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How To Pursue Long-Term Financial Independence

How To Pursue Long-Term Financial Independence

20 Aug 2021
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Long-term financial independence can be defined as being free of a threat of insolvency or lack of money in the future, by using proper money management techniques developed over time.

I used to think that I was financially independent when I could go into Costco and buy whatever I wanted without having to worry about my bank account going into the negative. As I got older, I realized that financial responsibilities included more than buying rotisserie chickens and a 2-month supply of cereal.

If you’re like most people, you worry about having enough money to retire. Maybe you would like to pay for your child’s education, buy a house, leave an inheritance, or make a donation to a charity at some point in your life.

A financial plan is the crux of the financial planning process. In a way, it’s the road map for your money, there to guide you financially from where you are today to where you want to be. Without a plan for your finances, you may find yourself navigating in a rough ocean without a compass, not knowing if you will ever reach a safe harbor.

What Can I Do To Start Planning For The Future?

Everyone wants to have financial freedom in the future, but not everyone knows how to achieve it. Some may think that they are too young to start planning, while others think it’s too late to plan, and have decided that they will just be frugal and rely on Social Security when they retire, but Social Security may not be enough. According to the Social Security Administration, Social Security should only be just one part of your retirement plan.

Steps to Pursue Financial Independence

You may think that economic independence is impossible or too difficult to achieve; however, no matter how much money you make, whether it’s $30,000 per year or $1 million per year, you can set goals for financial stability.

Regardless of what your current net worth is, the following steps can be applied to anyone at any stage of their life. These steps may require some discipline, but they are designed to help you be prepared financially. Click here for a complimentary 4 step guide.

Step 1: Put together a list of your assets and liabilities

Knowing what you own and how much you owe will help you understand where you stand financially, and also visibly show you where you may need to make some adjustments. Assets can be money, valuables, investments, life insurance policies, jewelry, and paid off vehicles.

A liability can be anything that is financed like credit card debt, a car loan, or a mortgage. Prioritizing your expenses allows you to see where your money is going and help you make decisions now that will affect your financial health in the future.

Once you see where your money is going, you can develop a plan to live within your means and spend less than you make. Money that is left over can be used to start building wealth which accumulates over time.

Step 2: Set financial goals

Think about the lifestyle you have now and calculate how much money it will require to maintain your lifestyle once you have retired. Factor in any pensions and income from other sources as part of your retirement plan.

It’s never too late or too early to set goals like college tuition, paying off a mortgage, or paying off debt. One way to save money is to ask your credit card issuer to lower the interest rate while you are paying it off. Another thing you can do is search for a coupon or promo code when shopping online – you’d be surprised how much money can be saved by getting 10% off or even free shipping in some cases with an existing code.

The takeaway here is that financial goals can either be short term (12 to 24 months) or long term (5 years or longer) and the best time to start is today.

Step 3: List your existing investments

Another great stop along your financial planning journey is to get a yearly checkup with a financial planner. Having someone go over your investments, no matter how big or small, is a great way to gauge your financial health. Getting professional help from someone who manages wealth for a living can help you manage your personal finances.

If you’re just starting out on your financial journey and you don’t have a lot of assets, but you want to get your finances in order, consider hiring an advisor on an hourly or subscription basis. Some wealth management firms and banks have minimum asset requirements in order to work for you. Others charge fees or receive commissions for certain products or services, so it’s important to know how a financial advisor receives compensation since your relationship could last for decades or even generations.

If you decide to manage your own investments, then make sure you understand the risks of different investments such as real estate, stocks, cryptocurrencies, and mutual funds. It’s important to carefully choose where to invest your money based on your risk tolerance.

The point is, well-managed investments can allow your money to grow. By setting goals of regular contributions to your investments you are allowing your money to work for you.

Step 4: Have some savings for emergencies

Life doesn’t always go as planned. Having access to cash in a savings account or other emergency fund when an unexpected small emergency arises can act as a buffer so you don’t have to reach into your portfolio and sell investments or cash out a 401(k). Having some money “for a rainy day” helps keep your investments on track for growth instead of having to liquidate those assets due to an unforeseen car repair.

Lastly, a good long-term financial plan is rooted in a deep understanding of how you make financial decisions and how you choose to invest. The best plans are based on goals that motivate you. No matter what your current financial situation is, you can improve your long-term financial security by starting now.

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More about the author: Harry Sherdil
As a fiduciary financial advisor at an independent firm, Harry strives to offer the same resources, tools, and research as bigger firms while serving new and existing clients' best interests.
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