to work.”
- “I don’t want to think about money in retirement. I don’t want to be penny-pinching in my golden years.”
These thoughts (or variations thereof) are essentially describing “financial independence,” whereby an individual has enough passive income to cover all desired living expenses without having to work.
The FIRE Movement
This desire for independence has become so popular that it spawned a new term called the FIRE movement (Financial Independence, Retire Early). The idea is simple: save aggressively (in some cases, 50%+ of income), invest wisely, and retire as early as possible (most desire in their 30’s or 40’s).
The FIRE movement was ushered in by a wave of people who resent the 9-5 life. They want to dictate life on their terms and not be subject to a boss or employer who tells them when and where they must be.
Recess Time
Imagine you’re in elementary school, and your PE teacher tells your class you must run or walk two miles, and after that, you can play at recess.
Some of your classmates will sprint the two miles to get to recess as soon as possible. These are the “FIRE” folks I just discussed. Other classmates will jog the two miles, allowing themselves a bit of recess time. These are the traditional “retire at 65” individuals. Other classmates might walk, talk, get distracted, and may not finish the two miles before class is over. These are the people who will struggle to achieve financial independence.
Clarify Your Goals
As you think about which group you might belong to, the questions to ask yourself should go something like this…
- “Do I desire financial independence?”
- “What does that look like to me?” and finally
- “How do I get there, and how do I avoid obstacles along the way?”
The founding fathers had a clear vision for the type of country they wanted…. one of “life, liberty, and the pursuit of happiness”. Likewise, if we are to become financially independent, we must have clarity on what we are trying to accomplish before setting off on our journey.
Maybe it’s having the flexibility to travel, pursuing a passion project, spending time with family, or starting a business. But find out what you desire, not what the world desires of you.
Obstacles to Financial Independence
As you set off on this journey, below are some common obstacles that hinder progress.
- Huge risks: Sometimes, the goal of financial independence can be so alluring that investors become desperate to achieve it, leading to outsized risks. While any investor will need to take some degree of risk to grow their assets, be careful when “experts” tout that leveraged real estate, Bitcoin, or your uncle’s start-up is the only way to achieve financial independence.
- Emotional investing: For many, investing becomes too emotional. Gains are accompanied by euphoria, and losses are accompanied by regret. Avoiding FOMO and panic is paramount to reaching your goals. Even more pervasive is what I call “Frozen Investor Syndrome,” where one simply does not invest their portfolio because they are terrified they’ll make the wrong move.
- Inflation and taxes: While $10,000/mo in passive income might be enough for you now, will it be enough in 20 years? Have taxes been accounted for, both now and in the future? I often ask prospective clients what their annual tax planning looks like. The most common response I get is “huh?” Taxes are often a family’s largest expense – they need to be minimized and planned for.
- Moving goalposts: If your expenses are on a never-ending upward trajectory, financial independence will never be achieved. It’s hard to hit a target when it’s moving away from you.
Progressing Towards Financial Independence
If financial independence is your goal and you have intentionally avoided the obstacles, below are a few items to help you along the way.
- Celebrate the small victories: A debt paid off, an emergency fund established, or a net worth target reached. Celebrating milestones helps with motivation.
- Changing goals: Life changes. We get married, have kids, change jobs, move states… and we often can’t foresee these future life events. Know that your financial goals will change (and sometimes be set back) with your life transitions, and that’s okay.
- Passive income: It’s difficult for investors to tangibly see how their assets might provide income for them, as there is often a fear of “dipping into principal.” This fear can be alleviated by shifting your portfolio to a more income-oriented approach as you near the withdrawal phase of life, as opposed to an index approach. Consider a strategy that provides for not only current income but also growth of income.
- Understand when you’ve hit the target: Part of obtaining financial independence is actually knowing and believing that you’ve reached it. I’ve served many clients who have more than enough income to meet their desires, but it doesn’t feel that way to them. Perhaps their parents scrounged pennies during the Great Depression, so a sense of financial comfort is a myth. However, sometimes investors need an advisor to tell them they are indeed financially independent and have permission to spend money.
Financial Independence vs. Financial Freedom
Financial independence is a worthy goal, but it’s important to remember that it is not the end goal we are striving for. It does not fulfill in and of itself.
Think of it this way: financial independence is a number you can reach, while financial freedom is a mindset you cultivate. It’s the ability to make choices based on your values, not solely on financial constraints. If you constantly crave more, obsess over your net worth, or cling tightly to your money, it’s a sign you haven’t achieved true financial freedom.
Money is a powerful tool. Let’s use it to build the life we truly desire, not let it control us. Join me on this journey! Together, let’s define what financial independence means to YOU and create a plan to achieve it.
Blaine Carver
Private Wealth Advisor
bcarver@thebahnsengroup.com
Trevor Cummings
PWA Group Director, Partner
tcummings@thebahnsengroup.com
