Financial independence can be very subjective, for some it may mean paying off bills, for others winning the lottery. In logical terms financial independence is when your assets generate income that is greater than your expenses. Some people also view their independence as having enough money so they do not have to work and will count on income from passive sources. Passive sources of income could be rental property, alimony, child support, trust fund, pension, life annuity or even royalties from creative works such as authoring a book. Independence becomes a balancing act, either you can focus on accumulating assets or decreasing debt.
Fortunately, or unfortunately, money is rarely viewed logically. When it comes to money, we are often ruled by emotion. A good example of that would be the stock market. When markets take a severe downturn, human emotion says “get me out”, and when it rebounds and has recovered, we say “I want back in”. If markets decline by 30%, it should be a signal to buy, buy, and buy! Certainly if there was 30% off everything at the grocery store, you would buy carriages filled with groceries – you may even buy things you don’t need, just because it is on sale. Often emotional attachment to money can get in the way of achieving long term goals for financial independence.
Financial independence requires meaningful action. This begins with developing a budget. A budget worksheet should have 3 columns: Monthly Budget Amount, Monthly Actual Amount and Monthly Difference. One of the most common mistakes with creating a budget is the omission of taxes. In order to correctly calculate your spendable income, you need to deduct federal, state and local taxes as well as social security or Medicare costs. Once you have determined your spendable income, you need have a comprehensive list of expenses. The last section of your budget should include contributions to savings, 401ks, etc. However, if your expenses exceed your spendable income, there is no room for savings. Decreasing spending would then be the priority.
There are several websites and budget templates, just google “budget worksheets” and you will find many options. Microsoft Word and Excel both offer a large selection of budget templates for family, personal and household budgets. Bettermoneyhabits.com offers basic budget tools that are ideal for younger individuals. Mint.com is a comprehensive website that can help you manage your bills, your credit score and your budget as well as keeping track of your retirement goals and savings. Remember these tools are to help you organize your finances, ultimately, you are responsible for your financial decisions. Financial independence is very achievable, but like any other forms of freedom, you have to work for it.
Roberta L. Nestor is a financial advisor practicing at 491 New Haven Avenue in Milford, CT offering retirement, long term care, investment and tax planning services. She also offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network – a member FINRA/SIPC and a Registered Investment Adviser. Fixed insurance products offered through Nestor Financial Network are separate and unrelated to Commonwealth. Commonwealth Financial Network or Nestor Financial Network does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation. Roberta can be reached at Nestor Financial Network, 203-876-8066 or firstname.lastname@example.org.